Business context and reporting period
Strategic Education, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. It operates Strayer University and Capella University, along with related education and skills-training businesses. Results are compared with the same 2019 periods.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $255.8m | $245.1m | $521.1m | $491.6m |
| Operating income | $46.4m | $27.6m | $90.4m | $53.3m |
| Operating margin | 18.1% | 11.3% | 17.3% | 10.8% |
| Net income | $34.2m | $24.4m | $69.4m | $35.9m |
| Diluted EPS | $1.55 | $1.10 | $3.15 | $1.63 |
Q2 revenue increased 4.4% year over year, while operating income rose 68% and net income rose 40%. Management attributed operating improvement mainly to enrollment growth, cost efficiencies and lower merger and integration costs. Adjusted operating income, a non-GAAP measure, was $63.0m in Q2 versus $46.0m; adjusted diluted EPS was $2.06 versus $1.59.
Q2 segment revenue was $138.1m at Strayer, up 4.8%, and $117.8m at Capella, up 3.9%. Strayer segment operating income was $35.8m versus $24.4m; Capella’s was $27.2m versus $21.6m. Q2 enrollment increased 6% at Strayer to 53,782 and 1% at Capella to 39,341.
Cash, liquidity and capital
- At June 30, cash and cash equivalents were $470.3m and marketable securities totaled $55.0m, or $525.3m combined. Total current assets were $553.5m; total current liabilities were $148.9m.
- Operating cash flow for the first six months was $111.9m, compared with $103.1m in 2019. Capital expenditures were $25.5m, versus $18.9m.
- The company had no borrowings outstanding under its $250m revolving credit facility and reported compliance with its covenants. The facility matures August 2023.
- It paid $26.7m in dividends during the first half; the quarterly dividend was $0.60 per share. Repurchases were approximately $0.2m during the half, with $249.8m of authorization remaining at June 30.
Changes, outlook and risks
- COVID-19 weakened demand and continuation rates after quarter-end. Management estimated Strayer Q3 new-student enrollment would decline about 27%; Capella new-student enrollment was expected to decline 5–10%. Total enrollment was projected to be down about 1% at Strayer and up about 1% at Capella.
- Management projected Q3 2020 revenue and adjusted operating income to be flat year over year. If enrollment trends persisted for the rest of 2020, it expected full-year revenue to be flat to slightly higher than 2019 and adjusted operating income and income before taxes to rise in the low-to-mid single digits. These are conditional outlook statements, not guarantees.
- The company offered students payment flexibility, scholarships and other pricing relief; it expected revenue per student to be flat to down 2% versus 2019. It paused planned campus expansion projects not yet started.
- Credit-loss allowances increased to $43.0m from $30.9m at year-end; the company recorded additional reserves for projected COVID-related collection deterioration. Q2 bad-debt expense was 4.7% of revenue in both years.
- On July 29, 2020, after quarter-end, the company agreed to acquire Laureate Education’s Australia and New Zealand operations for approximately $642.7m, subject to adjustments, approvals and closing conditions; closing was expected by Q1 2021. Lenders committed to expand the revolving facility to $350m at closing.
- Other watch items include the ongoing Department of Education review of Capella’s FlexPath program, uncertainty over the Department’s review of Capella’s accreditor, HLC, and ordinary-course litigation. Management said an adverse resolution of legal matters could affect results in a particular period, though it did not expect a material adverse effect overall.
Most important facts for investors to verify
- Whether COVID-related enrollment, persistence, pricing and collection trends match management’s conditional forecasts.
- Whether increased credit-loss reserves adequately reflect student receivable risk and whether collections deteriorate further.
- Whether the Laureate transaction closes on expected terms, and its financing, integration costs and effect on leverage and liquidity.
- Developments in Title IV compliance, Capella’s program review and HLC’s accreditation status, including any resulting liabilities or restrictions.
- Underlying performance excluding non-GAAP adjustments, including merger costs, acquired-intangible amortization and investment income.