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Strategic Education, inc (STRA) Q3 2021 Earnings Call Transcript

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STRA earnings call for the period ending September 30, 2021.

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Strategic Education, inc (STRA -0.13%)
Q3 2021 Earnings Call
Nov 4, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Strategic Education's Third Quarter 2021 Results Conference Call. [Operator Instructions]

I will now turn the call over to Terese Wilke, Director of Investor Relations for Strategic Education. Ms. Wilke, please go ahead.

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Terese Wilke -- Director Of Investor Relations

Thank you. Good morning, everyone, and welcome to Strategic Education's conference call in which we will discuss third quarter 2021 results. With us today are 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 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 -- President And Chief Executive Officer

Thank you, Terese, and good morning, everyone. This morning, we released our third quarter financial results. And rather than go through them in detail since all the information is actually in the release, I'd instead like to provide our owners with updates on our progress toward our strategic goals. First, our Australia and New Zealand segment continues to perform exceptionally well, notwithstanding the fact that they have operated with some of the world's most restricted COVID-related lockdown measures anywhere in the world. The integration of these assets on to SEI's infrastructure was completed in the third quarter and without any adverse impacts to students or staff. Our Australian team has been actively working with our U.S.-based team on beginning to implement revenue synergies, such as exporting existing U.S. programs into Torrens University to expand their program portfolio. Currently, we see that these revenue synergies are being worth potentially $50 million to $75 million over the next three-plus years.

The inability of foreign students to travel into Australia will likely have a slight negative impact on our revenue projections for the year, but this will almost be entirely offset with careful expense management, such that their full year EBITDA will be in line with our original projection of $60 million. We are encouraged that many of these restrictive lockdown measures are beginning to ease, and we are cautiously optimistic that foreign travel into Australia will be allowed to resume in the early part of 2022. In the United States, our Alternative Learning unit is on track to meet or exceed all of their objectives for 2021, starting with Sophia Learning. Since relaunching Sophia to a monthly paid subscription model in the third quarter of last year, we've added more than 51,000 paid subscribers and are seeing strong month-to-month growth in our subscriber base. Over the past year, more than 64,000 learners have collectively completed more than 190,000 courses and transferred more than 500,000 credit hours to other institutions, thereby dramatically lowering the cost of their degree programs.

And we fully expect Sophia to be a meaningful source of revenue and earnings growth for SEI as we continue to invest in its product offering for consumers. Workforce Edge, our SaaS-based educational benefits management platform, has gained significant traction in the marketplace after its first six months since launching. We now have 22 corporate agreements who collectively employ more than 430,000 employees on the Workforce Edge platform. The monetization strategy for Workforce Edge is two-pronged. First, and what we believe will be the largest source, is when employees on the platform select to attend either Strayer or Capella University, in which case we collect the tuition dollars; or second, when an employee on the platform selects to attend a non-SEI-owned partner school, in which case we collect an annual fee for administering the platform. Both of these revenue sources will be quite small this year as we've been focused on building the platform and enrolling corporate partners. But beginning next year, we expect several million dollars of revenue and ultimately within the next two to three years to be generating several thousand new students in the Strayer or Capella University each year.

And finally, our U.S. Higher Education segment, which primarily consists of Strayer and Capella Universities. At Capella, we continue to see very strong growth in FlexPath, where enrollment grew 18% in the third quarter and now comprises more than 19% of all U.S. Higher Education enrollments. We also continue to see strong traction in our employer-affiliated enrollments at Capella, and in particular, in healthcare. And turning to Strayer University, where our total enrollment declined in the third quarter, contributing to most of the revenue decline that we had in the U.S. Higher Education segment. We are, however, encouraged by some of the progress we're seeing within Strayer, including our third consecutive quarter of gains in student success, as well as improvements in student retention. As of today, 46 campuses representing 70% of total campuses have reopened. And the administrators, faculty and staff of Strayer remain as committed as ever to delivering a high-quality education while also working to get fully reopened post COVID. And finally, I'd like to thank my SEI colleagues for their ongoing dedication and hard work on behalf of our students.

And with that said, we'd be happy to answer questions.

Questions and Answers:

Operator

[Operator Instructions] The first question will come from Jeff Silberman with BMO Capital Markets. Please go ahead.

Jeff Silberman -- BMO Capital Markets -- Analyst

Thanks so much. Wanted to focus first on U.S. Higher Education. Can we parse out, if possible, both the new enrollment trends and the total enrollment trends between Strayer University and Capella? I know you may not give us specific numbers. If you do, great. But at least kind of directionally what's been going on, that would be great.

Karl McDonnell -- President And Chief Executive Officer

Sure, Jeff. Well, directionally, Capella University has been growing both new students and total enrollment throughout the year. As we've said on prior calls, Strayer's enrollment has been declining. As I said, we're focused right now on getting as many of our Strayer campuses reopened. We have about 70% of them are reopened today. And we've accepted the fact, over the years, that there's some amount of volatility, particularly in Strayer's undergrad-focused students, and we just have to wait and see when that enrollment will ultimately recover.

Jeff Silberman -- BMO Capital Markets -- Analyst

Have those trends, specifically in Strayer undergrad, got worse over the past quarter?

Karl McDonnell -- President And Chief Executive Officer

No. They have not gotten worse.

Jeff Silberman -- BMO Capital Markets -- Analyst

Have they gotten better?

Karl McDonnell -- President And Chief Executive Officer

In some instances, they are better.

Jeff Silberman -- BMO Capital Markets -- Analyst

Okay. All right. That's helpful. And then based on our calculation, it looks like revenue per student in U.S. Higher Education declined. Can we go into that exactly where those declines were? And again, if we can parse out Strayer versus Capella, that would be helpful.

Karl McDonnell -- President And Chief Executive Officer

Sure. Actually, the revenue per student at Capella is down on a year-over-year basis a little more than the decline in Strayer, which is almost completely attributable to the fact that we've been growing employer-affiliated enrollments who tend to pay lower tuition with a discount. And actually, Jeff, that's completely in line with our longer-term strategy to try to transition ultimately, over some amount of years, all of our tuition revenue, if we can, from Title IV to private sector pay. And so we don't necessarily look at a decline in revenue per student through a negative lens. We look at it as progress toward our goal to increase ultimately all of our revenue, if we can, into private sector and corporate pay.

Jeff Silberman -- BMO Capital Markets -- Analyst

Okay. That's great. And one more, and then I'll jump back in the queue. I think on the first quarter call, you gave us some guidance for the year. You gave us a little bit of update last quarter. I was wondering if we can get an update on that. Are you still comfortable with the guidance you've given us previously?

Karl McDonnell -- President And Chief Executive Officer

We don't have any new guidance to update today. And as we mentioned in our last call, we still project to be below the low end of the range that we provided earlier in the year.

Jeff Silberman -- BMO Capital Markets -- Analyst

Okay. Any comments on, again, if things changed directionally compared to last quarter. Is it lower than the lower end of the range that you talked about or kind of pretty much the same?

Karl McDonnell -- President And Chief Executive Officer

There's nothing really more to update, other than what we've already provided, Jeff, which is to say -- and we said this in our last call that we expect to be below the low end of the range.

Jeff Silberman -- BMO Capital Markets -- Analyst

Okay, I appreciate that. I'll jump back in the queue.

Operator

[Operator Instructions] Our next question will be from Tobey Sommer with Truist Securities. Please go ahead

Tobey Sommer -- Truist Securities -- Analyst

Thanks HMH I'm curious what are the outward signs that we may see intra-quarter outside of sort of quarterly updates that the climate for new enrollments is improving. Certainly, it's a tight labor market. Wages are rising. Do we need the labor market and the outlook for wage inflation to moderate to encourage folks to kind of go get a degree?

Karl McDonnell -- President And Chief Executive Officer

We certainly are seeing improvements in the economic conditions that we think impact our Strayer undergraduate students. 70% of Strayer students are at the undergraduate level. Half of every new cohort has never been to college before. That's the segment of the population that we think is most sensitive to large, adverse changes in the labor market and economy. As you've noted, that started to improve. What we look at internally are -- the size of the inquiry pools that are coming in, the percentage of those inquiries that elect to fill out an application for enrollment over the last weeks and several months, that has improved. And by improved, I mean less worse than it had been in prior quarters. We've remained focused on trying to get as many of our Strayer locations reopened. We're at 70% today. We hope to be at 100% by the end of the year, and so we'll just continue to provide updates each quarter as we make progress.

Tobey Sommer -- Truist Securities -- Analyst

And with respect to the fiscal campus openings, is that sort of less worse type of improvement that you described. Has that mapped against the footprint of campuses that are open? Or perhaps, conversely, are you evaluating the size of your footprint and maybe thinking about not going all the way to 100%.

Karl McDonnell -- President And Chief Executive Officer

Well, we definitely would like to be at 100%, and that's what our teams are working on. And it's -- in some cases, it's relatively early to make an assessment because some of these campuses have only been reopened a few weeks. So the data set is quite small. But generally, we see positive operational outcomes associated with reopening campuses.

Tobey Sommer -- Truist Securities -- Analyst

And then does the change in travel rules in Australia and New Zealand that is kind of pending, what does that do to the outlook in the business trends from your perspective?

Karl McDonnell -- President And Chief Executive Officer

Well, Torrens has operated so far through 2021 with borders being completely closed and foreign students not being able to travel. And they've had a pretty strong year, all things considered. So if in 2022, those restrictions would begin to ease and foreign students would be allowed to travel into the country, we obviously think that, that would be a positive catalyst for Torrens.

Tobey Sommer -- Truist Securities -- Analyst

Thank you very much.

Operator

The next question will come from Gary Bisbee with Bank of America. Please go ahead.

Gary Bisbee -- Bank of America -- Analyst

Hi, good morning. Sorry. Can you hear me?

Karl McDonnell -- President And Chief Executive Officer

Yes.

Gary Bisbee -- Bank of America -- Analyst

The -- so I guess, first question, you're obviously at Strayer, lapping the first step down in new students. And so is that continuing to decline against the big decline you saw a year ago? Or is it -- is there any recovery? Can you just give us any sense as to the pace of deterioration? I know you said less bad on some of the metrics earlier, but are you down again against the first decline a year go?

Karl McDonnell -- President And Chief Executive Officer

Well, we're not providing our new student growth for either Strayer or Capella University. I can just reiterate what I said just a few minutes ago, Gary, which is the enrollment trends at Strayer are improving by which, again, I mean they're less bad. Beyond that, we don't want to get into specific details around new student numbers within the segment.

Gary Bisbee -- Bank of America -- Analyst

Okay. All right. I mean, historically, I know Rob spent a lot of time talking about labor force participation rate being arguably the best way or at least a good way to think about the desire of new students to enroll. That remains a challenged figure at this point. I guess when you think about the macro factors and also what you can do as a company to improve the enrollment performance at Strayer, I mean, how are you thinking about that now? I guess a couple of quarters ago, you said you thought by early '22, we might see a turn. Just any updated thoughts on what you can control and what your outlook for the factors you can't that might help us think about when we might see stabilization.

Karl McDonnell -- President And Chief Executive Officer

Well, I mean we are encouraged that the economy, broadly, is improving, and wages are beginning to increase, and we'd like to see labor force participation rate tick up. So that's obviously all things that are substantially out of our control. What we focus on is, first and foremost, making sure that we're doing the best job that we can, teaching the tens of thousands of students that we serve every day. We've been actually very encouraged that student success, which is the percentage of students who are actually earning their credit hours at Strayer, has improved on a year-over-year basis every quarter this year. We've also seen increases in student retention.

We're very focused on Workforce Edge and converting as many of our 750-plus corporate partnerships that we can onto the platform. And so that, over time, we'll be able to continue to grow our employer-affiliated enrollments. And we're just focused on trying, to the best that we can right now, and just return Strayer University to a level of normality, which is to get our campus locations open, be there to serve our students as we try to do every day and just do the best job that we can educating them. And we think that, ultimately, when the undergraduate student that we predominantly serve is faring better in a macroeconomic lens that they'll begin to enroll in Strayer University again, and we look forward to that time when that happens.

Gary Bisbee -- Bank of America -- Analyst

Okay. And just one last one. I feel like over the last several quarters, a lot of the discussion around corporate success that you're having today has been more Capella focused. Given FlexPath and healthcare and some of the other things that you've been discussing, they're going quite well. When I think back 10, 15 years, the corporate was a huge part of the Strayer story, and yet, I haven't heard a lot of discussion of that, say, in the last 12 months from you. Can you just give us an update? How important is that to Strayer? Do you think the Workforce Edge and the strategic increased focus on employer over the last 12, 18 months really is going to meaningfully, over time, help Strayer? And what's going on there today?

Karl McDonnell -- President And Chief Executive Officer

Sure. It's -- you're right. It's always been a big part of Strayer University over tens of years, decades, and it remains a big part of it. Strayer continues to develop new relationships with new corporations. Every year, last year or earlier this year, we activated CVS, the second largest retailer in the United States. We have a very large agreement with Best Buy, one of the largest national retailers. We get thousands of students every year from our corporate partners at Strayer, and we also have strong growth at Capella. And Workforce Edge was designed to be a portal, hopefully, for what we see ultimately at maturity, which, for us, is probably a three-year horizon, to be generating thousands of new students into both Strayer and Capella as we continue to accumulate more and more employers and more employees on that platform. That's why we've invested the dollars behind Workforce Edge. So employer is still a very big part of Strayer's ability to serve and lower the cost of education for people, but it's becoming an equally being an important part of Capella as well.

Gary Bisbee -- Bank of America -- Analyst

Thank you.

Operator

The next question is a follow-up from Tobey Sommer with Truist Securities. Please go ahead.

Tobey Sommer -- Truist Securities -- Analyst

Hi, thanks. I just wanted to follow up on the guidance commentary. So we're going to be below the guidance given previously. And I think if I remember it correctly, the last time you commented on how business trends were performing relative to those targets, we were tracking toward the low end, and now we're below. Am I remembering that correctly? Or on the prior call, did you actually say you were going to be below that range?

Karl McDonnell -- President And Chief Executive Officer

Yes. Well, first, let me just say that when we put the notional range of outcomes earlier in the year, which was not our practice, it was really because we had just closed on an acquisition in Australia, and we knew that it was going to be difficult for our owners to try to parse out the contribution that Australia and New Zealand would have in the company. So we didn't look at that as guidance per se as more as a business model so that people could begin to model in Australia's contribution. That being said, and as we said in our last call and earlier on this call, based on the projections that we put out earlier in the year and based on what we see now for the balance of this year, we think that the results will be the low end of that range.

Tobey Sommer -- Truist Securities -- Analyst

Okay, thank you very much.

Operator

And at this time, there are no further questions. I would like to turn the conference back over to Karl for any closing comments.

Karl McDonnell -- President And Chief Executive Officer

Thank you, everybody. We appreciate your time, and we look forward to chatting with you next quarter.

Operator

[Operator Closing Remarks]

Duration: 21 minutes

Call participants:

Terese Wilke -- Director Of Investor Relations

Karl McDonnell -- President And Chief Executive Officer

Jeff Silberman -- BMO Capital Markets -- Analyst

Tobey Sommer -- Truist Securities -- Analyst

Gary Bisbee -- Bank of America -- Analyst

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