Strategic Education, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. Strategic Education provides U.S. and Australia/New Zealand higher education and employer-linked education technology services through U.S. Higher Education (USHE), Australia/New Zealand (ANZ), and Education Technology Services (ETS).
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $290.3 million | $256.6 million |
| Operating income (loss) | $41.4 million | $(1.3) million |
| Operating margin | 14.2% | (0.5)% |
| Net income (loss) | $29.7 million | $(2.0) million |
| Diluted EPS | $1.23 | $(0.09) |
| Operating cash flow | $77.6 million | $35.2 million |
Revenue grew 13.1%. USHE revenue rose 11.3% to $219.2 million; ANZ revenue rose 14.1% to $47.4 million; and ETS revenue rose 29.8% to $23.6 million. Reported growth reflected higher enrollment and Sophia Learning subscriptions, partly offset by unfavorable currency effects. USHE enrollment increased 9.8% to 87,731 and ANZ enrollment increased 4.8% to 20,197.
Instructional and support costs rose to $157.7 million from $152.9 million, but fell to 54.3% of revenue from 59.6%. General and administration costs rose to $96.7 million from $95.5 million, while declining to 33.3% of revenue from 37.2%. Bad debt expense was 4.2% of revenue, up from 3.8%. Adjusted, non-GAAP operating income was $35.8 million versus $8.2 million; adjusted diluted EPS was $1.11 versus $0.24.
Cash, debt, and liquidity
- Cash and cash equivalents were $222.1 million at March 31, 2024; marketable securities were $31.4 million. Together, these totaled $253.6 million, compared with $208.7 million at December 31, 2023.
- Operating cash flow was $77.6 million. Investing activities used $1.0 million, including $9.2 million of capital expenditures; financing activities used $18.4 million, including $14.7 million in dividends.
- Long-term debt was $61.3 million, down slightly from $61.4 million at year-end and down from $101.3 million at March 31, 2023. The $350 million revolving credit facility matures November 3, 2025. The company reported compliance with its covenants.
- The quarterly dividend was $0.60 per share. No shares were repurchased during the quarter; $240.0 million of repurchase authorization remained through December 31, 2024.
- Management believes existing cash and securities, operating cash generation, and facility availability will cover cash needs for the next 12 months and beyond.
Material changes and unusual items
- Results improved substantially from the prior-year quarter, when the company reported an operating loss and net loss. Management attributed the change to enrollment and subscription growth, lower restructuring costs, and no current-quarter intangible amortization; higher revenue also supported operating leverage.
- Restructuring costs were a net benefit of $5.5 million in Q1 2024, versus net costs of $5.6 million in Q1 2023. The current-quarter result included a $6.2 million gain from early lease termination; the prior period included a $3.6 million right-of-use asset impairment charge.
- ANZ goodwill declined by $22.0 million from currency translation. Foreign currency translation reduced comprehensive income by $26.7 million in Q1 2024.
- Income tax expense was $13.4 million, compared with $1.1 million in Q1 2023. Q1 2024 included approximately $1.3 million of share-based compensation tax shortfall impacts.
Outlook, risks, and contingencies
The filing provides no quantified revenue or earnings guidance. Management described a long-term strategy focused on student success, affordability, marketing, employer partnerships, and growth platforms, and cautioned that first-quarter results are not necessarily indicative of full-year results.
- Regulation: New gainful employment rules are scheduled to take effect July 1, 2024, with program metrics expected beginning in 2025. Certain failures could lead to disclosures or loss of federal aid eligibility. Litigation challenging the rule is pending; the company cannot predict its outcome.
- Borrower-defense claims: Capella and Strayer received notices concerning applications for federal loan forgiveness. The Department of Education may separately decide whether to seek recoupment from the universities. The company cannot predict whether claims will be approved or recoupment pursued; successful recovery could materially adversely affect the business.
- State authorization: Proposed changes to the State Authorization Reciprocity Agreement and possible future Department of Education rules could affect distance-education authorization and Title IV participation. The company says certain adopted proposals could have a material adverse effect.
- Currency: Revenue denominated in non-U.S. currencies was 16.3% of consolidated revenue. A hypothetical 10% adverse exchange-rate move would have reduced Q1 revenue by approximately $4.7 million. The company does not hedge foreign currency exposure.
- Other risks: Student enrollment, persistence, credit losses, Title IV compliance, accreditation, competition, and the ability of students to finance education may affect results. The company reported no material change to previously disclosed risk factors other than the state-authorization risk described in the filing.
Important facts for investors to verify
- Whether enrollment growth, employer-affiliated enrollment, and Sophia Learning subscriptions continue, and how these trends affect revenue and margins.
- Whether bad debt expense and tuition receivable collection trends worsen; the allowance for credit losses was $46.9 million at March 31, 2024.
- The effect and timing of gainful employment and state-authorization rules, including final regulatory metrics and SARA policy decisions.
- Developments in borrower-defense applications and any Department of Education decision to seek recoupment.
- How much of the reported earnings improvement reflects ongoing operations versus the $6.2 million lease-termination gain and other non-GAAP adjustments.
- Foreign-exchange effects, debt-facility terms and covenant compliance, and the company’s future dividend and share-repurchase decisions.