Strategic Education - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered a quality beat: adjusted diluted EPS rose to $1.64, up 41% YoY, driven by a 39% increase in adjusted operating income and 400 bps adjusted margin expansion on constant currency; ETS grew revenue 46% YoY while USHE margins improved significantly.
• Versus S&P Global consensus, STRA posted a material EPS beat and a revenue beat in Q3; Q2 showed an EPS beat with a slight revenue miss, and Q1 was a clean beat on both EPS and revenue (see Estimates Context)*.
• Strategic levers: employer-affiliated enrollment hit a record 32.7% of USHE enrollment; healthcare now 49% of USHE enrollment; ETS’ Sophia revenue +42% YoY and Workforce Edge at 80 corporate agreements.
• ANZ remains pressured by Australian regulatory limits on international students; domestic enrollment is improving and international caps are guided to increase 3% in 2026, supporting a path back to new student growth in 2026.
• Capital allocation: consistent $0.60 dividend, ~429k shares repurchased ($34m) in Q3 and $94m YTD, with $134m remaining authorization; productivity program targeting ~$100m OpEx savings by end-2027 is a medium-term margin catalyst.

What Went Well and What Went Wrong

What Went Well

• ETS surged: revenue +45.6% YoY to $38.3m and operating income +48% to $16.0m; Sophia revenue +42% to $17.8m; ETS margin held at ~41.7% despite a 44% expense increase.
• USHE margin inflection: revenue +2.6% YoY to $213.1m; operating income nearly doubled to $22.9m; operating margin expanded 520 bps YoY to 10.7% on lower drops, higher seats per student, and less discounting.
• Management confidence and structural levers: “We are very anchored on our notional model… nothing… leads me to believe that we won’t be able to hit the targets” and a company-wide productivity initiative targeting “upwards of $100 million” OpEx savings by end-2027.

What Went Wrong

• ANZ headwinds: revenue -4.7% YoY to $68.6m and operating income down to $12.5m, driven by lower international enrollment and FX; operating margin slipped to 18.2% (constant currency revenue -2.3%).
• RN-to-BSN softness: Capella’s RN-to-BSN program (post-licensure) saw “a little softness” through 2025, despite strong employer-affiliated enrollment.
• Bad debt expense ticked up: consolidated bad debt expense rose to 4.7% of revenue vs 4.5% a year ago.

Transcript

Operator (participant)

Welcome to Strategic Education's third quarter 2025 results conference call. I will now turn the call over to Therese Wilke, Senior Director of Investor Relations for Strategic Education. Mrs. Wilke, please go ahead.

Therese Wilke (Senior Director of Investor Relations)

Thank you.

Hello everyone, and welcome to Strategic Education's conference call in which we will discuss third quarter 2025 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. I would like to turn the call over to Karl. Karl, please go ahead.

Karl McDonnell (President and CEO)

Thank you, Therese, and good morning everyone. We are pleased with our third quarter results, especially the sustained strength in our Education Technology and Services segment, supported by strong growth at Sofia and Workforce Edge. On an adjusted constant currency basis, SEI's revenue rose 5% from the previous year. We continue to advance our efforts to leverage technology, resulting in operating expense growth of less than 1%, operating income growth of 39%, and a 400 basis point margin expansion. We did incur restructuring costs in the third quarter related to our ongoing productivity initiatives, which accounted for most of the difference between our GAAP and our adjusted results in the third quarter. Adjusted earnings were $1.64 compared to $1.16 from the prior year, an increase of 41%. Turning now to our segments.

Our Education Technology Services division generated continued strong growth during the quarter, with revenue and operating income increasing by 46% and 48% from the prior year to $38 million and $16 million, respectively. Notwithstanding our continued strong investment in ETS, which included a 44% increase in expenses, ETS's operating margin increased slightly on a year-over-year basis to 41.7%. Sofia Learning, our direct-to-consumer portal that offers high-quality college-level courses and has increasingly become a key component of many of our strategic corporate partnerships, grew both average and total subscribers and revenue by 42%, driven by strong growth in both consumer and employer-affiliated subscribers. ETS's share of SEI's operating income continues to grow and now represents one-third of consolidated operating income, reflecting progress with our employer-focused strategy. U.S.

Higher education total enrollment decreased slightly from the prior year but was more than offset by higher revenue per student, driven by fewer drops, less discounting, and students taking more courses on average. This resulted in revenue growth of 3% from the prior year. Employer-affiliated enrollment once again remained strong, increasing approximately 8% from the prior year and now represents 33% of all U.S. higher education enrollment, an increase of 290 basis points from the prior year. In addition to the strength in our employer-affiliated enrollment, U.S. higher education's healthcare portfolio generated strong total enrollment growth of 7% from the prior year. Healthcare is a critical part of our portfolio, representing half of all U.S. higher education enrollments and almost 40% of enrollment from employer partners.

Recently, we commissioned a survey in partnership with the Harris Poll, which highlights the ongoing burnout facing the healthcare workforce and the projected shortfall of clinical healthcare workers. This research emphasizes the importance of investing in employees' growth and making continuous education a key part of strategies to retain talent. Full survey results can be found on our website at strategiceducation.com. U.S. higher education operating expenses decreased by $6 million from the prior year, or a reduction of 3%. As a result, U.S. higher education operating income almost doubled from the prior year to $23 million. Its operating margin increased 520 basis points. Turning now to our Australia and New Zealand segment, ANZ's third quarter total enrollment decreased 2% from the prior year, driven by the continued regulatory restrictions on international student enrollment.

Using constant currency, revenue decreased 2% to $70 million, and operating income decreased from $15 million in the prior year to $13 million this year. Notwithstanding the decline in total international enrollment, we are encouraged by the continued progress with domestic enrollment growth and recent guidance from the Australian government that our international caps will increase 3% in 2026. Finally, regarding capital allocation, in addition to our regular quarterly dividend, we repurchased approximately 429,000 shares during the quarter for a total of $34 million. As of the end of the third quarter, we have repurchased over 1.1 million shares for $94 million, leaving us with $134 million remaining on our share repurchase authorization through the end of this year.

Finally, as always, I'd like to take this opportunity to thank all of my colleagues here at SEI for their ongoing commitment and support to our students and our employer partners. With that, Sheree, we'd be happy to take questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. One moment while we compile the Q&A roster. Our first question will come from the line of Jasper Bibb with Truist Securities. Your line is open.

Jasper Bibb (VP and Senior Equity Analyst)

Good morning, everyone. I wanted to ask two on U.S. to start. I guess first, what drove the healthy revenue per student gain in the quarter, and what should we expect on a revenue per student basis over the next few quarters? Second, a lot better margin than we anticipated in the U.S. too, just hoping to get a bit more detail on the expense reductions there.

Daniel Jackson (EVP and CFO)

Hey, Jasper, it's Dan. On the revenue per student, Karl mentioned. Lower drops and higher seats per student. There was also some lower discounts, and I think we'll see some benefit from that through the balance of the year. There'll be some upside on revenue per student at U.S. higher ed.

Karl McDonnell (President and CEO)

On margin, Jasper. We've said before we're in the midst of a pretty aggressive productivity initiative that's designed to essentially remake our entire expense base. We've got, through technology and artificial intelligence, notably, six different categories that touch all parts of the organization. Our expectation is that we'll probably be able to save upwards of $100 million in operating expenses by the end of 2027.

Jasper Bibb (VP and Senior Equity Analyst)

Okay. No, that's great. Could you maybe frame where you're at on that journey to $100 million in annual operating expenses? Is that only coming out of the U.S. business, or that's company-wide?

Karl McDonnell (President and CEO)

It's company-wide. In my prepared remarks, I referenced a restructuring that we completed at the end of the second quarter, beginning of the third quarter, on a run rate basis that equated to probably $30 million of expense reduction. I'd say there's another $70 million or so over the next two and a half years. Some of that we're going to reinvest as growth capital to continue to support the various businesses, and some of it will show up as increased margin.

Jasper Bibb (VP and Senior Equity Analyst)

Okay. That's great. For U.S., could you maybe frame the relative growth rates for Strayer and Capella at this point? Could you talk about how you're managing each of those businesses in the context of trying to get back to mid-single digit enrollment growth at the segment level? It sounds like you might already be at mid-single digit for Capella and Strayer's declining. Is that accurate?

Karl McDonnell (President and CEO)

I'd say that Capella has been stronger. The weakness that we've seen at Strayer is primarily attributable, as it has been in prior cycles, to a reduction in non-affiliated students. It is also a function of just, frankly, more efficient marketing dollars at Capella. We do not necessarily, we're not fixated on spending a set amount at both Strayer and Capella. We tell the U.S. higher education management team, solve for whatever is going to result in the overall highest growth for U.S. higher education as a division. Over the last 18 months or so, that's been much more effective at Capella. We have worked to grow Capella at a higher rate of growth than Strayer, and we're seeing that in the performance it's playing out.

Jasper Bibb (VP and Senior Equity Analyst)

Thanks. I wanted to ask about Australia and New Zealand encouraging news on the international student caps. Are you still expecting that business to return to total enrollment growth in 2026?

Karl McDonnell (President and CEO)

Total enrollment growth, I would like for it to return in 2026. Definitely new student growth in 2026 when we anniversary the caps. It generally takes four to six quarters of new student growth to overcome any declines you've had over the preceding four to six quarters. Getting to total enrollment growth by the end of 2026 would be a little bit of a stretch goal, but I would definitely expect new student growth beginning in the first part of 2026.

Jasper Bibb (VP and Senior Equity Analyst)

Okay. Got it. Maybe I misremembered the comment from the last call. Last one for me, as you see it today, do you think the 2026 for the company level would align with the notional framework you outlined a few years ago at the investor day?

Karl McDonnell (President and CEO)

Yeah. We are very anchored on our notional model. Nothing that I see now, at either the revenue line or the expense line, which we obviously control, leads me to believe that we won't be able to hit the targets that we laid out at our investor day.

Jasper Bibb (VP and Senior Equity Analyst)

Great. Thank you for taking the questions, guys.

Karl McDonnell (President and CEO)

Thanks.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question, please press star 11. Our next question will come from the line of Jeff Silber with BMO Capital Markets. Your line is open.

Jeff Silber (Managing Director and Senior Equity Research Analyst)

Thanks so much. I wanted to start with Australia and New Zealand. I know many folks on the line don't necessarily follow what's going on on a daily basis. Can you just remind us exactly what has happened, what the changes were compared to what we thought might have happened a few months ago?

Karl McDonnell (President and CEO)

The change is, the change from when we bought it is that the Australian government has put in place hard enrollment caps for international students. In our case, that resulted in a reduction of approximately 30% from what we had when there were no caps. International students historically at Torrens represented about half of any new student cohort that we had. The change that we did not further anticipate that happened at the beginning of this year is the government went further and put much more tighter controls and restrictions on the ability of an international student who already has a visa and who is already in Australia from transferring to another institution, which frankly was the source of most of the growth that we had at Torrens because it is a very common practice in Australia for universities to charge a pretty significant tuition premium for international students.

We at Torrens effectively have tuition parity between international and domestic students. There was a strong incentive for students to enroll at Torrens because they were going to save a significant amount of money. The change is that we, Torrens, have to essentially vet any transfer student the same way you would as somebody coming in offshore when they are just applying for a visa. You have to vet things like the amount of finances that they have on shore. You have to vet their ability to return back to their country and their willingness to return back to their country when they are done with the studies. It is a significant headwind. The product of that headwind is that far fewer students are transferring. Regardless, whether it is the offshore students coming in for the first time or the international transfer students, we are going to anniversary these caps mid-2026.

We've seen pretty strong domestic new student enrollment growth throughout 2025. When I was answering Jasper's question, I expect that we'll be growing new students in 2026, and hopefully that will translate into total enrollment growth by the end of 2026. By the time we fully anniversary these restrictions heading into 2027, we expect that business to be growing.

Jeff Silber (Managing Director and Senior Equity Research Analyst)

Okay. That's really helpful. I appreciate it. Why don't I move back to U.S. higher education, and I appreciate you guys calling out your healthcare exposure. Can you just remind us, I know there seems to be some concern on the street between what they call pre-licensure and post-licensure programs. Can you just remind us of the exposure in those two buckets?

Karl McDonnell (President and CEO)

We are not in the pre-licensure field in nursing. We are in the post-licensure with the RN to BSN program. That is a FlexPath program, which is the largest program at Capella. We have seen, I'd say, a little softness in that program, the RN to BSN, throughout 2025. We further believe that we are advantaged because that is also our largest program from an employer-affiliated enrollment standpoint. As I have said in my prepared remarks, that part of our business remains strong.

Jeff Silber (Managing Director and Senior Equity Research Analyst)

Okay. Great. Just one more. I know also there's some concern on the government shutdown, specifically those companies that might have exposure to military and veteran students. Can you talk about any potential impact you've seen and what you think the impact might be going forward? Thanks.

Karl McDonnell (President and CEO)

To my knowledge, we haven't seen any impact. When I think about our largest clients like CVS Health or Best Buy or Dollar General, they're not really impacted by the government shutdown per se. As of yet, Jeff, we haven't seen any adverse impact.

Daniel Jackson (EVP and CFO)

Jeff, this is Dan. We have very few direct military students. So the exposure there is really insignificant. Okay. I appreciate the clarification. Thanks so much.

Jeff Silber (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Karl McDonnell for any closing remarks.

Karl McDonnell (President and CEO)

Thank you, everyone. We look forward to joining you in February to discuss our fourth quarter and full year results.

Operator (participant)

This concludes today's program. Thank you all for participating. You may now disconnect.