Strategic Education, Inc.

Welcome to the Strategic Education fourth quarter 2025 results conference call. I will now turn the call over to Terese Wilkie, Senior Director of Investor Relations for Strategic Education. Ms. Wilkie, please go ahead.

Thank you. Hello, everyone, and welcome to Strategic Education's conference call in which we will discuss fourth quarter 2025 results. With us today are Carl McDonald, President and Chief Executive Officer, and Daniel Jackson, Executive Vice President and Chief Financial Officer. Following today's remarks, we will open the call for questions. Please note that this call may include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements are based on current expectations and are subject to a number of assumptions, uncertainties, and risks that strategic education has identified in today's press release. that could cause actual results to differ materially. Further information about these and other relevant uncertainties may be found in Strategic Education's most recent annual report on Form 10-K to be filed, the most recent 10-Q, and other filings with the Securities and Exchange Commission, as well as Strategic Education's future 8-Ks, 10-Qs, and 10-Ks. Copies of these filings and the full press release are available for viewing on the website at strategiceducation.com. And now, I'd like to turn the call over to Carl. Carl, please go ahead.

Thank you, Therese, and good afternoon, everyone. We are very pleased with our fourth quarter and 2025 full year results that we released earlier today. And at the outset, and as is normally the case, let me say that the results that I referenced today are adjusted and reflect a constant currency comparison. For the fourth quarter, our revenue increased 4% from the prior year, and our operating expenses declined 1%, resulting in operating income growth of 35% and a 390 basis point expansion in our operating margin to 16.9%. Earnings per share was $1.75, which was an increase of 38%. For the full year, 2025, our revenue increased 4% and our operating income increased 25%, generating 260 basis points of operating margin expansion to 15.5%. Our adjusted earnings per share was $6.21, an increase of 28% from the prior year. Our ongoing AI-driven productivity improvements across the portfolio resulted in approximately $30 million of expense reductions, which was used to both fund new growth opportunities and expand our operating margin. We remain on track to generate at least an additional $70 million of expense savings through the end of 2027, And as was the case this year, those savings will be used both to fund additional growth and continue to expand our operating margin. 2025 was another record year for education technology services segment, which grew revenue by more than 40% to nearly $150 million. And notwithstanding our continued strong investment in ETS, which included a 44% increase in expenses, ETS's operating income increased 38% to $59 million, generating an operating margin of 40%. ETS's share of SEI's operating income grew to roughly one-third of consolidated operating income in 2025, reflecting progress with our higher margin technology and services business. Sophia Learning grew average total subscribers by 47%, and revenue by 41% in the fourth quarter and by 42% and 40% respectively for the full year. These results were driven by strong growth in both consumer and employer-affiliated subscribers. Workforce Edge also had a record year with strong revenue growth driven by employer-affiliated enrollment, platform fees, and new employer partnerships. Employer-affiliated enrollment grew 6% for the quarter and ended the year at an all-time high of 33.5% of total U.S. higher education enrollment. Employer-affiliated mix of new students in U.S. higher education was 40%. Another key part of our overall employer strategy is to grow our healthcare portfolio, which remains quite strong. It now represents half of all U.S. higher education enrollment and 37% of total employer-affiliated enrollment. Workforce Edge ended 2025 with 80 corporate agreements collectively employing more than 3.9 million employees. Our network of corporate partners remains one of SEI's major competitive strengths. Turning now to U.S. higher education. Revenue increased 2% for the fourth quarter. and 1% for the full year due to a 6% increase in revenue per student driven by fewer student drops, lower discounts, and scholarships. In 2025, the bulk of our AI-driven productivity improvements were focused in US higher education, which enabled a 3% decline in operating expenses for the fourth quarter and a 2% decline for the full year. This resulted in a 58% increase in operating income in the fourth quarter, and a 32% increase for the full year. U.S. higher education's operating margin increased 470 and 270 basis points respectively for the fourth quarter and full year. U.S. higher education also recorded record average student retention of 88% for the full year. Our Australian New Zealand segment's total enrollment decreased by 2% for both the fourth quarter and the full year, driven by continued regulatory constraints on international enrollment, which was partially offset by domestic new student growth. A&Z's revenue also decreased by 2% in the fourth quarter and was flat on a year-over-year basis. As was the case in U.S. higher education, we also had significant productivity gains in Australia with operating expenses decreasing 6% for the quarter and were flat for the full year. This resulted in a 16% increase in fourth quarter operating income at A and Z and an operating margin of 19%, a 290 basis points improvement. Next, regarding capital allocation in 2025. We generated $247 million in pretax cash from operations. We paid $49 million in taxes and invested $44 million in capital expenditures leaving us with $154 million of distributable free cash flow. We use this cash and our existing cash balance to return approximately $58 million to our owners through our $2.40 common dividend and just under $140 million in share repurchases, including $45 million in the fourth quarter for a total of 1.7 million shares repurchased in 2025, or approximately 7% of our outstanding shares. As of the end of 2025, we still have more than $200 million remaining on our share repurchase authorization. We ended the year with $153 million of cash and marketable securities and no debt. Our plans for 2026 reflect continued performance in line with the notional model that we outlined in our 2023 Investor Day. And finally, as always, I'd like to take this opportunity to thank all of my colleagues here at SEI for their ongoing commitment and support to our students and our employer partners. And with that, Kevin, we'd be happy to take questions.