Welcome to Strategic Education's Second Quarter 2021 Results Conference Call. I will now turn the call over to Terese Wilke, Director of Investor Relations for Strategic Education. Mrs. Wilke please go ahead. .

Robert Silberman, Executive Chairman; Karl McDonnell, President and Chief Executive Officer; and Daniel Jackson, Executive Vice President and Chief Financial Officer. Following today's remarks, we will open the call for questions.

Please note that this call may include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

The statements are based on current expectations and are subject to a number of assumptions uncertainties and risks that Strategic Education has identified in today's press release that could cause actual results to differ materially.

Further information about these and other relevant uncertainties may be found in Strategic Education's most recent annual report on the Form 10-K the 10-Q to be filed and other filings with the Securities and Exchange Commission as well as Strategic Education's future 8-Ks, 10-Qs and 10-Ks.

Copies of these filings and the full press release are available for viewing on the website at strategiceducation.com. And now I'd like to turn the call over to Karl. Karl, please go ahead. .

Thank you, Terese, and good morning everyone. Our second quarter financial results that we released this morning were basically right in line with our expectations. And this morning I'd like to cover a few highlights from our results and then open the call up for your questions as Terese just said.

And first I'd like to begin with our Australia/New Zealand segment which generated $74 million of revenue and $16 million of operating income in the second quarter.

The integration of Torrens University, Think Education and the Media Design School onto SEI's infrastructure is mostly complete and we expect the last component of that integration to be complete by the middle of August, well ahead of our original plan which was the end of the year.

At the beginning of this year, we assumed that the Australian borders would reopen to foreign travel, including international students by this time of the year essentially the third quarter.

However, it now appears that borders will remain closed through at least spring of 2022 which we expect could have a moderately negative impact on this year's revenue. Notwithstanding this, we still believe ANZ's EBITDA will be essentially at their plan of $60 million.

And next I'd like to provide a few updates on our alternative learning segment which again includes Sophia Learning Workforce Edge which again is our education benefits management platform for employers and our Employer Solutions team. For the second quarter, alternative learnings' direct revenue increased 52% from the prior year to $13 million.

Their operating income increased 24% to $5.2 million and the reduction in their operating margin was the result of continued accelerated investments in new products and services to support their continued growth.

Sophia Learning continues to perform exceptionally well and is now generating more than $1 million of subscription-based revenue each month and is on track to generate $15 million this year which is up more than 300% from the 12 months preceding the pandemic. Also Workforce Edge continues to gain good traction in the marketplace.

And since launching Workforce Edge roughly five months ago, we've already signed 20 corporate agreements which collectively employ more than 415,000 employees. This compares to our internal goal of 250,000 total employees for the full year.

Based on this strong traction, we expect to have more than 750,000 total employees to be on the Workforce Edge platform by the end of the year. Turning now to our US Higher education segment. I thought it would be useful to talk specifically about both of our US-based universities beginning with Capella.

Capella University had a great second quarter and an incredibly strong first half of the year. Year-to-date Capella's total enrollment has grown 6% from the prior year and its continuation rate has increased 50 basis points.

Total FlexPath enrollments have increased 36% so far in 2021 and now comprise 35% of total enrollments which is up 700 basis points from the prior year. Employer affiliated enrollments at Capella have increased 18% year-to-date.

Turning now to Strayer University, where we continue to focus on reversing their enrollment declines and returning the university to positive enrollment growth following more than a year of COVID related lockdowns. Strayer's spring term or second quarter enrollment was in line with our expectations.

And Strayer's summer academic enrollment, which ultimately will inform our third quarter financial results continue to improve and was sequentially better than the second quarter albeit at a level that was below what we had expected.

As a result of this, as well as the extended border closures in Australia, SEI's full year 2021 financial results could be at the bottom or low end of the indicative outlook we provided during our last earnings call.

However, we are continuing to focus on reversing Strayer's enrollment declines by working to resume normal operating practices as quickly and safely as we can. We have already reopened 30 of Strayer's 65 campuses with plans to open all remaining campuses no later than October 1.

We have added additional resources to Strayer's advising and coaching functions as well as our Employer Solutions team, which has also resumed in-person meetings with our network of corporate partners. We have also added additional operating managers to assist our campus in the resumption of their activities supporting and enrolling students.

And since the end of our summer enrollment period, we've seen strong increases in several leading indicators, such as inquiries into the University as well as applications for new enrollment. Both of which are now positive on a year-over-year basis.

And course success, the strongest predictor of long-term retention and defined as the percentage of students who complete a course and earn academic credit was positive on a year-over-year basis in both the first and second quarter, which should aid us in the back half of the year.

We remain very confident that these steps along with others will return Strayer University to positive enrollment growth. And Strayer remains a strong institution with a rich 129 year history of serving working adults and which has weathered other periods of declining enrollment before returning solid growth.

Across all of our institutions, we remain committed to providing the highest quality education that we can and working to help our graduates earn a substantive return on their educational investments.

And finally, before opening the call up for questions, SEI continues to have substantial liquidity of nearly $300 million of cash and marketable securities and has generated $125 million in cash from operations in the first six months of 2021, representing a 13% increase over the prior year.

And I would like to once again extend my thanks to all of my colleagues within SEI for their ongoing commitment to serving our students. And with that Dani, we would be happy to open the call for questions. .

[Operator Instructions] Your first question comes from the line of Tobey Sommer from Truist Securities. Please ask your question..

Thank you.

I'm curious what is the impact so far and expected future impact of reopening physical campuses on particularly, your marketing and enrollment trends?.

Well, we have many years of data to suggest that both enrollment rates – new student enrollment rates, as well as academic achievement rates are substantially higher in areas where we have campuses versus areas that we don't.

And we have some early and preliminary data on the campuses that we've reopened after more than a year of being shut down as a result of COVID, and it does suggest that they are performing better than the campuses that remain closed.

So as I said, we've already reopened 30 and we have plans to open the remaining 35 for a total of 65 no later than October 1. And we expect that that will improve the performance both on our new enrollment as well as retention and academic achievement..

Have you had to roll any of that back based on localized geographic conditions? Or have you – every time you've reopened one has it been maintained open?.

We've not had to pivot and close a campus that we've reopened. Obviously, we're working to open our campuses as safely as we can. And of course, we would always comply with any local or state regulations. But to-date that has not been an issue. And we continue to plan all -- or to open all 65 campuses by October 1st..

Okay.

Pivoting a little bit what are your future plans to expand FlexPath across the schools whether it's specifically FlexPath or conceptually something like it? And how has the last 16, 17 months of experience informed your view?.

Well, FlexPath is a great program in that it's designed to allow Capella learners to complete their degree essentially in half the time at half the cost. As I said it's been a major driver of Capella's enrollment growth. We've recently launched the first doctoral FlexPath program.

So, there's probably areas to extend into doctoral as well as expanding some of the bachelor programs into FlexPath. We've said before that we have looked at bringing FlexPath over to Strayer University.

That's a longer lead-time issue just given the regulatory approvals that are involved with it, but we continue to believe that FlexPath has a lot of runway ahead and we're very happy to support its future growth..

With respect to the Australia/New Zealand newly acquired business, is there an opportunity for this kind of concept there or is it maybe not applicable?.

We are looking at that along with some other revenue synergies by exporting existing US-based curricula into Australia. The first one that we plan to do which will be in place by the end of this year is the Jack Welch Management Institute's MBA program.

But there is an opportunity to think about a FlexPath-like program for Torrens University in Australia as well. And online nursing as well..

Okay. Last question for me. Could I get your perspective on the medium and long-term outlook for pricing across your schools? And Terese if you could touch on the geographic differences as well? Thank you..

Well, on purely a notional basis because a lot of our strategy as we just said FlexPath which we know reduces the cost of a degree and has slightly lower revenue per student as well as our strategy to continue to drive higher and higher corporate enrollments. Those are things that ultimately reduce revenue per student.

We notionally plan for pricing overall to be relatively flat which would be a mix of taking some very moderate tuition increases where we think there's value in the degree program and there might be an opportunity to do so. But that normally is offset by increases in corporate enrollment increases in FlexPath and so forth.

So, we plan notionally for pricing to be flat..

Thank you very much..

Your second question comes from the line of Gary Bisbee from BoA Securities. You may ask your question..

Hey good morning..

Hey Gary, good morning..

A couple of questions. So, on the Strayer, I guess, it's positive that some of the leading indicators are looking up after this difficult period, but you also acknowledge some are trending below what you thought earlier in the year.

What does that really mean? I mean previously you said you thought new students could potentially turn back to positive in Q4, but it might more likely be first half of 2022. Is that still fair? Or does this make it look like it's later in 2022? It's just hard to define from those two statements what you're really telling us. Thanks..

Well, the best way to describe it Gary is Strayer's enrollment has been steadily improving since the first part of this year. And the third quarter was actually better than the second quarter the summer academic term, which I will remind you we're in the midst of.

So, those enrollment numbers are not final, because we still have students attending the summer term and some could drop and so forth. But the third quarter is also the first quarter from a year ago where we saw the first new student declines at Strayer.

And so from just a sheer expectation standpoint, we had thought that the enrollment might be higher than it was notwithstanding the fact that it continues to get better and was better than the second quarter.

And even since then so more currently the leading indicators that I referenced which is inquiries into the university applications for new enrollment, those are two very important leading indicators. Those are positive now on a year-over-year basis for the first time in close to 16 months probably.

And so we remain confident that we're on the trajectory to return Strayer to growth at some point relatively soon. Could that be the fourth quarter? Maybe. Could it be the first quarter? We certainly hope so by then, but we'll just have to wait and see how the enrollment plays out between now and the end of the year..

Got it. So the comp's gotten a lot easier. That's probably part of the year-to-year improvement you're seeing. But even that aside sequentially as you've moved through the year, things have gotten a little better off the bottom.

Is that…?.

Yes, that's fair..

Okay. That's helpful. And then on -- with last quarter you called out three things that were impacting it. The economic hardship on the students, which we understand and I think a lot of your demographic, still, is challenged with schools and day care not fully open and whatnot.

Just trying to parse apart the BLS data it doesn't strike me that's gotten a ton better. Competitive intensity I don't know if you have any update on that. And then you did reference the operating challenges getting the campuses open some more headcount some more focus there.

Are those all three still issues, any real change in the first two from your perspective relative to the comments a quarter ago?.

No. I wouldn't say there's any change. I'd say the biggest lever that we have available to us is getting our campuses reopened. And it has been encouraging to see the higher level of performance in the campuses that have reopened. That was our expectation. That has borne out.

We have added some resources as you just noted both at the student facing level as well as the management level just to try to resume as much normal activity as we can as quickly as we can and as safely as we can.

And so what the team is focused on now is just getting all of our campuses open and then shifting our Strayer focused advertising dollars into those local campuses because historically that's what we always relied on to drive brand awareness in the part of the prospective new students.

So the quicker we can return to normal campus operations, we think the better and we're on target to do that by October 1st..

Great. And then just one on Australia and New Zealand if I could. So I heard your commentary on the border. I guess last year the border was closed, but my understanding was they allowed students that were enrolled to do it remotely from wherever they were. And I guess what changed now? The year-to-year change in new enrollment flowed sharply.

I guess, is that just this concept of the international students either weren't allowed to do that or didn't want to do online for a second year? Or is that what's going on? Or is there something else that would explain the deceleration in the pace of enrollment growth?.

Well, what we've seen specifically in Torrens with the inability of foreign students to enter the country is a fair amount of the students that were enrolled at Torrens or who would prospectively enroll came from areas that were very hard hit from COVID including India..

Okay..

And so we think that that's kind of a one-time issue.

What we're saying is if the borders continue to remain closed for some indefinite period of time -- and all we know is what we read in the Australian press, which is suggesting that it could be the middle part of next year before the country reopens to foreign travel that that is likely at some point to have a moderately negative impact on their enrollment.

But it's also impacting all of the other 42 universities in Australia who also rely on international students.

And in that respect, Torrens is pretty well-positioned given that they have the capability to teach all of their programs fully online as we've been doing, which is a unique competitive position because none of the other Australian universities are in that position.

So in a world where we could have sustained border closures in Australia, we expect that we would continue to attract certainly domestic students and do the best job that we can from a remote standpoint teaching those online offshore students as we've done this last year..

Hey, Gary it's Rob. Just one other comment on that is I think the simplest way to think about it is at first when the borders were closed, most of the international students that Torrens had were -- those who were inside Australia, obviously, stayed enrolled and those that were outside Australia most of them enrolled online.

As the borders continue to stay close, I think what we're seeing is that it takes a little bit of the sizzle off the top of growth from international students. And that's really what's reflected in I think Karl's comments..

Right, right. But presumably that would normalize once we get through this..

Correct..

Okay. And one last tactical one on that.

So the $73 million adjusted revenue -- given the seasonality and the timing of the school year, is there any reason other than FX or something like that that that would not be a reasonable assumption for this next quarter?.

Yes. Gary, I don't think so. I think there's more seasonality there. So I don't think you should just carry forward ANZ revenue. And we -- of course we still don't know what the enrollment is going to be for the third quarter for the most part so, yes. .

Is the seasonality better or worse? Because I had previously had Q2 and three the same essentially and that was I think based on some of your preliminary guidance when you closed this year... .

I'd say they're similar. .

Yes that's what he was asking. Gary it is. Q2 and Q3 are similar in terms of seasonality. .

Yes. Okay. I understand there's certainly some variability with enrollment. Okay. That’s all I had. Thank you..

Yes, thanks Gary..

[Operator Instructions] Your third question comes from the line of Greg Pendy of Sidoti. Please go ahead. .

Hey guys. Thanks for taking my question.

I appreciate the color on the inquiries and applications on Strayer, but can you provide a little bit where you think job growth might be impacting, any pickups in demand? And maybe on that topic as well, whether you're seeing any different mix in demand for degrees maybe based on job growth in areas like business versus IT something of that effect?.

Well on the Capella side we see very strong health care. It's -- the health care programs health care-related programs including the RN-to-BSN degree at Capella are the highest growing reflecting strong job growth in the health care field. The Strayer side is, and always has been predominantly undergraduate.

And the primary focus or area of demand has always been business that continues to be the case. So obviously our teams are always looking at ways we might expand programs, if we believe that there's an area to add a program where there's expected to be strong job growth.

But for now, we haven't really seen any shift away from what has been historically the strongest areas of demand for our degree programs. Counseling health care and other masters and doctoral programs in Capella and then mostly undergraduate business at Strayer. .

Okay. Great. And then can you maybe compare and contrast maybe -- you mentioned you'd seen a downturn maybe around '08 at Strayer.

What is different maybe this time in what you're seeing in terms of the recovery? Any color on that front?.

Well, we've seen several downturns at Strayer related to suppressed economic activity. What was different this time is, it was pandemic induced and so we weren't even able to operate in our campuses. We had our entire network shut down for more than a year which I think is why we had such a disparate impact from prior periods.

But what we know from those prior periods is, when we do return to a level of normality in terms of economic activity and when we're able to open our campuses fully and fully resume all of our normal activities we expect that Strayer will once again return to growth as it's done when it's faced other periods of enrollment decline.

And I should also note that obviously one thing that's very different today versus periods where we had enrollment decline before, in those prior periods it was just Strayer. And we had to weather that as an organization, fully absorbing the impact of those enrollment declines.

Today, we're a much bigger more diverse organization with obviously our Australia/New Zealand assets, Capella University. Now we've got this fast-growing alternative learning division.

So I think we're even better equipped to weather this -- what we believe will be a relatively short-lived period of enrollment declines and returning to normality beginning next year. .

Yes, Greg the other thing I would add is that, the thing about running the university is it tends to have a lot of fixed costs. It's a highly operationally levered enterprise. You pay for the professors, you pay for the curricula, you pay for the technology in the classrooms.

And when you add students, you're adding revenue without addition -- a lot of additional costs. So there's high incremental margin contribution per student. And it's the same thing in reverse when you lose students. And we've seen that at least twice before in our tenure here.

When you had enrollment declines your operating margin goes down pretty quickly. And as you start to grow enrollment again the operating margin expands very rapidly.

So we think this particular cycle will be similar to the other ones that we face where we face some margin pressure now and we'll get some pretty significant margin expansion when enrollment starts to grow again..

Very helpful. Thanks a lot..

You bet..

And your next question comes from the line of Jeff Silber from BMO Capital Markets. .

Thanks so much. You mentioned earlier – or I think it was one of the questions regarding parsing out some of the issues you had at Strayer University and one side has been seeing some economic hardships.

I'm just wondering in some of the states where the extra unemployment subsidies ended a bit early, are you seeing any meaningful change in either applicants or enrollments from those locations?.

Well, first of all good morning, Jeff. What we are seeing is increased demand as I said. So for the first time in 16 months aggregate demand – overall demand is up year-over-year. And it's difficult to parse out exactly why that is other than we have begun to reopen our campus network.

We are focusing market – our marketing dollars advertising dollars into those local markets. There is a healthier economic activity. So my guess is it's a combination of all those factors, which is why we continue to plan to reopen our entire network of campuses by the end of the summer essentially.

And our hope and expectation is that will help improve our performance and ultimately return Strayer's enrollment to growth..

Okay. That's helpful. And then if we can switch over to ANZ.

Despite the issues that are going on there are you still kind of blessed your EBITDA guidance for the year? How can you get there if for some reason there is either an enrollment or revenue shortfall?.

Well, we expect any revenue shortfall to be if there is one to be relatively modest. And that's a very efficient organization. So we expect if we – if we have fewer students there'll be fewer instructional costs. And then we have a management team that is very focused on cost discipline.

And just due to the seasonality of the ANZ academic calendar, the bulk of their enrollment and therefore their revenue happens in the first part of the year. So the smaller intake periods are actually in the back half of the year. So there's less opportunity for there to be some sort of major miss.

I want to caveat that by saying we still have to get through the calendar and we still have to see what the enrollment is. But at this point based on everything that we see we're not expecting them to come in below their EBITDA of US$60 million..

Okay. That’s really helpful. Thanks so much..

Sure. Thank you, Jeff..

And your next question comes from the line of Tobey Sommer of Truist Securities. Go ahead, please..

Just wanted to ask a question on expected regulatory changes or impact. At this stage if you could refresh us on what you think the down the fairway sort of expected changes may be emanating from the Biden administration? Thank you.

Yes. Sure. Well first let me say that when we manage our universities we always take a very long-term view and we always base all the decisions that we make on making sure that we're providing as high quality of an education as we can.

And based on that approach we've always been confident that both of our US-based universities would be able to comply with any reasonable set of regulations. At this point the department is just in the very early stages of announcing a negotiated rulemaking. So we don't have a lot of details on what that potentially might cover.

We hope to be a constructive party to any new rulemaking. And to the extent we would ever be asked we would be delighted to share our opinion on what some regulatory reforms might look like. But we're confident in the regulatory profile of both Capella and Strayer. Obviously, we'll pay attention to what's happening in the rule-making process.

And as I said to the degree that we would ever be asked to participate we would welcome the opportunity to do so..

Have you been asked to participate in prior rulemaking processes? And would you expect to be invited at some stage during this one?.

We have participated in several rulemaking sessions with SEI executives being actually members of the rulemaking committee. We certainly have no expectation to be invited. But should we be invited, we would obviously participate and do so as constructively as we could..

Thank you very much..

And your next question comes from the line of Gary Bisbee from BoA Securities. Go ahead please..

Just one follow-up. The Workforce Edge product, what does 20 companies and 400,000 going to 700,000 workers at those companies, what does it really mean? I know in the past you've said you hope to get 1% to 3% of their employees signed up at your universities.

Is that still how you're thinking about that -- or maybe over what time period? And other than initially just using your software platform which you're not charging for if I understand it right.

What does it mean for your business in the short-term? I understand the long-term potential to enroll a lot of their employees and drive a lower cost acquisition costs and whatnot. But what are they doing with it? Just any update on what it really means in the short-term? Thank you..

Well, everything you said Gary is exactly right on point. So, the monetization strategy for Workforce Edge is to first get as many employees as we can on the platform just to get scale. You're correct, we allow employers to use the platform at no cost.

The monetization comes when members of those companies employees of those companies decide to enroll in an SEI institution be it Strayer or Capella.

And just based on national averages around participation rates within companies that have educational benefits, we don't think it's unreasonable to expect that somewhere between 1% and 3% of the employees on the Workforce Edge platform ultimately would decide to enroll in either Strayer or Capella. And we don't expect it to be that long-term.

This very first year was all about getting into the market continuously to improve the platform itself and just to build scale on the platform itself which we're very much on track to do. I mean if we could get close to a million employees by the end of the year that would be enormously successful.

And so we really look to 2022 to be the year where we would start to see scale in the way of new enrollments coming in. And you are also correct to say that it's a channel for us that would have no acquisition cost other than obviously whatever we invest in the platform itself would be -- which to-date is barely $1 million.

So, it's a great product that's had a very good initial go-to-market strategy and we think it's going to be a potentially major source of new students for us in 2022 and beyond. .

Hey, Gary one other thing on that. I also think as compared to other entities that are in this space we're going to be providing a better product at zero cost and with zero tuition revenue take from other traditional universities..

Okay, all right. That’s helpful. Thank you..

And there are no further questions at this time. I'll hand the call back to Karl. .

All right. Thank you very much everyone. We appreciate your time today and look forward to having another call with you next quarter. .

And this concludes today's conference call. Thank you for participating. You may now disconnect..