Strategic Education, Inc. — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. The company operates Strayer University and Capella University, serving primarily working adults through campus-based and online education.
Financial performance
| Metric | Q1 2019 | Q1 2020 |
|---|---|---|
| Revenue | $246.5 million | $265.3 million |
| Income from operations | $25.7 million | $44.0 million |
| Operating margin | 10.4% | 16.6% |
| Net income | $11.5 million | $35.2 million |
| Diluted EPS | $0.52 | $1.60 |
| Operating cash flow | $58.7 million | $68.7 million |
| Capital expenditures | $8.8 million | $14.3 million |
- Revenue increased about 7.6%, primarily due to enrollment growth. Strayer revenue rose 11.4% to $145.7 million; Capella revenue rose 3.4% to $119.6 million.
- Enrollment grew 11% at Strayer to 55,337 and 4% at Capella to 41,200. New-student enrollment increased 7% at Strayer and 17% at Capella.
- Instructional and support costs declined to $132.9 million from $134.1 million; as a share of revenue, they fell to 50.1% from 54.4%. General and administration costs increased to $69.2 million from $64.1 million.
- Lower merger and integration costs ($3.8 million versus $7.2 million) also contributed to higher operating income. Adjusted, non-GAAP operating income was $63.1 million and adjusted diluted EPS was $2.11; these measures exclude specified items and are not substitutes for GAAP results.
- The effective tax rate was 23.5%, versus 60.4% in Q1 2019. The prior-year rate included an $11.5 million discrete tax charge related to changes in deferred compensation arrangements. Q1 2020 also included favorable tax adjustments, including share-based compensation tax windfalls.
Financial position and liquidity
- At March 31, 2020, cash and cash equivalents were $442.8 million and marketable securities totaled $63.4 million; together, $506.3 million, compared with $491.2 million at December 31, 2019.
- Total assets were $1.784 billion and total liabilities were $324.7 million. The company had no revolving-credit borrowings and reported $250 million of available revolver capacity; it was in compliance with facility covenants.
- Operating cash flow was $68.7 million. Investing activities used $6.3 million, including capital expenditures; financing activities used $38.7 million, including $13.3 million in dividends and $25.1 million in net payments for stock awards.
- The quarterly dividend was $0.60 per share. The company repurchased approximately $0.2 million of stock during the quarter and had $249.8 million of repurchase authorization remaining.
- Management said cash, operating cash generation and, if needed, the credit facility should be sufficient to meet requirements for at least the next 12 months.
Outlook, management commentary and risks
- COVID-19 measures included remote work for most employees, campus closures, moving Strayer’s on-ground classes online, and pausing planned 2020 campus expansion projects not yet started. On-ground classes had represented less than 5% of total seat count.
- The company anticipated COVID-19 could reduce enrollment and revenue per student. Student payment flexibility, scholarships and other pricing relief were expected to negatively affect revenue per student and bad-debt expense over the next three to four quarters. Management estimated a full-year 2020 revenue-per-student decline of approximately 3%, partly offset by expected expense savings. This is management’s estimate, not formal earnings guidance.
- Q1 bad-debt expense was 4.2% of revenue versus 5.0% a year earlier. The 2020 provision included additional reserves for expected COVID-related deterioration in collections, partly offset by better-than-expected collections.
- Strayer declined $5.8 million in CARES Act institutional emergency funding, citing the predominantly online student population, and instead offered a $500 summer-term scholarship to students enrolled in on-ground classes before conversion to online instruction. Capella was ineligible because its students were exclusively online.
- Key uncertainties include the pandemic’s effects on student persistence, collections, employer tuition assistance and operations; Title IV eligibility and regulatory compliance; student loan defaults; and the unresolved Department of Education program review of Capella’s FlexPath program. Ordinary-course litigation was not expected by management to have a material overall effect, though an unfavorable resolution could affect a particular period.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020, reducing opening retained earnings by $3.3 million net of tax. The allowance for credit losses rose to $38.1 million at March 31, including the $4.6 million adoption impact and Q1 expense additions.
Important facts for investors to verify
- Whether COVID-related enrollment, pricing relief and collections trends diverged from management’s estimated 3% full-year revenue-per-student decline.
- Subsequent bad-debt expense, allowance adequacy and student receivable collections, particularly as economic conditions evolve.
- Enrollment and revenue trends at each university, including new- and continuing-student performance.
- Compliance with Title IV requirements and the outcome of Capella’s FlexPath program review, including any findings or liabilities.
- Capital spending, dividend and repurchase activity, and continued liquidity and covenant compliance.