Strategic Education(STRA) - 2023 Q4 - Earnings Call Transcript

Financial Data and Key Metrics - Revenue for the fourth quarter grew 12.5% to $304 million, with operating income more than doubling to $57 million and operating margin increasing by 870 basis points [60] - Full-year revenue grew 7.4%, operating expenses grew 4%, operating income grew 43%, and operating margin increased by 280 basis points [17] - Earnings per share more than doubled to $1.70 per share in Q4 [60] - The company generated $159 million in pretax cash from operations and sold a campus property for $6 million, resulting in $165 million in generated cash [10] - $42 million was paid in taxes, $37 million was invested in capital and growth expenditures, and $40 million of debt was paid down, leaving $208 million in cash and marketable securities at year-end [10][23] Business Segment Performance Education Technology and Services (ETS) - ETS revenue grew 31% in Q4 and 26% for the full year, with operating income increasing 119% in Q4 and 51% for the full year [2] - Sophia Learning, a direct-to-consumer portal, grew revenue by 42% in Q4 and achieved a 50% operating margin, up from 22% in the prior year, with paid subscribers increasing 44% to over 35,000 [61] - Workforce Edge enrollments doubled year-over-year, with 65 corporate partners and enrollments growing 112% to nearly 1,500 students [100] U.S. Higher Education - Total enrollment grew 11% in Q4 and 7% for the full year, with employer-affiliated enrollment growing 24% in Q4 and 19% for the full year [21] - Revenue grew 9% in Q4 and 6% for the full year, while operating income grew 149% in Q4 and 55% for the full year [56] - Corporate partnerships accounted for 70% of incremental enrollment growth, with retention stable at 87.4% [56] Australia New Zealand (ANZ) - Revenue grew 20% in Q4 and 6% for the full year on a constant currency basis [100] - Domestic and international enrollment is roughly 50-50, with domestic new student enrollment up 20% year-over-year in Q3, while international new students declined slightly [36][67] - The company plans to make substantial investments in ANZ in 2024 to support growth [32] Market and Strategic Insights - The company attributes strong enrollment growth to its network of over 1,000 corporate partnerships, which drove outperformance in U.S. Higher Education [77] - Labor force participation rates are a key macro indicator for future demand, as they reflect employment confidence, which is a predictor of working adults returning to school [31] - The company expects consolidated margins to settle in the low to mid-20s, with fluctuations based on investments made in any given quarter or year [18] Management Commentary on Environment and Outlook - Management remains confident in the quality of Torrens University and Media Design School in New Zealand, with plans for substantial investments in 2024 [32] - The company expects investments in 2024 to be weighted toward the second half of the year, with the exception of Australia, where investments will be made throughout the year [33] - The company is well-positioned to support academic institutions, fund opportunities, and return capital to shareholders in 2024 [23] Other Important Information - The company returned $74 million to shareholders through dividends and share repurchases, with a focus on opportunistic share repurchases at a significant discount to intrinsic value [59][29] - The company targets cash conversion or distributable cash at the same level as adjusted net income, with plans to pay down the revolver and maintain a payout ratio of roughly one-third for dividends [68][75] Q&A Summary Question: Enrollment Growth Drivers - The primary driver of enrollment growth is the company's corporate partnerships, which have seen accelerated growth in the back half of the year [77] - Workforce Edge enrollments doubled year-over-year, contributing significantly to growth [14] Question: ANZ Enrollment and Visa Changes - The company does not expect tighter student visa qualification rules in Australia to adversely impact enrollments, as it takes a measured approach to international recruitment [67] - Domestic new student enrollment was up in Q4, while international new students declined slightly, with overall growth expected in the future [98] Question: Capital Deployment and Share Repurchases - The company plans to pay down the revolver, maintain dividend payouts, and consider opportunistic share repurchases based on stock price relative to intrinsic value [74][29] - Cash conversion is expected to align with adjusted net income moving forward [75] Question: Operating Margin Sustainability - Management expects margins to settle in the low to mid-20s, with fluctuations based on investments, and remains confident in the sustainability of gains [18][92] Question: 2024 Outlook - The company remains comfortable with the preliminary 2024 outlook provided at Investor Day, with no significant changes to the growth drivers or segment performance [19][93]