Q1 2023 Strategic Education Inc Earnings Call
Participants
Daniel W. Jackson; Executive VP & CFO; Strategic Education, Inc.
Karl McDonnell; President, CEO & Director; Strategic Education, Inc.
Terese Wilke; Director of IR; Strategic Education, Inc.
Alexander Peter Paris; Director of Research and Education & Business Services Analyst; Barrington Research Associates, Inc., Research Division
Heather Nicole Balsky; VP; BofA Securities, Research Division
Jeffrey Marc Silber; MD & Senior Equity Analyst; BMO Capital Markets Equity Research
Presentation
Operator
Welcome to Strategic Energy First Quarter 2023 Results Conference Call. I will now turn the call over to Terese Wilke, Director of Investor Relations for Strategic Education. Ms. Wilke, please go ahead.
Terese Wilke
Thank you. Hello, everyone, and welcome to Strategic Education's conference call in which we will discuss first quarter 2023 results. With us today are Robert Silberman, 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 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.
Karl McDonnell
Thank you, Terese, and good morning, everyone. Our first quarter financial results that we reported this morning were basically right in line with our expectations. You may recall that during our last earnings call, we said that a couple of timing-related issues would impact our first quarter results and that we expected our revenue to be roughly flat on a year-over-year basis and our expenses to be up approximately 5%, and that's exactly where we landed. Our U.S. Higher Education division grew its total enrollment in the first quarter by 2.3% from the prior year. This is the first enrollment growth since the third quarter of 2020 and is the result of continued strong new student growth at both Capella and Strayer as well as continued growth in our employer affiliated enrollments. Total employer affiliated enrollment grew 13% at Capella, 25% at Strayer and 17% across all of U.S. higher education, substantially outpacing the growth in our nonemployer affiliated enrollments. These employer enrollments now comprise 26.3% of all U.S. higher education enrollments, which is a 330 basis point gain from 2022. Revenue in U.S. Higher Education increased just over half of 1% to $197 million. Revenue per student decreased slightly from the prior year, primarily as a result of the ongoing strength in our employer affiliated enrollments, as I just noted. The overall demand environment in the U.S. continues to be quite strong. And like last year, we are forecasting full year new student growth at both Strayer and Capella Universities.
Our Education, Technology & Services division generated a 25% increase in revenue and a 23% increase in operating income for the first quarter. ETS' operating margin contracted slightly to 31.8% from 32.3% in the prior year as we continue to invest in both Sophia and Workforce Edge. Average Sophia total paid subscribers grew 24% in the first quarter and Sophia revenue increased 36%. SEI enrollments from Workforce Edge increased 230% from the prior year to 986 enrollments. In the first quarter, SEI had a total -- excuse me, I just made the same point. Our first quarter results in Australia and New Zealand are unfavorably impacted by the previously announced adjustments to the academic calendar at Torrens University, which split their total first term enrollment between the first and second quarter. This calendar adjustment is the primary driver of the 8% decrease in revenue on a constant currency basis. And we continue to be encouraged by the steadily improving operating environment in Australia and are looking forward to the second half of the year, which will be the first fully normalized period for international student immigration in Australia since the start of the pandemic in 2020. And finally, I'd like to extend an offer to all of our owners to attend our Investor Day, which will be held on November 7 at the Palace Hotel in New York City. Additional details will become available as we get closer to the date. And with that, Kevin, we'd be happy to take questions.
Question and Answer Session
Operator
Thank you, ladies and gentlemen, if you have a question or comment at this time (Operator Instructions). First question comes from Jeff Silber with BMO. Your line is open.
Jeffrey Marc Silber
I believe on last quarter's call, you gave some guidance for 2023 in terms of revenues and enrollments going up mid-single digits and operating expenses going up low single digits. Can we revisit that? Is that something you're still looking for?
Karl McDonnell
Well, based on our current trends continuing, Jeff, we would expect our revenue to be up around mid-single digits. We said that we would expect expenses in that scenario to be up no more than 3%. If by chance our revenue increases more than mid-single digits, we'd have a slight uptick in expenses due to the variable nature of instructional results or extractional expense as a result of having more students.
Jeffrey Marc Silber
All right. That makes sense. If I could switch to the different segments. Can we get a little bit color on U.S. higher education enrollment trends by either program type or degree type?
Karl McDonnell
Well, FlexPath at Capella continues to be a major source of growth. It continues to be very popular, continues to increase as a mix of overall U.S. higher education enrollments. At Strayer, I'd say the growth is across the board, predominantly at the undergraduate level. But as I said in my prepared remarks, at both Strayer and Capella, the bulk of the strength is coming from our employer affiliated enrollments, both new and total growth.
Jeffrey Marc Silber
And in terms of any specific program type to call out?
Karl McDonnell
Well, within the corporate channel, healthcare remains the strongest channel for Capella. And at Strayer, it would be our business program, which remains our largest program, but the strength is relatively even and across the board.
Jeffrey Marc Silber
All right. Great. If I could just sneak in one more. It looks like enrollment trends at Australia and New Zealand worsened a little bit from what we've seen. Is there anything going on specifically then if we can get any guidance for the rest of the year, that would be great.
Karl McDonnell
No. Nothing beyond what we said that would happen as a result of splitting their first term enrollment between the first and second quarter, it was down modestly in the first quarter. I think the way that we'll look at it is when we get through the second quarter, we'll be able to normalize that and we'll have a better sense for what their enrollment growth looks like through that part of the year.
Daniel W. Jackson
Karl, the actual shift pushes that by way the way to the fourth quarter, right? The additional students in the revenue will hit in the fourth quarter versus the second.
Karl McDonnell
Yes. The bulk of the revenue that we'll get from the continuation of those students will hit in the back half of the year and specifically, Jeff, in the fourth quarter.
Jeffrey Marc Silber
Okay. That's really helpful. I'll jump back in the queue. Thanks so much.
Operator
One moment before our next question. Our next question comes from Alex Paris with Barrington Research. Your line is open.
Alexander Peter Paris
First question on the ANZ segment. We are -- on the last call, you noted that the Australian government has ruled that all students on active Visas must be in country and attending classes full-time by June, which you see as a potential catalyst for the second half, getting back, as you just said, to the truly normalized results. Any changes there either in terms of the Australian government or your expectations?
Karl McDonnell
No, no change. That rescinding of that Visa waiver is due to take effect on June 1, and we continue to see that as a positive catalyst for ANZ enrollment moving forward.
Alexander Peter Paris
Got you. And then just following on Jeff's question, enrollment was down 6.3% in ANZ. Revenues were down about 14% or 8% on constant currency. Those are both a little bit below my unguided expectations. Were they in line with your expectations?
Karl McDonnell
Yes. I would say they were in line, Alex. The thing you have to remember is the prior year comparable didn't have a split first term. So it's kind of noisy from that standpoint. I would wait until we get our second quarter enrollment, look at it holistically through the first half of the year to get a better sense of their enrollment trajectory.
Alexander Peter Paris
Great thanks. And then a couple of clarifications. Restructuring costs in the quarter were $5.6 million, which I didn't really have an assumption there at all in my model. But -- but given that your OpEx increase was in line with what you had said, you had obviously factored that in. Is that where you expected it to be? A little higher than I would have thought. And I guess it was lease impairment charges associated with the restructuring. And what are your expectations? Are we kind of through that? Or is there more to come on that front?
Daniel W. Jackson
Alex, this is Dan. That was exactly what we had expected. And we don't necessarily plan it out quarter by quarter. We're looking opportunistically where we can consolidate real estate. And when we see that opportunity, we take it, and that's what you're seeing in those restructuring charges.
Alexander Peter Paris
Got you. So do you see other opportunities for consolidation over the balance of the year and into next year?
Daniel W. Jackson
Nothing like what we just took advantage of, but there could be some smaller opportunities later this year.
Alexander Peter Paris
Okay. Good enough. And then lastly, just in going through your 10-K recently that was filed on February 27, you had said with regard to 90-10 that the 22 calculation hadn't been finalized. Have they been finalized at this point? And what are they?
Daniel W. Jackson
The 22 is not final yet. We report that information to the department by the end of June. So we don't have anything to report to you now. But other than that, we expect to be compliant.
Alexander Peter Paris
Got you. Obviously, in 2021, Strayer was about 83%. Capella was 67%. Do you have much exposure at either Strayer Capella to VA and TA?
Karl McDonnell
We have a little bit more exposure at Strayer on VA than we do at Capella. But as Dan just noted, we don't expect to have any compliance-related issues on 90-10. And given the strength of our corporate channel moving forward, we would expect that our 90-10 would get better over time.
Alexander Peter Paris
Got you. Very helpful. I appreciate the color. That's all for me.
Karl McDonnell
Thanks, Alex.
Operator
Again, ladies and gentlemen, if you have a question or comment (Operator Instructions. One moment before our next question. Our next question comes from Heather Balsky with BofA. Your line is open.
Heather Nicole Balsky
I just want to touch base with you. We've gotten some questions with regards to the education department looking at OPMs are online program management companies. And I thought it would be helpful just to kind of talk to you about sort of in any way that you may work with an OPM and what you think regulatory changes could look like? Or could they have any impact, I think.
Karl McDonnell
Well, of course, we're not an OPM in any respect. We don't work with OPMs. So we don't expect to be impacted at all from any of the department's rulemaking or other policymaking with respect to online program managers. And that would also include their recent language on third-party servicers. So it's not something that we really expect to impact us at all, Heather.
Heather Nicole Balsky
Great, thank you.
Operator
All right. I'm not showing any further questions at this time. I'd like to turn the call back to Karl for any closing remarks.
Karl McDonnell
Thank you, everyone. We appreciate your time today and look forward to talking to you next quarter.
Operator
Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.
