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Strategic Education, Inc. Reports Strong First Quarter 2020 Results; Solid Financial Foundation Entering the Second Quarter

·21 mins read

Strategic Education, Inc. (SEI) (NASDAQ: STRA) today announced financial results for the period ended March 31, 2020.

Karl McDonnell, Chief Executive Officer of SEI said, "We are very pleased with continued strong performance at both Strayer University and Capella University during the first quarter of 2020. As we continue to adapt to the challenges presented by the COVID-19 pandemic, I’m impressed by the resilience of our staff and faculty, and encouraged by numerous daily examples of compassion and creativity as the team works to help our students and learners continue their educational objectives."

COMPANY RESPONSE TO COVID-19

Notwithstanding the fact that more than 95% of our students already take classes online, and much of our workforce works remotely or are very accustomed to working remotely, the Company took early action to ensure the health and well-being of our students and employees. Measures taken, which were informed by guidance from the Centers for Disease Control and Prevention (CDC) and other public health and government authorities, included:

  • Moving to 100% work from home for all employees

  • Closing all Strayer University ground campuses and Capella University Campus Centers

  • Shifting Strayer University’s on-ground class schedule fully online for the Spring 2020 term (Capella University classes are already entirely online)

  • Postponing large student events, such as graduation ceremonies

  • Prohibiting non-essential employee travel and large meetings and events

The Company also decided to pause planned 2020 new campus expansion for campus projects that have not yet started. This decision was driven in part by practical considerations associated with travel limitations recommended by the CDC. We have already started construction on roughly half of the originally planned eight to twelve new campuses for 2020, and thus estimate we will now open at least four to five new campuses in 2020, with the potential for an additional four to five new campuses later in the year, pending improved visibility into U.S. recovery from the COVID-19 crisis.

In addition, the Company is taking measures to provide financial relief to our students and employer partners impacted negatively by the COVID-19 crisis. Measures include payment flexibility, scholarship opportunities, and other pricing relief. We expect that these measures will enable more students to continue pursuing their education during and after the COVID-19 crisis, but will likely negatively impact revenue-per-student and bad debt expense over the next three to four quarters. We continue to prudently manage expenses, and expect some expense savings in 2020 to partially offset declining revenue-per-student.

Finally, the Company maintains fortress financial strength, with over $500 million in cash, $250 million of undrawn credit, and projected continued quarterly cash generation. We believe these existing financial resources are sufficient to support the ongoing operation of SEI and its two Universities in a manner that protects the health and well-being of our employees, students, and partners. Accordingly, the Company does not plan to seek COVID-19 related financial support from the Federal government or any other governmental entity.

STRATEGIC EDUCATION, INC. CONSOLIDATED RESULTS

Three Months Ended March 31

  • Revenue increased 7.6% to $265.3 million compared to $246.5 million for the same period in 2019.

  • Income from operations was $44.0 million or 16.6% of revenue, compared to $25.7 million or 10.4% of revenue for the same period in 2019. Income from operations in 2020 includes $15.4 million of amortization expense related to assets acquired in the merger with Capella Education Company and $3.8 million in costs associated with the merger with Capella Education Company, and transaction expenses associated with potential future business combinations. Income from operations in 2019 included $15.4 million of amortization expense related to assets acquired in the merger with Capella Education Company and $7.2 million in costs associated with the merger with Capella Education Company. Adjusted income from operations, which is a non-GAAP financial measure and excludes the aforementioned expenses, was $63.1 million in 2020 compared to $48.3 million for the same period in 2019. The adjusted operating income margin was 23.8% compared to 19.6% for the same period in 2019. For more details on non-GAAP financial measures, refer to the information in the Non-GAAP Financial Measures section of this press release.

  • Net income, which includes the items described above, and also includes income from partnership interests and other investments, and certain discrete tax adjustments, was $35.2 million in 2020 compared to $11.5 million for the same period in 2019. Adjusted net income was $46.5 million compared to $36.7 million for the same period in 2019.

  • Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $69.7 million in 2020 compared to $51.7 million in 2019. Adjusted EBITDA, which excludes merger costs and stock-based compensation expense, was $76.5 million compared to $61.0 million for the same period in 2019.

  • Diluted earnings per share was $1.60 compared to $0.52 for the same period in 2019. Adjusted diluted earnings per share increased to $2.11 from $1.66 for the same period in 2019. Diluted weighted average shares outstanding increased to 22,071,000 from 22,050,000 for the same period in 2019.

Strayer University Segment Highlights

  • The Strayer University segment now includes the revenue and operating expenses of our DevMountain and Hackbright Academy software development bootcamps.

  • For the first quarter, student enrollment at Strayer University increased 11% to 55,337 compared to 49,886 for the same period in 2019. New student enrollment for the period increased 7% and continuing student enrollment for the period increased 12%. Starting in the first quarter, Strayer University has adopted a new enrollment reporting census date, which occurs approximately two weeks following the start of the academic term. Previously the Strayer University enrollment census date coincided with the end of the University’s "drop-add" period, approximately one week following the start of the academic term. This new census date is consistent with the approach employed by Capella University. All historical enrollment data included in this release and other disclosures has been revised using the new census date. Year-over-year percentage change in enrollment for the new census date does not differ significantly from the prior approach.

  • Revenue increased 11.4% to $145.7 million in the first quarter of 2020 compared to $130.7 million for the same period in 2019, driven by higher first quarter enrollment and revenue-per-student.

  • Income from operations increased to $36.6 million in the first quarter of 2020 from $23.8 million for the same period in 2019. The operating income margin was 25.1%, compared to 18.2% for the same period in 2019.

Capella University Segment Highlights

  • For the first quarter, student enrollment at Capella University increased 4% to 41,200 compared to 39,700 for the same period in 2019. New student enrollment for the period increased 17% and continuing student enrollment for the period increased 1%. Starting in the first quarter, Capella University has consolidated two different enrollment reporting census dates into a single date, which occurs approximately two weeks following the start of the academic term. All historical enrollment data included in this release and other disclosures has been revised accordingly. Year-over-year percentage change in enrollment for the new census date does not differ significantly from the prior approach.

  • FlexPath continued to be a significant driver of new and total enrollment growth in the first quarter of 2020, and is 35% of Capella University’s bachelor’s and master’s degrees total enrollment. As previously announced, Capella University received approval from the Higher Learning Commission to offer its Doctor of Nursing Practice program via the FlexPath learning format, and has now received approval from the U.S. Department of Education to offer federal financial aid to its students for this program. Students will be able to start classes in July of 2020.

  • Revenue increased 3.4% to $119.6 million in the first quarter of 2020 compared to $115.8 million for the same period in 2019, driven by higher first quarter enrollment.

  • Income from operations increased to $26.5 million in the first quarter of 2020 from $24.5 million for the same period in 2019. The operating income margin was 22.2%, compared to 21.2% for the same period in 2019.

  • During the first quarter of 2020, the Company opened its second Capella University Campus Center, in Augusta, Georgia. This Campus Center is the first-ever co-located model with Strayer University.

BALANCE SHEET AND CASH FLOW

At March 31, 2020, Strategic Education, Inc. had cash, cash equivalents, and marketable securities of $506.3 million, and no debt. For the first three months of 2020, cash provided by operations was $68.7 million compared to $58.7 million for the same period in 2019. Capital expenditures for the first three months of 2020 were $14.3 million compared to $8.8 million for the same period in 2019. Capital expenditures for 2020 are now expected to be at the lower end of our previous estimate of between $40 million and $45 million.

For the first quarter of 2020, consolidated bad debt expense as a percentage of revenue was 4.2%, compared to 5.0% of revenue for the same period in 2019. Bad debt expense for the quarter includes additional reserves to account for projected deterioration in collections performance in 2020 due to the COVID-19 crisis. These reserves were offset in the first quarter by better-than-expected collection of receivables from Q1 2020 and prior.

COMMON STOCK CASH DIVIDEND

SEI announced today that it declared a regular, quarterly cash dividend of $0.60 per share of common stock. This dividend will be paid on June 8, 2020 to shareholders of record as of June 1, 2020.

CONFERENCE CALL WITH MANAGEMENT

SEI will host a conference call to discuss its first quarter 2020 earnings results at 10:00 a.m. (ET) today. To participate in the live call, investors should dial (877) 303-9047 ten minutes prior to the start time. In addition, the call will be available via webcast. To access the live webcast of the conference call, please go to www.strategiceducation.com in the Investor Relations section 15 minutes prior to the start time of the call to register. An earnings release presentation will also be posted to www.strategiceducation.com in the Investor Relations section prior to the start time of the call. Following the call, the webcast will be archived and available at www.strategiceducation.com in the Investor Relations section.

About SEI

Strategic Education, Inc. (NASDAQ: STRA) (www.strategiceducation.com) is dedicated to enabling economic mobility with education. We serve working adult students through a range of educational opportunities that include: Strayer University and Capella University (separate institutions that are each regionally accredited), which collectively offer flexible and affordable associate, bachelor’s, master’s, and doctoral programs; a Top-25 Princeton Review-ranked online MBA program through the Jack Welch Management Institute at Strayer University; self-paced courses for college credit through Sophia; customized degrees for corporations through Degrees@Work; and non-degree web and mobile application development courses through DevMountain, Generation Code, and Hackbright Academy. These programs help our students prepare for success in today’s jobs and find a path to bettering their lives.

Forward-Looking Statements

This communication contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by the use of words such as "expect," "estimate," "assume," "believe," "anticipate," "may," "will," "forecast," "outlook," "plan," "project," "potential" and other similar words, and include all statements that are not historical facts, including with respect to, among other things, the future financial performance of SEI; SEI’s plans, strategies and prospects; the impact of the current COVID-19 pandemic on SEI’s business and results; and future events and expectations. The statements are based on SEI’s current expectations and are subject to a number of assumptions, uncertainties and risks, including but not limited to:

  • SEI’s continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as regional accreditation standards and state regulatory requirements;

  • rulemaking by the Department of Education and increased focus by the U.S. Congress on for-profit education institutions;

  • the pace of growth of student enrollment;

  • competitive factors;

  • risks associated with the further spread of COVID-19, including the ultimate impact of COVID-19 on people and economies;

  • the impact of regulatory measures or voluntary actions that may be put in place to limit the spread of COVID-19, including restrictions on business operations or social distancing requirements;

  • risks associated with the opening of new campuses;

  • risks associated with the offering of new educational programs and adapting to other changes;

  • risks associated with the acquisition of existing educational institutions;

  • risks relating to the timing of regulatory approvals;

  • SEI’s ability to implement its growth strategy;

  • the risk that the combined company may experience difficulty integrating employees or operations;

  • risks associated with the ability of SEI’s students to finance their education in a timely manner;

  • general economic and market conditions; and

  • additional factors described in SEI’s most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Many of these risks, uncertainties and assumptions are beyond SEI’s ability to control or predict. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, these forward-looking statements speak only as of the information currently available to SEI on the date they are made, and SEI undertakes no obligation to update or revise forward-looking statements, except as required by law. Actual results may differ materially from those projected in the forward-looking statements.

STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

For the three months ended
March 31,

2019

2020

Revenues

$

246,508

$

265,302

Costs and expenses:

Instructional and support costs

134,050

132,936

General and administration

64,139

69,226

Amortization of intangible assets

15,417

15,417

Merger and integration costs

7,179

3,764

Total costs and expenses

220,785

221,343

Income from operations

25,723

43,959

Other income

3,327

2,123

Income before income taxes

29,050

46,082

Provision for income taxes

17,550

10,843

Net income

$

11,500

$

35,239

Earnings per share:

Basic

$

0.53

$

1.62

Diluted

$

0.52

$

1.60

Weighted average shares outstanding:

Basic

21,499

21,810

Diluted

22,050

22,071

STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

December 31,
2019

March 31,
2020

ASSETS

Current assets:

Cash and cash equivalents

$

419,693

$

442,845

Marketable securities

34,874

26,842

Tuition receivable, net

51,523

41,335

Other current assets

18,004

21,761

Total current assets

524,094

532,783

Property and equipment, net

117,029

117,284

Right-of-use lease assets

84,778

82,345

Marketable securities, non-current

36,633

36,590

Intangible assets, net

273,011

259,178

Goodwill

732,075

732,075

Other assets

21,788

23,566

Total assets

$

1,789,408

$

1,783,821

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

90,828

$

81,859

Income taxes payable

1,352

13,728

Contract liabilities

39,284

40,495

Lease liabilities

25,284

24,806

Total current liabilities

156,748

160,888

Deferred income tax liabilities

47,942

44,581

Lease liabilities, non-current

80,557

78,765

Other long-term liabilities

41,451

40,440

Total liabilities

326,698

324,674

Commitments and contingencies

Stockholders’ equity:

Common stock, par value $0.01; 32,000,000 shares authorized; 21,964,809 and 22,213,587 shares issued and outstanding at December 31, 2019 and March 31, 2020, respectively

220

222

Additional paid-in capital

1,309,438

1,287,406

Accumulated other comprehensive income

233

253

Retained earnings

152,819

171,266

Total stockholders’ equity

1,462,710

1,459,147

Total liabilities and stockholders’ equity

$

1,789,408

$

1,783,821

STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the three months ended
March 31,

2019

2020

Cash flows from operating activities:

Net income

$

11,500

$

35,239

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of deferred financing costs

83

83

Amortization of investment discount/premium

127

65

Depreciation and amortization

25,983

25,733

Deferred income taxes

10,834

(2,108

)

Stock-based compensation

3,010

3,025

Impairment of right-of-use lease assets

453

Changes in assets and liabilities:

Tuition receivable, net

4,847

3,553

Other current assets

(1,060

)

(3,321

)

Other assets

325

231

Accounts payable and accrued expenses

(3,537

)

(7,028

)

Income taxes payable and income taxes receivable

6,031

12,314

Contract liabilities

1,702

1,901

Other long-term liabilities

(1,187

)

(1,445

)

Net cash provided by operating activities

58,658

68,695

Cash flows from investing activities:

Purchases of property and equipment

(8,756

)

(14,258

)

Purchases of marketable securities

(6,249

)

(1,863

)

Maturities of marketable securities

12,910

9,905

Other investments

(374

)

(118

)

Net cash used in investing activities

(2,469

)

(6,334

)

Cash flows from financing activities:

Common dividends paid

(11,091

)

(13,327

)

Net payments for stock awards

(4,443

)

(25,089

)

Repurchase of common stock

(247

)

Net cash used in financing activities

(15,534

)

(38,663

)

Net increase in cash, cash equivalents, and restricted cash

40,655

23,698

Cash, cash equivalents, and restricted cash — beginning of period

312,237

420,497

Cash, cash equivalents, and restricted cash — end of period

$

352,892

$

444,195

STRATEGIC EDUCATION, INC.

UNAUDITED SEGMENT REPORTING

(in thousands)

For the three months
ended March 31,

2019

2020

Revenues:

Strayer University

$

130,745

$

145,654

Capella University

115,763

119,648

Consolidated revenues

$

246,508

$

265,302

Income from operations:

Strayer University

$

23,803

$

36,603

Capella University

24,516

26,537

Amortization of intangible assets

(15,417

)

(15,417

)

Merger and integration costs

(7,179

)

(3,764

)

Consolidated income from operations

$

25,723

$

43,959

Non-GAAP Financial Measures

In our press release and schedules, we report certain financial measures that are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America ("GAAP"). We discuss management's reasons for reporting these non-GAAP measures below, and the press release schedules that follow reconcile the most directly comparable GAAP measure to each non-GAAP measure that we reference. Although management evaluates and presents these non-GAAP measures for the reasons described below, please be aware that these non-GAAP measures have limitations and should not be considered in isolation or as a substitute for revenue, total costs and expenses, income from operations, operating margin, net income, earnings per share or any other comparable financial measure prescribed by GAAP. In addition, we may calculate and/or present these non-GAAP financial measures differently than measures with the same or similar names that other companies report, and as a result, the non-GAAP measures we report may not be comparable to those reported by others.

Management uses certain non-GAAP measures to evaluate financial performance because those non-GAAP measures allow for period-over-period comparisons of the Company’s ongoing operations before the impact of certain items described below. These measures are Adjusted Total Costs and Expenses, Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Net Income, Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), Adjusted EBITDA and Adjusted Diluted Earnings Per Share (EPS). We define Adjusted Total Costs and Expenses, Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Net Income, and Adjusted Diluted EPS to exclude (1) amortization and depreciation expense related to intangible assets and software assets associated with the Company’s merger with Capella Education Company, (2) integration expenses associated with the Company's merger with Capella Education Company, and transaction expenses associated with potential future business combinations, (3) income recognized from the Company’s investments in partnership interests and other investments, and (4) discrete tax adjustments utilizing an adjusted effective tax rate of 27.5% and 28.5% for the three months ended March 31, 2019 and 2020, respectively. We define EBITDA as net income before other income, the provision for income taxes, depreciation and amortization, and from this amount in arriving at Adjusted EBITDA we also exclude stock-based compensation expense and the amounts in (2) above. These non-GAAP measures are reconciled to the most directly comparable GAAP measures in the sections that follow. Non-GAAP measures should not be viewed as substitutes for GAAP measures.

STRATEGIC EDUCATION, INC.

UNAUDITED RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

ADJUSTED INCOME FROM OPERATIONS, ADJUSTED NET INCOME, AND ADJUSTED EPS

(in thousands, except per share data)

For the three months ended March 31, 2019

Non-GAAP Adjustments

As
Reported
(GAAP)

Amortization
of intangible
assets(1)

Merger and
integration
costs(2)

Income from
other
investments(3)

Tax
adjustments(4)

As Adjusted
(Non-GAAP)

Revenues

$

246,508

$

$

$

$

$

246,508

Total costs and expenses

$

220,785

$

(15,417)

$

(7,179)

$

$

$

198,189

Income from operations

$

25,723

$

15,417

$

7,179

$

$

$

48,319

Operating margin

10.4%

19.6%

Net income

$

11,500

$

15,417

$

7,179

$

(1,023)

$

3,629

$

36,702

Earnings per share:

Diluted

$

0.52

$

1.66

Weighted average shares outstanding:

Diluted

22,050

22,050

For the three months ended March 31, 2020

Non-GAAP Adjustments

As
Reported
(GAAP)

Amortization
of intangible
assets(1)

Merger and
integration
costs(2)

Income from
other
investments(3)

Tax
adjustments(4)

As Adjusted
(Non-GAAP)

Revenues

$

265,302

$

$

$

$

$

265,302

Total costs and expenses

$

221,343

$

(15,417)

$

(3,764)

$

$

$

202,162

Income from operations

$

43,959

$

15,417

$

3,764

$

$

$

63,140

Operating margin

16.6%

23.8%

Net income

$

35,239

$

15,417

$

3,764

$

(254)

$

(7,685)

$

46,481

Earnings per share:

Diluted

$

1.60

$

2.11

Weighted average shares outstanding:

Diluted

22,071

22,071

(1)

Reflects amortization and depreciation expense of intangible assets and software assets acquired through the Company’s merger with Capella Education Company.

(2)

Reflects integration expenses associated with the Company's merger with Capella Education Company, and transaction expenses associated with potential future business combinations.

(3)

Reflects income recognized from the Company's investments in partnership interests and other investments.

(4)

Reflects tax impacts of the adjustments described above and discrete tax adjustments related to stock-based compensation and other adjustments, utilizing an adjusted effective tax rate of 27.5% and 28.5% for the three months ended March 31, 2019 and 2020, respectively.

STRATEGIC EDUCATION, INC.

UNAUDITED NON-GAAP SEGMENT REPORTING

(in thousands)

For the Three Months Ended

March 31,

2019

2020

Revenues:

Strayer University

$ 130,745

$ 145,654

Capella University

115,763

119,648

Consolidated revenues

$ 246,508

$ 265,302

Income from operations:

Strayer University

$ 23,803

$ 36,603

Capella University

24,516

26,537

Amortization of intangible assets

(15,417)

(15,417)

Merger and integration costs

(7,179)

(3,764)

Consolidated income from operations

25,723

43,959

Adjustments to consolidated income from operations:

Amortization of intangible assets

15,417

15,417

Merger and integration costs

7,179

3,764

Total adjustments to consolidated income from operations

22,596

19,181

Adjusted income from operations by segment:

Strayer University

23,803

36,603

Capella University

24,516

26,537

Total adjusted income from operations by segment

$ 48,319

$ 63,140

STRATEGIC EDUCATION, INC.

UNAUDITED RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

ADJUSTED EBITDA

(in thousands)

For the three months
ended March 31,

2019

2020

Net income

$

11,500

$

35,239

Provision for income taxes

17,550

10,843

Other income

(3,327)

(2,123)

Depreciation and amortization

25,983

25,733

EBITDA

51,706

69,692

Stock-based compensation

2,530

3,025

Merger and integration costs (1)

6,781

3,764

Adjusted EBITDA

$

61,017

$

76,481

(1)

Reflects integration expenses associated with the Company's merger with Capella Education Company, and transaction expenses associated with potential future business combinations. Excludes $0.4 million of depreciation and amortization expense and includes $0.5 million of stock based compensation expense for the three months ended March 31, 2019.

View source version on businesswire.com: https://www.businesswire.com/news/home/20200429005128/en/

Contacts

Terese Wilke
Manager, Investor Relations
Strategic Education, Inc.
(612) 977-6331
terese.wilke@strategiced.com