Strategic Education, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Strategic Education provides campus-based and online higher education and employer education-benefit services through U.S. Higher Education (USHE), Education Technology Services (ETS), and Australia/New Zealand (ANZ). This unaudited quarterly report covers the three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $287.7m | $273.6m | $544.3m | $532.4m |
| Operating income | $16.8m | $21.9m | $15.5m | $35.3m |
| Operating margin | 5.8% | 8.0% | 2.8% | 6.6% |
| Net income | $14.2m | $15.2m | $12.2m | $22.2m |
| Diluted EPS | $0.59 | $0.63 | $0.51 | $0.92 |
| Operating cash flow | Not presented by quarter | $40.7m | $80.7m |
- Q2 revenue rose 5.2%; six-month revenue rose 2.2%. Revenue growth did not translate into higher profit: operating income fell 23% in Q2 and 56% for the six months.
- Q2 USHE revenue increased 6.7% to $202.7m; enrollment grew 4.7% to 80,353. ETS revenue increased 22.1% to $19.5m, supported by Sophia Learning subscriptions and employer-affiliated enrollment. ANZ revenue declined 3.1% to $65.5m; enrollment fell 4.6% to 17,966.
- For the first half, USHE revenue increased 3.6% to $399.6m, ETS revenue increased 23.4% to $37.7m, and ANZ revenue declined 7.8% to $107.0m.
- Instructional and support costs rose to 56.1% of Q2 revenue from 53.9%; for the first half they rose to 57.8% from 54.8%. Management cited higher bad debt, technology and (for the first half) student-material costs. Q2 bad debt expense was 4.4% of revenue versus 3.2% a year earlier.
- Cash, cash equivalents and marketable securities totaled $215.1m at June 30, down from $235.9m at December 31, 2022. Current assets were $350.9m and current liabilities $242.1m. Operating cash flow fell year over year, mainly due to lower earnings, working-capital use and higher tax payments.
- Capital expenditures were $17.8m for the first half, versus $22.7m. Dividends paid were $29.5m; share repurchases were $10.0m. The company reported $236.8m of remaining repurchase authorization through December 31, 2023.
- Long-term debt was $101.3m, substantially all under a $350m revolving credit facility maturing November 2025. The company was in compliance with its facility covenants. First-half interest and unused commitment fees were $4.2m, versus $1.2m. The facility was amended to replace LIBOR references with alternative benchmarks, including Term SOFR for U.S.-dollar loans.
Material changes, outlook and risks
- Profitability and segment mix: Management attributed lower operating income to weaker USHE and ANZ earnings, higher restructuring costs and unfavorable foreign-exchange effects. ETS operating income improved. ANZ’s first-half results were also affected by academic-term timing.
- Restructuring and other items: Restructuring costs were $11.9m for the first half, including $8.4m of employee-separation charges. Q2 included a $2.1m gain from selling a closed campus; this gain was recorded within restructuring costs. The company also recorded $5.1m of right-of-use lease asset impairment charges for the first half.
- Adjusted results: Management reported non-GAAP adjusted operating income of $27.2m and adjusted diluted EPS of $0.82 for Q2, versus $29.5m and $0.85 a year earlier. For the first half, adjusted operating income was $35.4m and adjusted diluted EPS was $1.06, versus $48.9m and $1.39. These measures exclude specified items and are not GAAP results.
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management said available cash and securities, operating cash generation and, if needed, facility availability should meet cash requirements for the next 12 months and beyond. It described continued investment in student success, affordability, marketing and growth platforms as part of its long-term strategy.
- Regulatory exposure: The revised 90/10 regulations apply to fiscal years beginning on or after January 1, 2023. Proposed federal rules on gainful employment, financial responsibility and other matters could affect program eligibility, disclosures or financial-protection requirements. Potential changes to the State Authorization Reciprocity Agreement could increase costs or restrict distance-education enrollment. Student-loan repayments were scheduled to resume in October 2023.
- Legal contingency: Capella is among institutions covered by the Sweet borrower-defense settlement. The Department of Education has said any institutional recovery would require a separate proceeding; whether it will seek recovery from Capella is unclear, and the company cannot predict the outcome.
- Other risks and controls: Foreign-currency exposure is primarily Australian-dollar related; a hypothetical 10% adverse exchange-rate change would have reduced first-half revenue by approximately $10.7m. The company does not hedge this exposure. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether enrollment and revenue growth can offset higher bad debt and other instructional costs, particularly in USHE.
- Whether ANZ enrollment, revenue and operating performance stabilize after term-timing and currency effects.
- The persistence of restructuring charges and the extent to which reported results converge with management’s adjusted measures.
- Developments in federal higher-education rules, state authorization arrangements and Capella borrower-defense matters.
- Cash generation, dividend and repurchase levels, and compliance with the revolving-credit covenants as interest costs and regulatory requirements evolve.