Strategic Education, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited consolidated results compared with Q1 2022. The company 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).
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $256.6 million | $258.9 million |
| Operating income (loss) | ($1.3) million | $13.4 million |
| Operating margin | (0.5)% | 5.2% |
| Net income (loss) | ($2.0) million | $7.0 million |
| Diluted EPS | ($0.09) | $0.29 |
| Operating cash flow | $35.2 million | $56.6 million |
- Revenue declined 0.9%. Operating costs rose to $258.0 million from $245.4 million, and the company moved to a GAAP operating loss and net loss.
- Cash, cash equivalents, and marketable securities totaled $240.0 million at March 31, 2023, versus $235.9 million at December 31, 2022. Cash and equivalents alone were $202.8 million.
- Long-term debt was $101.3 million, primarily drawn under a $350 million revolving facility maturing November 2025. The company reported compliance with facility covenants.
- Operating cash flow fell year over year, which management attributed to lower earnings, working-capital use, and higher tax payments. Investing used $23.3 million, including $17.1 million of marketable-security purchases; capital expenditures were $8.3 million. Financing used $19.7 million, including $14.8 million of dividends.
- The quarterly dividend was $0.60 per share. No shares were repurchased during the quarter; $246.8 million of authorization remained through December 31, 2023.
Segments and material changes
- USHE: Revenue increased 0.6% to $196.9 million. Enrollment rose 2.3% to 79,935, while operating income fell to $9.6 million from $15.5 million. Management cited lower revenue per student and higher marketing investment.
- ETS: Revenue increased 24.9% to $18.2 million and operating income rose to $5.8 million from $4.7 million, reflecting Sophia Learning growth and higher employer-affiliated enrollment. Employer-affiliated enrollment was 26.3% of USHE enrollment, versus 23.0% a year earlier.
- ANZ: Revenue fell 14.4% to $41.5 million; enrollment declined 6.3% to 19,269. Operating loss widened to $7.2 million from $0.7 million. Management cited academic-term timing, unfavorable currency effects, and increased marketing investment.
- Instructional and support costs increased to $152.9 million; as a share of revenue they rose to 59.6% from 55.9%. Bad-debt expense was 3.8% of revenue, up from 2.8%.
- Restructuring costs rose to $5.6 million from $1.9 million. Q1 2023 included approximately $3.6 million of lease-asset impairment charges and $2.3 million of severance costs. One owned U.S. campus was classified as held for sale; no impairment was recorded.
- Management’s non-GAAP adjusted operating income was $8.2 million versus $19.4 million; adjusted net income was $5.8 million versus $13.1 million, and adjusted diluted EPS was $0.24 versus $0.54. These measures exclude specified items and are not substitutes for GAAP results.
Outlook, risks, and contingencies
- The filing provides no specific revenue or earnings guidance. Management said available cash and securities, expected operating cash flow, and facility availability should cover cash requirements for the next 12 months and beyond. Management also described continued investment in student success, affordability, marketing, employer partnerships, and growth platforms.
- Regulatory and funding risks include changes to Title IV requirements and the 90/10 Rule, borrower-defense matters, accreditation and state authorization, and proposed changes to the State Authorization Reciprocity Agreement. The company warned that excluding for-profit institutions from SARA could materially affect operations. New 90/10 regulations apply to fiscal years beginning on or after January 1, 2023.
- Capella is included in a borrower-defense settlement providing automatic presumptive relief to certain borrowers. The company cannot predict the outcome or whether the Department of Education will pursue recovery from Capella; any such recovery would be contested. Ordinary-course litigation remains outstanding, and the company stated it did not expect a material overall effect, while noting an adverse resolution could affect a particular period.
- ANZ currency exposure is material: 16.2% of Q1 revenue was denominated in non-U.S. currencies, primarily Australian dollars. A hypothetical 10% adverse exchange-rate move would have reduced quarterly revenue by approximately $4.2 million. The company does not hedge these exposures.
- Interest expense was $1.8 million versus $0.9 million a year earlier. The filing notes that a 100-basis-point increase in LIBOR would add $3.5 million of annual interest expense if the full $350 million facility were drawn.
- Capella received a fully certified Department of Education Program Participation Agreement on April 18, 2023, extending Title IV participation through September 30, 2025.
Important facts for investors to verify
- Whether USHE enrollment gains and ETS growth can offset ANZ weakness and lower revenue per student.
- Whether bad-debt expense, restructuring charges, and segment operating losses improve in subsequent quarters.
- Progress and potential financial effects of borrower-defense claims, 90/10 compliance, and SARA and other regulatory changes.
- Cash generation, debt costs and covenant headroom, and the sustainability of dividends and planned capital needs.