Strategic Education, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. The company provides U.S. and Australia/New Zealand higher education and employer-focused education technology services.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $273.6 million | $299.2 million | $532.4 million | $589.5 million |
| Operating income | $21.9 million | $26.7 million | $35.3 million | $38.7 million |
| Operating margin | 8.0% | 8.9% | 6.6% | 6.6% |
| Net income | $15.2 million | $20.0 million | $22.2 million | $29.6 million |
| Diluted EPS | $0.63 | $0.83 | $0.92 | $1.22 |
| Operating cash flow | Not stated for Q2 alone | $80.7 million | $125.8 million |
- Q2 revenue fell 8.6%; six-month revenue fell 9.7%. Lower U.S. Higher Education (USHE) enrollment was the principal driver; Australia/New Zealand results also faced foreign-exchange and revenue-per-student pressure.
- Q2 instructional and support costs declined, but rose as a share of revenue to 53.9% from 51.1%. General and administration expense rose to $96.7 million from $93.4 million, including increased branding and brand-ambassador investment; its revenue share rose to 35.4% from 31.2%.
- Six-month operating cash flow declined by $45.2 million, primarily due to lower USHE earnings, partly offset by working-capital timing. Capital expenditures were $22.7 million versus $23.1 million.
- Adjusted non-GAAP Q2 operating income was $29.5 million versus $54.3 million, and adjusted diluted EPS was $0.85 versus $1.57. For six months, adjusted operating income was $48.9 million versus $107.2 million, and adjusted diluted EPS was $1.39 versus $3.10. These measures exclude specified purchase-accounting, integration, restructuring, and other items; review the filing’s reconciliations before comparing them with GAAP results.
Segments and operating trends
- USHE: Q2 enrollment decreased 9% to 76,728; revenue fell 10.5% to $190.0 million. Q2 operating income fell 63% to $11.9 million, reflecting lower enrollment and increased marketing investment. Trailing four-quarter persistence was 87.1% in Q1 2022, versus 86.5% a year earlier.
- Australia/New Zealand: Q2 enrollment was nearly flat at 18,834 versus 18,800, while revenue fell 8.8% to $67.5 million, principally due to foreign exchange and lower revenue per student. Operating income was $12.3 million versus $15.6 million.
- Education Technology Services: Q2 revenue increased 23.9% to $16.0 million, attributed to Sophia Learning growth and higher employer-affiliated enrollment. Operating income was $5.3 million versus $5.2 million. Employer-affiliated enrollment represented 24.6% of USHE enrollment, up from 20.5%.
Balance sheet, liquidity and capital allocation
- At June 30, cash and cash equivalents were $262.9 million; marketable securities totaled $26.8 million. The company reported $289.7 million of cash, cash equivalents and marketable securities, versus $298.8 million at December 31, 2021.
- Long-term debt was $141.4 million, substantially unchanged from year-end. The $350 million revolving facility matures November 3, 2025; the company reported covenant compliance at quarter-end.
- Current assets were $395.8 million and current liabilities $235.6 million. Contract liabilities increased to $121.0 million from $73.2 million at year-end; these include advance tuition and obligations such as future Graduation Fund benefits.
- Six-month financing cash outflows included $29.9 million of dividends and $25.0 million of share repurchases. The quarterly dividend was $0.60 per share; $225.0 million of repurchase authorization remained at June 30, 2022.
- Management said existing cash, operating cash generation and, if needed, facility borrowings should meet requirements for at least the next 12 months. This is not earnings guidance.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or enrollment guidance. Management described its strategy as focused on student success, affordability, marketing, employer relationships and new growth platforms, with a long-term growth objective.
- Foreign currency translation was a significant headwind to comprehensive income: the six-month translation adjustment was a loss of $36.5 million, and accumulated other comprehensive income moved from $9.2 million at year-end to a loss of $28.0 million. The company does not hedge foreign-currency exposures; management estimated a 10% adverse exchange-rate move would reduce six-month revenue by about $11.6 million.
- Regulatory exposure includes federal student-aid eligibility and rulemaking, including changes to the 90/10 rule and proposed borrower-defense and gainful-employment regulations. Strayer’s 2021 Title IV revenue percentage was approximately 82.95%; Capella’s was 67.06%. Changes to these requirements could affect operations or access to student aid.
- The CFPB asserted supervisory authority and alleged potential violations concerning historical transcript withholding for delinquent balances. The practice had already been discontinued; the company disputes the CFPB’s position and alleged violations, is cooperating, and said it intended to complete requested remedial actions. A CFPB education-loan examination began in June 2022 and was expected to continue into August.
- Capella faces uncertainty concerning borrower-defense applications and a proposed class settlement in separate litigation; the filing says potential recoupment exposure, if any, is unclear. The Ornelas matter was settled and dismissed with prejudice in April–May 2022. The company says litigation outcomes are uncertain and that unfavorable resolution could affect a particular period.
- Restructuring charges were $5.5 million for the first half, down from $23.1 million, while Q2 included $3.7 million. Q2 impairment charges included $1.1 million for right-of-use lease assets and $2.2 million for fixed assets. No goodwill impairment was recorded.
Most important facts for investors to verify
- Whether USHE enrollment and operating income stabilize, and whether increased marketing produces improved enrollment and returns.
- How much of the revenue decline reflects enrollment, foreign exchange and lower revenue per student, particularly in Australia/New Zealand.
- GAAP versus adjusted earnings reconciliations and the impact of nonrecurring adjustments on year-over-year comparisons.
- Cash-flow conversion, the sustainability of dividends and repurchases, and compliance with credit-facility covenants.
- Developments in CFPB actions, Capella borrower-defense claims, and federal and state regulation of student-aid eligibility.