Strategic Education, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparison is Q1 2021 unless noted. Strategic Education provides U.S. and Australia/New Zealand postsecondary education and employer education-benefit services. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $258.9 | $290.3 |
| Income from operations | $13.4 | $12.0 |
| Operating margin | 5.2% | 4.1% |
| Net income | $7.0 | $9.6 |
| Diluted EPS | $0.29 | $0.40 |
| Operating cash flow | $56.6 | $78.8 |
| Capital expenditures | $9.7 | $12.7 |
- Revenue fell 10.8% year over year. Operating income rose despite lower sales, mainly because restructuring costs and acquired-intangible amortization were substantially lower. Net income declined as lower operating performance and investment income, and a higher tax rate, weighed on results.
- Gross cash, cash equivalents and marketable securities totaled $321.5 at March 31, 2022, up from $298.8 at December 31, 2021. Current assets were $417.8 and current liabilities $254.8.
- Long-term debt was $141.7, outstanding under a $350 million revolving credit facility maturing November 2025. The company reported compliance with facility covenants. It also had lease liabilities of $184.8, current and non-current combined.
- Operating cash flow decreased $22.2 year over year, primarily due to lower U.S. Higher Education earnings, partly offset by working-capital timing. The company paid $15.0 in dividends and repurchased $4.0 of shares during the quarter.
Material changes and segment performance
- U.S. Higher Education: Revenue declined 13.6% to $195.8; enrollment fell 13% to 78,172. Operating income declined 67.6% to $15.5, reflecting lower enrollment and higher marketing investment.
- Australia/New Zealand: Revenue declined 5.4% to $48.5, with enrollment down 4% to 20,575 and lower revenue per student. Operating loss narrowed to $0.7 from $2.9.
- Education Technology Services: Revenue rose 16.4% to $14.6, while operating income declined 19.9% to $4.7 due to greater corporate-partner outreach spending. Management cited growth in Sophia Learning and employer-affiliated enrollment.
- Instructional and support costs decreased to $144.6, but rose to 55.9% of revenue from 52.6%. General and administration expense increased to $94.8, or 36.6% of revenue, from $86.8, or 29.9%, mainly reflecting branding and brand-ambassador initiatives.
- Reported restructuring costs were $1.9 versus $18.3 in Q1 2021; the prior-year period included $14.4 of right-of-use asset charges and additional fixed-asset impairments. Intangible amortization fell to $3.7 from $19.4 as certain acquired assets had become fully amortized.
- Non-GAAP adjusted operating income was $19.4 versus $52.9, and adjusted diluted EPS was $0.54 versus $1.53. These measures exclude specified purchase-accounting, integration, restructuring, investment and tax items; they are not GAAP measures.
Outlook, risks and contingencies
- No numerical full-year guidance is provided. Management said near-term U.S. Higher Education revenue is expected to remain pressured by weaker enrollment demand associated with the ongoing COVID-19 pandemic. It stated that available cash, operating cash generation and facility borrowings, if needed, should cover requirements for at least 12 months.
- Key risks include enrollment and student persistence, reliance on federal Title IV funding, and evolving higher-education rules, including proposed 90/10 and gainful-employment changes. The company cannot predict the effect of pending rulemaking.
- After quarter-end, the CFPB asserted supervisory authority and said it was considering potential findings concerning historical transcript-withholding practices for delinquent students; both universities had discontinued that practice before the correspondence. The company disputes the CFPB’s position and alleged violations, is cooperating, and said the CFPB planned an education-loan examination in June 2022.
- Capella had received approximately 500 borrower-defense applications in a Department of Education fact-finding process concerning alleged representations about doctoral-program completion times; the company said the outcome could not be predicted. Separately, the related Ornelas litigation was settled effective April 20, 2022 and dismissed with prejudice on April 25.
- The company disclosed ordinary-course litigation and said it did not expect existing matters, individually or in aggregate, to materially adversely affect its financial position, results or cash flows, while noting an unfavorable resolution could affect a particular period.
- Q1’s effective tax rate increased to 42.7% from 32.4%, primarily due to a $1.3 million tax shortfall on share-based payments. A 10% adverse currency-rate move was estimated to reduce quarterly revenue by approximately $4.9 million; the company does not hedge foreign-currency exposures.
Investor verification points
- Track U.S. enrollment and revenue trends, and whether management’s expected near-term demand weakness persists.
- Review cash generation, tuition receivables and credit-loss assumptions; net tuition receivables were $64.8 million, and the allowance was $44.9 million.
- Monitor the CFPB inquiry and examination, borrower-defense applications, Capella’s program recertification, and developments in federal education rulemaking.
- Assess adjusted results alongside GAAP results, especially the substantial year-over-year effect of lower excluded restructuring and amortization charges.
- Verify continued compliance with credit-facility covenants and evaluate dividends, share repurchases and debt levels against operating cash flow.