Strategic Education, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Strategic Education provides U.S. and Australia/New Zealand post-secondary education and employer-linked education services through U.S. Higher Education (USHE), Australia/New Zealand (ANZ), and Education Technology Services (ETS).
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $285.9 million | $263.1 million | $830.2 million | $795.5 million |
| Operating income | $25.6 million | $7.8 million | $41.1 million | $43.1 million |
| Operating margin | 9.0% | 3.0% | 5.0% | 5.4% |
| Net income | $18.5 million | $6.1 million | $30.7 million | $28.3 million |
| Diluted EPS | $0.77 | $0.25 | $1.28 | $1.18 |
- Revenue and segments: Q3 USHE revenue rose 8.8% to $201.8 million, ETS rose 26.7% to $20.8 million, and ANZ rose 3.4% to $63.3 million. USHE enrollment increased 9.9% to 82,548; ANZ enrollment declined 1.2% to 18,279. For the nine-month period, USHE revenue rose 5.3% and ETS 24.6%, while ANZ revenue declined 3.9%.
- Profitability and costs: Q3 operating income improved mainly on USHE enrollment growth and Sophia Learning subscription growth. Q3 instructional and support costs were 54.5% of revenue, down from 58.2%; general and administrative costs were 34.1%, down from 37.2%. For the nine months, instructional and support costs increased to 56.6% of revenue from 56.0%, while general and administrative costs declined to 35.2% from 36.4%.
- Cash flow: Nine-month operating cash flow was $87.2 million, down from $124.7 million, primarily due to working-capital use and higher tax payments. Investing activities used $30.5 million; financing activities used $99.1 million. Capital expenditures were $27.3 million versus $32.5 million.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $198.6 million at September 30, versus $235.9 million at December 31, 2022. Revolver debt was $61.2 million, down from $101.4 million after a $40 million repayment in September. The company had a $350 million revolving facility and was in compliance with its covenants. Management said available liquidity and expected operating cash generation should cover requirements for the next 12 months and beyond.
- Capital returns: The company paid $44.1 million in dividends during the first nine months and repurchased $10.0 million of stock. The quarterly dividend was $0.60 per share. At quarter-end, $236.8 million of repurchase authorization remained available through December 31, 2023.
Material changes and unusual items
- Q3 restructuring costs were $3.3 million versus $0.6 million a year earlier; nine-month costs rose to $15.2 million from $6.1 million. The 2023 charges included $11.3 million of severance and facility-related impairment costs. A $2.1 million gain on sale of a closed campus partially offset year-to-date charges.
- Nine-month operating income declined despite revenue growth, principally because of higher restructuring costs and unfavorable foreign-exchange effects. Net income increased partly because other income improved, including investment and interest income.
- Bad-debt expense was 5.2% of Q3 revenue, compared with 4.5% a year earlier. The allowance for credit losses was $48.3 million at September 30.
- Foreign-currency translation reduced nine-month comprehensive income; accumulated other comprehensive loss was $62.9 million at quarter-end. Management reports no goodwill or intangible-asset impairment indicators for the period.
Non-GAAP context: Management reported adjusted Q3 operating income of $32.6 million and adjusted diluted EPS of $0.97; nine-month adjusted operating income was $68.0 million and adjusted diluted EPS was $2.03. These measures exclude specified items such as amortization, integration and restructuring costs, investment income or loss, and tax adjustments; they are not substitutes for GAAP results.
Outlook, risks, and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management described its strategy as investing in student success, affordable education, marketing, employer relationships, and growth platforms, and expressed a long-term expectation of continued growth.
- Regulatory exposure is significant. New 90/10 requirements apply to institutional fiscal years beginning on or after January 1, 2023. Final gainful-employment rules take effect July 1, 2024 and may affect federal aid eligibility for covered programs that fail specified outcome tests. Further Department of Education rulemaking may change compliance obligations and costs.
- Capella is included in the approved Sweet borrower-defense settlement class. The company cannot predict the outcome of borrower-defense matters or whether the Department may later seek recovery of discharged loan amounts from Capella. The filing also describes related borrower-defense applications and regulatory proceedings.
- Foreign exchange, student credit losses, enrollment trends, Title IV eligibility, accreditation and state authorization are key risks. A hypothetical 10% adverse currency-rate movement would have reduced nine-month revenue by about $17 million. A 100-basis-point rise in Term SOFR would add approximately $3.5 million in annual interest expense if the full revolver were drawn.
- The company reported ordinary-course litigation and does not expect the matters, individually or together, to materially affect its financial position, results, or cash flows; however, an unfavorable outcome could materially affect a particular period. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether USHE enrollment growth and ETS subscription momentum persist, and whether ANZ enrollment and revenue stabilize.
- Whether elevated bad-debt expense and restructuring charges moderate, and how these affect GAAP margins and cash generation.
- Progress on gainful-employment metrics, 90/10 compliance, and other federal and state regulatory requirements.
- Any developments in Capella borrower-defense claims, potential recoupment, or related litigation.
- Liquidity after dividends, debt repayment, and any further share repurchases, including the timing and cost of capital spending.