Strategic Education, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. The company provides U.S. higher education, employer education-benefit services, and education programs in Australia and New Zealand.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $263.1m | $270.1m | $795.5m | $859.6m |
| Operating income | $7.8m | $7.3m | $43.1m | $46.0m |
| Operating margin | 3.0% | 2.7% | 5.4% | 5.4% |
| Net income | $6.1m | $3.9m | $28.3m | $33.4m |
| Diluted EPS | $0.25 | $0.16 | $1.18 | $1.38 |
| Operating cash flow | Not stated for quarter | $124.7m | $161.2m |
- Revenue and segment trends: Q3 revenue fell 2.6%; nine-month revenue fell 7.5%. US Higher Education (USHE) revenue declined 3.3% in Q3 and 9.4% year to date, mainly from lower enrollment. Australia/New Zealand revenue fell 6.2% and 7.0%, respectively, including foreign-exchange pressure. Education Technology Services revenue grew 26.9% in Q3 and 22.5% year to date.
- Profitability: Q3 GAAP operating income rose modestly, helped by lower amortization and restructuring costs, but USHE reported a $1.9m operating loss versus $5.2m income a year earlier. Nine-month GAAP operating income and net income declined. Company-defined adjusted operating income was $12.2m in Q3 versus $20.7m, and $61.1m year to date versus $127.9m; adjusted diluted EPS was $0.33 versus $0.59 and $1.73 versus $3.69, respectively. These non-GAAP measures exclude specified acquisition, restructuring, investment, and tax items and are not directly comparable to GAAP results.
- Costs and margins: Q3 instructional and support costs were 58.2% of revenue versus 56.9%; general and administrative costs were 37.2% versus 35.4%. For the nine months, those ratios were 56.0% versus 53.4% and 36.4% versus 32.1%. Lower amortization, integration and restructuring charges partly offset increased branding and marketing investment and weaker USHE performance.
- Cash flow and investment: Nine-month operating cash flow was $124.7m, down from $161.2m, primarily reflecting lower USHE earnings, partly offset by working-capital timing. Capital expenditures were $32.5m versus $33.6m. Cash, cash equivalents and marketable securities totaled $288.8m at September 30, 2022, versus $298.8m at year-end 2021.
Financial position and capital allocation
- Cash and cash equivalents were $262.8m; marketable securities were $26.0m. Current assets were $402.7m and current liabilities $259.9m. Tuition receivable, net, increased to $81.7m from $51.3m at year-end; current contract liabilities rose to $131.7m from $73.2m.
- Long-term debt was $141.2m, essentially unchanged from year-end, under a $350m revolving facility maturing in November 2025. The company reported compliance with all facility covenants. Interest expense was $1.6m in Q3 and $3.6m for the nine months; the facility has variable-rate exposure.
- The company paid $44.6m in dividends and repurchased $36.9m of shares during the first nine months. The quarterly dividend was $0.60 per share. Remaining repurchase authorization was $213.1m through December 31, 2022.
- Accumulated other comprehensive loss reached $66.4m, mainly reflecting foreign-currency translation. The company recorded a $74.7m currency translation loss in the first nine months.
Outlook, risks and unusual items
- No quantified revenue, earnings or enrollment guidance is provided. Management said existing cash, operating cash generation and, if needed, credit-facility borrowings should be sufficient for requirements for at least the next 12 months. Management’s longer-term strategy emphasizes student success, affordability, employer partnerships and investment in growth platforms.
- Enrollment trends remain important: Q3 USHE enrollment declined 3% to 75,144; Australia/New Zealand enrollment rose 1.7% to 18,493. USHE persistence was 87.3% for Q2 2022, reported one quarter in arrears. Employer-affiliated enrollment rose to 25.3% of USHE enrollment from 21.1%.
- Regulatory and legal exposure includes federal student-aid eligibility and changing rules, including the revised 90/10 rule effective for fiscal years beginning on or after January 1, 2023. Strayer and Capella reported 2021 Title IV revenue shares of 82.95% and 67.06%, respectively, under the then-applicable calculation. The company also described proposed federal rules on borrower defense, gainful employment and institutional oversight.
- The CFPB’s education-loan examination was ongoing; it had raised a preliminary finding concerning a product no longer used. The company disputes the CFPB’s supervisory position and alleged violations. Both universities had discontinued the historical practice of withholding transcripts from delinquent students and reported completing requested remedial actions.
- Capella borrower-defense claims and a proposed class settlement involving listed institutions, including Capella, remained uncertain as of the filing. The filing says potential Department of Education recoupment, if borrower loans are discharged, is unclear. The company also reported that the Ornelas litigation was settled and dismissed with prejudice in April–May 2022.
- Foreign currency is a material sensitivity: 22.3% of nine-month revenue was denominated in currencies other than the U.S. dollar, primarily Australian dollars. A hypothetical 10% adverse exchange-rate move would have reduced nine-month revenue by about $17.7m. The company does not hedge these exposures. A 100-basis-point increase in LIBOR would add about $3.5m annual interest expense if the full $350m facility were drawn.
Most important facts for investors to verify
- Whether USHE enrollment and operating performance stabilize, and whether growing employer-affiliated enrollment and Education Technology Services can offset declines elsewhere.
- Whether the sharp year-over-year decline in adjusted earnings persists; review the company’s non-GAAP exclusions alongside GAAP results.
- Collection trends and bad debt: Q3 bad-debt expense was 4.5% of revenue, up from 3.8%; tuition receivables also increased.
- Developments in CFPB oversight, Capella borrower-defense claims, 90/10 implementation and other higher-education regulations, including potential financial or operating consequences.
- Cash generation after dividends, buybacks and capital expenditures; variable-rate debt costs; and the effect of currency movements on results.