Strategic Education, Inc. 10-Q Summary
Filing identity: The supplied filing is for Strayer Education, Inc., not Strategic Education, Inc. It covers the unaudited quarter and nine months ended September 30, 2016, with comparisons to 2015.
Business context and reporting period
Strayer operated Strayer University, offering undergraduate and graduate degrees on campus and online, and, from January 13, 2016, New York Code and Design Academy (NYCDA), offering non-degree technology courses. The company reported one segment. About 95% of nine-month 2016 revenue was tuition.
Financial results
Amounts below are in millions except per-share data. Margins are calculated from reported figures.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $102.2 | $99.1 | $321.8 | $320.8 |
| Operating income | $4.8 | $7.3 | $37.8 | $48.0 |
| Operating margin | 4.7% | 7.3% | 11.7% | 15.0% |
| Net income | $2.9 | $3.7 | $23.1 | $27.0 |
| Net margin | 2.8% | 3.8% | 7.2% | 8.4% |
| Diluted EPS | $0.27 | $0.35 | $2.14 | $2.52 |
- Q3 revenue increased 3%, driven mainly by 4% higher University enrollment; revenue per student declined 1%. University summer-term enrollment was 38,813 versus 37,221 a year earlier.
- Nine-month revenue was nearly flat. Average University enrollment increased 2% to 40,238, while revenue per student declined 1%.
- Q3 marketing expense rose 18% to $25.4 million; nine-month marketing expense increased 16% to $61.4 million. Management attributed the increases principally to branding investments at Strayer University and NYCDA.
- Q3 bad-debt expense was 3.8% of revenue, versus 2.3% a year earlier. The filing cites higher bad-debt expense as a risk to results.
- Cash and cash equivalents were $120.5 million at September 30, 2016, versus $106.9 million at December 31, 2015. Current assets were $152.7 million and current liabilities $61.7 million.
- Operating cash flow for the first nine months was $30.1 million, down from $54.5 million; capital expenditures were $7.5 million versus $9.6 million. The company attributed lower operating cash flow largely to working-capital changes, tax-payment timing, and NYCDA-related retention payments.
- No revolver borrowings were outstanding. The company had a $150 million revolving facility maturing July 2, 2020, and reported compliance with its covenants. Interest expense was $0.5 million for the nine months, compared with $3.7 million in 2015.
- Operating lease commitments, before subleases, totaled $141.9 million, including $34.6 million due within one year. Management expects cash, operating cash generation and available credit to be sufficient for at least 12 months.
Material changes, outlook, and risks
- NYCDA was acquired in January 2016 to complement degree programs with technology training. The filing reports $7.6 million of acquisition cash used net of cash acquired during the nine months, $8.0 million of contingent consideration recorded as a noncash transaction, and $14.5 million fair value of acquisition-related contingent consideration at September 30. Potential total acquisition and earnout payments could reach $25.0 million. The purchase-price allocation remained preliminary.
- Operating income and net income declined despite higher Q3 revenue, reflecting higher marketing and admissions costs, among other factors. Management expects undergraduate revenue per student to continue declining, though more gradually, as more students enter under the reduced tuition structure. It also expected marketing expense could increase in absolute terms and as a share of revenue during 2016. No specific earnings or revenue guidance was provided.
- Q3 and nine-month results included reductions in the estimated liability for unused facilities. Q3 after-tax benefits were approximately $0.1 million in 2016 and $0.2 million in 2015. These are estimates subject to changes in sublease income and market conditions.
- The Department of Education’s October 2016 draft gainful-employment rates showed no University programs failing, but two associate-degree programs in the “Zone.” The company was reviewing the underlying data and could appeal inaccuracies by December 7, 2016; final rates were expected in January 2017.
- Strayer University’s provisional Program Participation Agreement allowed Title IV participation through June 30, 2017. Proposed federal rules concerning borrower defenses and state authorization for distance education could create added obligations or affect eligibility; the company said their impact was uncertain.
- Regulatory compliance, Title IV funding, student enrollment and collections, competition, acquisition integration, and lease and sublease estimates are significant risks. The company reported no pending material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer identity: this filing names Strayer Education, Inc., while the request names Strategic Education, Inc.
- Track enrollment and revenue per student separately, especially undergraduate pricing trends and graduate enrollment.
- Monitor bad-debt expense and collections, given the increase to 3.8% of Q3 revenue.
- Review final gainful-employment rates and the outcome for the two associate programs in the draft Zone, along with the University’s Title IV participation status.
- Follow NYCDA’s performance, remaining contingent payments, purchase-price allocation, and expansion-related regulatory approvals.
- Assess cash generation against lease commitments and other obligations; operating lease commitments are not recognized as balance-sheet lease liabilities under the accounting guidance then in effect. The company expected future lease accounting changes to have a material balance-sheet impact.