Strategic Education (NASDAQ:STRA) released first-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.

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Summary

Strategic Education Inc reported a 1% YoY decline in revenue for Q1 2026, attributed to a slight decrease in consolidated enrollment, but achieved a 3% growth in operating income due to a 2% reduction in adjusted operating expenses.

The Education Technology Services (ETS) division saw a 21% revenue increase, with Sofia Learning subscriptions and Workforce Edge partnerships driving growth. ETS now accounts for 46% of the company's consolidated operating income.

U.S. higher education employer-affiliated enrollment grew 10%, with healthcare enrollment representing over half of total U.S. higher education enrollment. However, U.S. higher education revenue declined 4% due to unaffiliated enrollment decreases and increased discounts.

In Australia and New Zealand, total enrollment declined 3% due to regulatory constraints on international enrollment, while domestic new student growth continued. The region reported a $2.4 million operating loss, reflecting normal business seasonality.

Management expressed high confidence in achieving EBIT and EPS targets for the year, driven by technological productivity enhancements and cost management. Despite challenges, they anticipate improved enrollment trends and potential revenue growth in the coming quarters.

Full Transcript

OPERATOR

Welcome to Strategic Education's first quarter 2026 results conference call. I will now turn the call over to Therese Wilkie, Senior Director of Investor Relations for strategic education. Ms. Wilkie, please go ahead.

Therese Wilkie (Senior Director of Investor Relations)

Thank you. Hello everyone and welcome to Strategic Education's conference call in which we will discuss first quarter 2026 results. With us today are Carl 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 10K, the 10Q to be filed, and other filings with the securities and Exchange Commission, as well as Strategic Education's Future 8Ks, 10Qs and 10Ks. Copies of these filings and the full press release are available for viewing on our [email protected] and now I'd like to turn the call over to Carl. Carl, please go ahead.

Carl McDonnell (President and Chief Executive Officer)

Thank you, Therese and good morning everyone. Our first quarter results reflect meaningful progress across three of our primary strategic objectives, the continued investment and growth of our Education Technology Services division, growing our Employer Focus strategy and further implementing our AI and other productivity enabling Systems. For the first quarter, SEI revenue declined 1% year over year driven by a slight decrease in consolidated enrollment. Based on our current enrollment trends, we expect that the first quarter will be the low point of the year in both absolute revenue and revenue growth. Our productivity initiatives drove a 2% reduction in adjusted operating expenses, resulting in 3% operating income growth and slight margin expansion to 14.3%. Adjusted earnings per share came in at $1.41. Turning now to our segments, Education Technology services grew revenue 21% to $42 million driven by Sofia Learning subscriptions, higher employer affiliated enrollment and new Workforce Edge partnerships. Even with a 7% increase in expenses. As we continue to invest in the ETS business, ETS operating income grew 42% to $20 million and a 47% margin. ETS now represents 46% of consolidated operating income. Within ETS, Sophia Learning grew average total subscribers by 40% and revenue by 32%, with strong growth in both consumer and employer affiliated subscribers. Workforce Edge ended the quarter with 82 corporate agreements covering 4 million employees and enrollments from Workforce Edge into either Strayer or Capella University grew 70%, reaching nearly 4,000 students. As you know, expanding this network of corporate partners continues to be among our most important strategic focus areas. Moving to US higher education, employer affiliated enrollment grew 10% and reached a new all time high of 34.5% of total US higher education enrollment, an increase of more than 300 basis points from the prior year. Health care, which is a key component of our employer Strategy, also grew 10%. And healthcare enrollment now represents more than half of all U.S. higher education enrollment. U.S. higher education revenue declined 4% in the quarter, reflecting a slight decline in unaffiliated enrollment, along with somewhat higher discounts and scholarships, which together lowered revenue per student. Our productivity initiatives continue to enable effective cost control. With operating expenses down 2%, the segment delivered $26 million of operating income and a 12% margin. U.S. higher education also set a new record for average student retention at 89%. Turning now to Australia and New Zealand, total enrollment declined 3% in the quarter. Regulatory constraints on international enrollment continue to be a headwind and only partially offset by continued domestic new student growth. We remain focused on maximizing international enrollment within the current CAHPs and on our continued investment in the domestic market on a constant currency basis. ANZ revenue was down 4%, reflecting the enrollment decline and a slight decrease in revenue per student. Here too, our productivity initiatives drove a 3% reduction in operating expenses. We reported an operating loss of $2.4 million for the quarter, which, as we've noted before, reflects the normal seasonality of that business. On capital allocation. In addition to our regular quarterly dividend, we repurchased approximately 493,000 shares during the quarter for a total of $40 million. As of the end of the first quarter, we have approximately $200 million remaining on our share repurchase authorization through the end of the year. And finally, as always, I'd like to thank all of my colleagues here at SCI for their ongoing commitment to our students and our employer partners. And with that, Kevin, we'd be happy to take questions. Thank you.

OPERATOR

Ladies and gentlemen, if you have a question or a comment at this time, please press Star one one on your telephone. If your question has been answered or wish to move yourself from the queue, please press Star one one again. We'll pause for a moment while we compile our Q and A roster. Our first question comes from Jeff Zilber with BMO Capital Markets. Your line is open.

Jeff Zilber (Analyst at BMO Capital Markets)

Thanks so much, Carl. I appreciate the comments about saying that the first quarter is hopefully the low point from a revenue and a growth perspective. I know you've always talked about getting back to your notional plan. Any idea in terms of the timing of that, when we might see that?

Carl McDonnell (President and Chief Executive Officer)

Sure. Well, we have partial visibility into the next quarter, obviously, and I'd say that enrollment trends in U.S. higher education have been improving. We expect that they will continue to improve, which is why we had to comment on Q1 being the low point on revenue growth for the year. As for the notional plan or model, I should clarify, Jeff, that when I'm talking about our performance against the notional plan, I'm predominantly referring to EBIT and EPS. And from that lens, I have very high confidence that we're going to be on our notional plan this year. Could we get there with better expense management and maybe a little less revenue, just given how the first quarter played out? I think that's possible. But as I say, I'm very confident that we're going to be there from an EBIT and EPS standpoint.

Jeff Zilber (Analyst at BMO Capital Markets)

Okay, that's great to hear. If I could just move on to a regulatory issue. You know, effective July 1st, we've got some new rules coming from the One Big Beautiful Bill Act, specifically the caps on graduate and professional loans. I know you don't have as much exposure there, especially on the professional side, but I'm just curious if you've seen any impact. Are students maybe a little bit reluctant because they're unsure about the funding environment? Any color you can provide would be great.

Carl McDonnell (President and Chief Executive Officer)

Yeah, I've not heard of any demand related issues or pressures as a result of grad loan limits changing. We're still waiting on final language to see exactly how that's going to be shaped, but I don't expect that we're going to have a major impact from changes to the grad loan limits.

Jeff Zilber (Analyst at BMO Capital Markets)

All right, great to hear. I'll get back in the queue, thanks. Thanks, Jeff.

OPERATOR

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. One moment for our next question. Our next question comes from Alex Parrish with Barrington Research. Your line is open.

Alex Parrish (Analyst at Barrington Research)

Hi guys. Thanks for taking my question. I just had a follow up on that last one, the notional plan. Carl, you said you had confidence, high confidence in EBIT and EPS from the notional plan. Can you just refresh my memory? It calls for 4 to 6% revenue growth and and 200 basis points of adjusted operating margin improvement. You said it might be A little less revenue, a little bit more cost reduction. But what are you referring to? Are you referring to the 200 basis points of adjusted operating income improvement?

Carl McDonnell (President and Chief Executive Officer)

Yes, specifically. And the reason I say that is obviously we control our expenses. I'd say that the AI and other technological enablements of productivity are being implemented a little faster than even I expected. So I think it's going to have a slightly bigger impact this year than I otherwise would have expected. And I don't know what revenue is going to be ultimately. But if you just assume that our current enrollment trends are going to continue through the balance of the year and you layer on experience accelerated productivity, that gives me high confidence that we're going to get to the 200 basis points of margin expansion and that will translate into whatever growth rate it is on eps.

Alex Parrish (Analyst at Barrington Research)

Gotcha. And then regarding enrollment in US Higher education, obviously big growth continues in employer affiliated enrollment that accelerated sequentially from the fourth quarter. Unaffiliated was down 5.5% by my calculation. That too represents a sequential improvement when it was down 8.5% in the fourth quarter. So what explains the sequential improvement? Are new students up in that channel

Carl McDonnell (President and Chief Executive Officer)

specifically? We've had, I'd say, a little better than what we've expected in new student growth at Capella. In fact, I would describe Capella's new student enrollment as quite strong. We have seen ongoing weakness in predominantly Strayer's undergraduate unaffiliated enrollment, which frankly is not part of our strategy. We're not trying to grow unaffiliated enrollment, but it has been improving. So I'd say, Alex, it's a mix of Capella doing better than what we expected and Strayer beginning to improve from lower levels that we had last year. Gotcha.

Alex Parrish (Analyst at Barrington Research)

And then is there anything different you're doing in terms of marketing to the unaffiliated? Obviously your focus is on employer affiliated, but social media marketing, things like that. Trying to drive enrollment in undergraduate unaffiliated at Strayer.

Carl McDonnell (President and Chief Executive Officer)

Yeah, well, it's a combination of a couple of things that have been really playing out over the last couple of years. The first is We've told our U.S. higher education management team that we want them to solve for the overall highest growth we can get across US Higher Ed and to not necessarily solve for any particular growth at either Stray or Capella, but to try to maximize the sum of both of those. And what's happened as a result of that is Capella has just been a much stronger grower and as such we've been supporting Capella's growth with increased investments in marketing. And because we haven't necessarily increased the aggregate amount in US Higher ed, that means that we've been marketing a lot less at Strayer, which is predominantly the channel for unaffiliated enrollment. And in fact, Dan could give you maybe a more precise number. But if you go back two years ago and compare it to where we are today from a marketing investment standpoint, Strayer is probably down by 50% or more and Capella is up by 50% or more. And that's feeding the strategy that we're trying to execute, which is employer focused, healthcare focused in some quarters. Capella's mix of employer affiliated enrollments is over 50%. So it's a direct enablement of our strategy. We're happy to have unaffiliated enrollments. We're not trying to exclude them. It's just not where we're investing our growth capital. We're investing our growth capital in the employer channel, health care and ETS in the States. And that's how it's playing out. And that's how we plan for it to be be executed for the rest of this year and moving forward in 27. Gotcha.

Alex Parrish (Analyst at Barrington Research)

And given the improving trends in US higher education enrollment, the sequential improvement, the slowing rate or the declining rate of decline, do you think we'll get to growth by the end of the year in US Higher education enrollment?

Carl McDonnell (President and Chief Executive Officer)

I think it'll be very close. I think we have a good chance to do that. You know, I can't predict, obviously, but I think that's entirely possible. Great.

Alex Parrish (Analyst at Barrington Research)

And then the last question, and kind of similarly ANZ segment, given the 3% increase in the international caps expected in 2026 and the strength that you're seeing on the domestic side of new student enrollment, do you still expect that segment to get to overall enrollment growth by the end of the year?

Carl McDonnell (President and Chief Executive Officer)

It's going to be close. I do. I'm hopeful, I should say that we're going to have full year new student growth, which will be the first in the post CAP era. Whether or not we get to total enrollment growth, it'll depend. I have to say that one of the things that we saw in the first quarter that we didn't foresee is that the Australian government has begun to slow down visa approvals even when you're below your cap. That's not something we saw last year. The Australian government was very good about approving visas as long as you were under your international cap. This year there's been more friction and we suspect it May have something to do with just greater immigration scrutiny following the Bondi beach incident that happened in Sydney last year. But that was something that didn't happen last year. It happened in the first quarter. I don't know if it's going to happen in the second quarter. Moving on. But that was more friction than what we were expecting, and that may impact our ability to generate total enrollment growth this year.

Alex Parrish (Analyst at Barrington Research)

But you feel good about new student enrollment growth this year in anc?

Carl McDonnell (President and Chief Executive Officer)

Yes, and we continue to have pretty strong domestic enrollment growth. And I'd have to go back and look, but I think three out of the four quarters last year we had it the last three, and we also saw that in the first quarter. Great.

Alex Parrish (Analyst at Barrington Research)

That's helpful. I appreciate the additional color. I'll get back in the queue. Okay, thanks, Alex.

OPERATOR

One moment for our next question. Our next question comes from Jasper Bibb with Truist. Your line is open.

Jasper Bibb (Analyst at Truist)

Hey, morning, everyone.

Daniel Jackson (Executive Vice President and Chief Financial Officer)

Underneath the US Margin performance this quarter, can you compare where the operating margins for Capella and Strayer sit at this point? Like, is there a big difference there? And with the shifting growth investments from Capella, from Strayer to Capella that you talked about, do you think you've kind of fully rightsized your fixed costs for what's become a smaller business on the Strayer side versus where you were pre Covid, or is there more to do there potentially? Hey, Jasper, it's Dan. The Capella margin, probably not surprising, is much higher than Strayer and is driving most of the operating income for US Higher ed. Strayer has a positive margin. It's just a fraction right now of Capella. And the expenses for Strayer, though, we're pretty close to right sizing them, there's still opportunities when it comes to some of the productivity work that Carl referenced and continued real estate rationalization. So I think the Strayer margin will improve, but it's unlikely to get to where Capella is. And then is this slight decline in revenue per student in US in the first quarter? I guess in the context of revenue bottoming in the first quarter, the expectation there. How are you thinking about revenue per student in the US over the balance of the year? Yeah. So first off, we're expecting relatively stable revenue per student for the full year. The first quarter was lower due to higher scholarships and discounts and lower classes per student both year over year and sequentially from the fourth quarter. And that variability is driven by program and degree mix, the mix of corporate students and the mix of some of our unaffiliated Student groups that are eligible for scholarships. Again, it's hard to predict those. But with pricing that takes effect starting in the second quarter, we think the full year revenue per student is still likely to be flat. So it'll offset some of these other trends. Makes sense. And one other note, Jasper, on that the sequential issue was also exacerbated by our fourth quarter. 25. Revenue per student was significantly higher due to a significant decline in scholarships and discounts that quarter compared to 4Q24. So that was a little bit of an anomaly.

Carl McDonnell (President and Chief Executive Officer)

Makes sense. Thank you. And then for education technology, it seems like your growth rate for Sofia stayed pretty high, but the Workforce Edge growth rate has slowed a bit. I know you're starting to lap your large retail partner that you were ramping last year. Anything else we should consider for how each of those two businesses are going to perform in 26 and the relative growth rates there? Well, you got to remember Sofia is pretty big now, so it would not surprise me if the growth rate moderate some. Although our expectations is that we should be able to continue to support 20 plus percent growth at Sofia. You're right. We're anniversarying a big retail client in Workforce Edge. So, you know, there could be slightly less growth there. But remember, the big or one of the big benefits of Workforce Edge is enrollments into Strayer and Capella. And as I said in my prepared remarks, we had over 4,000 of those students in the first quarter. We expect that number will continue to grow. We have a very robust pipeline of new clients coming into Workforce Edge. We continue to get unsolicited inbound RFPs every quarter. So the way that we think about ETS is that we basically have two market leading businesses there. Sophia is the market leader on Alternative Credit Pathways. Workforce Edge is knocking on the door of being the market leader on Education Benefit Management. They're both great businesses. We continue to invest heavily in them and we expect that they'll continue to grow significantly both in the near term and the long term. Got it. Thank you for taking the questions. Sure. Thank you.

OPERATOR

And I'm not showing any further questions this time. I turn the call back to Carl for any further remarks.

Carl McDonnell (President and Chief Executive Officer)

Thank you, ladies and gentlemen. And we look forward to discussing our second quarter results next quarter.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.