Strategic Education, Inc.

Welcome to Strategic Education's second quarter 2026 results conference call. I will now turn the call over to Terese Wilke, Senior Director of Investor Relations for Strategic Education. Ms. Wilke, please go ahead.

Thank you. Hello, everyone, and welcome to Strategic Education's conference call in which we will discuss second quarter 2026 results. With us today are Karl McDonnell, 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, the 10Q to be filed, and other filings with the Securities and Exchange Commission, as well as Strategic Education's future 8-Ks, 10Qs, and 10-Ks. Copies of these filings and the full press release are available for viewing on our website at strategiceducation.com. and now I'd like to turn the call over to Karl. Karl, please go ahead.

Thank you, Terese, and good morning, everyone. SEI's second quarter financial results, which we released this morning, demonstrate continued significant strength in our ETS division, increased momentum in U.S. higher education, and meaningful progress in returning our Australia business to growth in 2027. Before I go through the results themselves, I just want to remind everyone that I'm referring to our adjusted financial results and from a constant currency standpoint. SEI's second quarter revenue increased approximately 3% from the prior year to $330 million. Our operating expenses increased by approximately 1.5% from the prior year but this is inclusive of a one-time charge related to a labor matter in Australia dating back to the close of the transaction in 2020 and which I will comment on when we discuss the Australia segment's results momentarily. Excluding this non-recurring expense, our operating expenses would have been $265 million or a reduction of 3% from the prior year. Operating income was $53 million for the quarter, a 9% increase from the prior year, and our operating margin for the quarter was 16%, a 90 basis point improvement from the prior year. Again, excluding the one-time Australian charge of $13 million, operating income would have increased by 35%, and our operating margin would have been 20%. Adjusted earnings per share were $1.76. A 16% increase from the prior year. Year-to-date cash flow from operations increased 18% from the prior year to $117 million. So overall it was a very solid quarter financially and now turning to our segments. Our education technology services division grew revenue 15% to $42 million and operating income by 30% to $20 million while operating margin increased to 46.2%, an increase of 520 basis points. Sophia Learning total average subscribers grew 32% and revenue increased by 27% to $21 million. Workforce Edge ended the quarter with 81 corporate agreements covering 4 million employees and enrollments from Workforce Edge into either Strayer or Capella University grew 21% to roughly 4,000 students. We were proud to recently announce that Workforce Edge was selected as winner of the Professional Development Solution Provider of the Year Award in the eighth annual EdTech Breakthrough Awards program that recognizes top companies and solutions in the global education technology market. ETS now represents nearly 40% of SEI's consolidated income from operations. Turning now to U.S. higher education. Employer-affiliated enrollment grew 8% and reached a new all-time high of 35% of total U.S. higher education enrollment, an increase of nearly 300 basis points from the prior year. Healthcare enrollment, which again is a key component of our employer strategy, grew 11% and now represents 52% of all U.S. higher education enrollment. As part of our healthcare expansion strategy, I'm pleased to announce that during the second quarter, Capella University launched a BSN pre-licensure program, which enrolled its first cohort this month. U.S. higher education revenue increased 2% in the quarter, driven by higher revenue per student and lower scholarships and discounts. Our productivity initiatives continue to enable very effective cost control, with operating expenses down 3% from the prior year. U.S. higher education operating income increased 56% from the year to $32 million, and the operating margin increased by 500 basis points to 10% from, I'm sorry, up from 10% last year to 15% this year. U.S. higher education student retention increased last quarter to 89%, representing an all-time high for this metric. Turning now to Australia and New Zealand. Total enrollment declined 5% in the second quarter and revenue decreased just under 3% to $67 million. Operating income was $1 million in the quarter, but this is net of the $13 million charge we took to create a reserve related to an ongoing labor matter dating back to the close of the transaction in 2020. At issue is whether grading time should be included in our casual faculty contracts or should that portion of the work be compensated separately? Our view, which is the view that has been in place at Torrens since its inception and therefore was in place when we closed the transaction, is that grading is part of teaching the course and therefore should be included in our casual faculty contracts. Casual faculty is the equivalent to adjunct faculty here in the US. The Australian Fair Works Ombudsman assisting a former Torrens instructor challenged this view in court and the Court sided with us, ruling in favor of our interpretation. Later, the Australian Appeals Court overturned this ruling, making a determination that grading time should be compensated separately. We have appealed this ruling to the Australian High Court and have created a reserve to compensate faculty members affected by this ruling should our appeal not be heard by the High Court or should the High Court affirm the Appellate Court's ruling. Independent of the High Court's ruling, we have already made modifications to our instructional model such that we do not anticipate any increases in our instructional expense as a result of this change. We continue to be encouraged by domestic student growth in Australia and are making investments in new programs and potential campus additions to further grow the domestic student population. And just a note on capital allocation. In addition to our regular quarterly dividend, we repurchased approximately 421,000 shares during the quarter for a total of $33 million. As of the end of the second quarter, we have approximately $141 million remaining on our share repurchase authorization through the end of this year. And as always, I'd like to thank all of my colleagues here at SEI for their ongoing commitment to our students and our employer partners. And with that, Kevin, we'd be happy to take questions.