Strayer Education (STRA) Q2 2011 Earnings Call July 28, 2011 10:00 AM ET
Operator
Good morning, everyone, and welcome to Strayer Education Incorporated's Second Quarter 2011 Earnings Results Conference Call. This call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Strayer Education's Senior Vice President of Corporate Communications, Ms. Sonya Udler. Ms. Udler, please go ahead.
Sonya Udler
Thank you, operator. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education; Karl McDonnell, President and Chief Operating Officer; and Mark Brown, Executive Vice President and Chief Financial Officer.
For those of you that wish to listen to the conference via the Internet, please go to strayereducation.com, where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 1:00 p.m. Eastern through Thursday, August 4. The replay is available at (800) 642-1687, conference ID 78833654. Following Strayer's remarks, we will open the call for questions and answers.
I would like to remind everyone that today’s press release contains, and certain information on this call may contain, statements that are forward-looking and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act. The statements are based on the company's current expectations and are subject to a number of uncertainties and risks that the company has identified in the paragraph on forward-looking statements at the end of its press release and that could cause the company's actual results to differ materially.
Further information about these and other relevant uncertainties may be found in the company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission. Copies of these filings and the full press release are available online and upon request from the company's Corporate Communications department.
And now, I'd like to turn the call over to Rob. Rob, please go ahead.
Robert Silberman
Thank you, Sonya, and good morning, ladies and gentlemen. As it's our custom, I'd like to begin this morning with a brief overview of both our company and our business model for any listeners who are new to Strayer. I'll then ask Mark to report on our second quarter financial results and Karl to comment on our second quarter operational results, as well as our enrollment statistics for the summer academic term. Finally, I'd like to provide an update on our growth strategy, the company's earnings outlook for Q3 2011 and some thoughts on the Department of Education's recently finalized gainful employment rule making. Strayer Education is an education service company, whose primary asset is Strayer University, a 55,000-student, 92-campus, post-secondary education institution founded in 1892, which offers bachelors, masters and associate degrees in Business Administration, Accounting, Computer Science, Public Administration and Education.
Unlike traditional universities, Strayer University students are working adults, who are returning to college and graduate schools to improve their lives. Our revenue comes from tuition payments and associated fees. Approximately 75% of that revenue comes to us from federal Title IV loans issued to our students.
Our expenses at Strayer Education, include the costs of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies costs. We serve students in 20 states through physical campuses, as well as in all 50 states and over 30 foreign countries through our online courses. Strayer University is accredited by the Middle States Commission on Higher Education.
Now Mark, would you run through the financials
Mark Brown
Sure. Revenues for the 3-months ended June 30, 2011, increased 3% to $163.8 million, compared to $159.3 million for the same period in 2010, due to level enrollment and a tuition increase, which commenced in January of this year. Income from operations was $50.1 million compared to $58.7 million for the same period in 2010, a decrease of 15%. Operating income margin was 30.6%, compared to 36.8% for the same period in 2010. Net income was $29.6 million, compared to $35.7 million for the same period in 2010, a decrease of 17%. Diluted earnings per share was $2.53 compared to $2.60 for the same period in 2010, a decrease of 3%, reflecting a lower share count due to share repurchases. Diluted weighted average shares outstanding decreased to 11,737,000 from 13,704,000 for the same period in 2010. Revenues for the 6-months ended June 30, 2011, increased 6% to $335.7 million, compared to $317.2 million for the same period in 2010, due to increased enrollment and a tuition increase which commenced in January of this year.
Income from operations was $109.4 million, compared to $118.6 million for the same period in 2010, a decrease of 8%. Operating income margin was 32.6%, compared to 37.4% for the same period in 2010. Net income was $65.4 million, compared to $72 million for the same period in 2010, a decrease of 9%. Diluted earnings per share was $5.34, compared to $5.25 for the same period in 2010, an increase of 2%, reflecting a lower count -- a lower share count due to share repurchases. Diluted weighted average shares outstanding decreased to 12,263,000 from 13,716,000 for the same period in 2010. At June 30, 2011, the company had cash and cash equivalents of $50.6 million. The company generated $87.4 million from operating activities in the first 6 months of 2011 compared to $87.9 million during the same period in 2010. Capital expenditures were $18.1 million for the 6-months ended June 30, 2011, compared to $22.6 million for the same period in 2010. As previously announced, the Company entered into an amended and restated revolving credit and term loan agreement on April 4, 2011. This credit facility, which is secured by the assets of the company provides $100 million revolving credit facility and $100 million term loan facility, with a maturity date of March 31, 2014. Proceeds from the term loan were used to pay off the $80 million outstanding at March 31, 2011, under the original revolving credit facility. At June 30, 2011, the company had $100 million outstanding under its term loan and $15 million outstanding under its revolving credit facility. During the 3-months ended June 30, 2011, the Company used $55.5 million to repurchase approximately 434,000 shares of stock at an average price of $127.73 per share, as part of a previously announced stock repurchase authorization. During the 6-months ended June 30, 2011, the Company used $182.7 million to repurchase approximately 1,370,000 shares of stock at an average price of $133.32 per share. The company's remaining authorization for stock repurchases was $25 million at June 30, 2011. During the 6-months ended June 30, 2011, the company paid regular quarterly dividends of $25.2 million or $1 per share for each of the quarterly dividends. For the second quarter 2011, bad debt expense as percentage of revenues was 4.1% compared to 3.6% for the same period in 2010. Days sales outstanding was 12 days at the end of the second quarter of 2011, compared to 11 days at the end of the second quarter of 2010. Rob?
Robert Silberman
Thanks, Mark. Karl, you want to hit the operational results and comment on the summer enrollment as well.
Karl McDonnell
Sure. Total enrollment for the summer academic term was 47,790 students, a decrease of 8% versus the prior year. New student enrollments decreased 21% and continuing enrollments decreased 5%. Our continuation rate in the quarter declined 390 basis points. Enrollment at mature campuses decreased 9%, declined 3% at new campuses and global online students decreased 12%. Enrollments from corporate and institutional alliances grew 8% and as a result, students from corporate and institutional alliances have increased from 20% to 25% of our total student body. In addition, we added 4 new agreements during the quarter, including the agreements with Sysco Corporation, a nationwide food distribution company, as well as the BIC Corporation. Also today, we announced that we have opened 3 new campuses for the fall academic term, including 2 in Chicago, which is both a new state and a new market as well as one in Dallas, Texas, which is our 4th in that market. With these 3 campuses, we have completed our planned 8 new campuses for 2011. And in October, we'll announce our new campus plans for 2012. Lastly, in terms of student mix, approximately 70% of our students are enrolled in undergraduate degree programs with Business and Accounting, representing roughly 2/3 of that population. Graduate programs continue to comprise 1/3 of our overall student mix. Rob?
Robert Silberman
Thanks, Karl. Just a couple of comments on the Q2 financials from my perspective going back to Mark's comments. At first, at $2.53, we did earn $0.16 -- $0.16, $0.17 more than our forecast of 90 days ago. Over that large positive variance was caused entirely by lower share count from share repurchases that we executed during the quarter. Our actual revenue and expense lines were right on Mark's and my target. So, that explains the large variance. Using the share account that we had reported at the end of the first quarter, we would have earned $2.38, which was right where we said we would be in the second quarter. Second, while net income was down 17% in the quarter, distributable cash flow in the quarter was actually flat with last year at about $14 million, and that's as a result of Mark and Karl and their teams doing both a great job at working capital management and slightly lower CapEx.
Turning to a brief update on the growth strategy. Many of you will remember that our strategy is based on 5 objectives: The first is to maintain enrollment in the company's mature markets; the second is to invest our human and financial capital in opening new campuses, particularly in new states and markets; third, is to continue to build our online offerings; fourth, increase our corporate and institutional alliances; and the fifth and final objective, is to effectively redeploy are owner's capital. Karl has already covered the update on the first 4 objectives. On the capital redeployment, as Mark mentioned, we did announced our regular quarterly dividend of $1 per share and also that we have repurchased approximately $55 million worth of our common stock during the second quarter, and that was at an average price of around $128 per share. That brings our share repurchases during calendar year 2011 to approximately 10% of the outstanding shares of the company at the start of the year. On the earnings outlook for the third quarter of 2011, based on the 8% decrease in the university's enrollment for the summer term, we expect earnings per share between $1.04 and $1.06 in the third quarter and that's again, using the share count at the end of Q2. And approximately 1,000 basis points of operating margin decrease versus the prior year. You'll remember summer term is seasonally lower for us, and so the incremental margin impact of both increases or decreases in enrollment have always been larger in the summer term. Finally, on the Department of Education's recently published gainful employment regulation. While we're still reviewing all 450-some pages, and awaiting both clarifications and data from the Department in certain areas, which they have said they are going to provide, based on what we have seen, we remain comfortable that all of our academic programs will meet the requirements of this rule and we currently contemplate no major changes to either our academic offerings or our business model on the basis of this rule.
And with that, operator, we'd be pleased to answer any questions.
Operator
Good morning, everyone, and welcome to Strayer Education Incorporated's Second Quarter 2011 Earnings Results Conference Call. This call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Strayer Education's Senior Vice President of Corporate Communications, Ms. Sonya Udler. Ms. Udler, please go ahead.
Sonya Udler
Thank you, operator. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education; Karl McDonnell, President and Chief Operating Officer; and Mark Brown, Executive Vice President and Chief Financial Officer.
For those of you that wish to listen to the conference via the Internet, please go to strayereducation.com, where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 1:00 p.m. Eastern through Thursday, August 4. The replay is available at (800) 642-1687, conference ID 78833654. Following Strayer's remarks, we will open the call for questions and answers.
I would like to remind everyone that today’s press release contains, and certain information on this call may contain, statements that are forward-looking and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act. The statements are based on the company's current expectations and are subject to a number of uncertainties and risks that the company has identified in the paragraph on forward-looking statements at the end of its press release and that could cause the company's actual results to differ materially.
Further information about these and other relevant uncertainties may be found in the company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission. Copies of these filings and the full press release are available online and upon request from the company's Corporate Communications department.
And now, I'd like to turn the call over to Rob. Rob, please go ahead.
Robert Silberman
Thank you, Sonya, and good morning, ladies and gentlemen. As it's our custom, I'd like to begin this morning with a brief overview of both our company and our business model for any listeners who are new to Strayer. I'll then ask Mark to report on our second quarter financial results and Karl to comment on our second quarter operational results, as well as our enrollment statistics for the summer academic term. Finally, I'd like to provide an update on our growth strategy, the company's earnings outlook for Q3 2011 and some thoughts on the Department of Education's recently finalized gainful employment rule making. Strayer Education is an education service company, whose primary asset is Strayer University, a 55,000-student, 92-campus, post-secondary education institution founded in 1892, which offers bachelors, masters and associate degrees in Business Administration, Accounting, Computer Science, Public Administration and Education.
Unlike traditional universities, Strayer University students are working adults, who are returning to college and graduate schools to improve their lives. Our revenue comes from tuition payments and associated fees. Approximately 75% of that revenue comes to us from federal Title IV loans issued to our students.
Our expenses at Strayer Education, include the costs of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies costs. We serve students in 20 states through physical campuses, as well as in all 50 states and over 30 foreign countries through our online courses. Strayer University is accredited by the Middle States Commission on Higher Education.
Now Mark, would you run through the financials
Mark Brown
Sure. Revenues for the 3-months ended June 30, 2011, increased 3% to $163.8 million, compared to $159.3 million for the same period in 2010, due to level enrollment and a tuition increase, which commenced in January of this year. Income from operations was $50.1 million compared to $58.7 million for the same period in 2010, a decrease of 15%. Operating income margin was 30.6%, compared to 36.8% for the same period in 2010. Net income was $29.6 million, compared to $35.7 million for the same period in 2010, a decrease of 17%. Diluted earnings per share was $2.53 compared to $2.60 for the same period in 2010, a decrease of 3%, reflecting a lower share count due to share repurchases. Diluted weighted average shares outstanding decreased to 11,737,000 from 13,704,000 for the same period in 2010. Revenues for the 6-months ended June 30, 2011, increased 6% to $335.7 million, compared to $317.2 million for the same period in 2010, due to increased enrollment and a tuition increase which commenced in January of this year.
Income from operations was $109.4 million, compared to $118.6 million for the same period in 2010, a decrease of 8%. Operating income margin was 32.6%, compared to 37.4% for the same period in 2010. Net income was $65.4 million, compared to $72 million for the same period in 2010, a decrease of 9%. Diluted earnings per share was $5.34, compared to $5.25 for the same period in 2010, an increase of 2%, reflecting a lower count -- a lower share count due to share repurchases. Diluted weighted average shares outstanding decreased to 12,263,000 from 13,716,000 for the same period in 2010. At June 30, 2011, the company had cash and cash equivalents of $50.6 million. The company generated $87.4 million from operating activities in the first 6 months of 2011 compared to $87.9 million during the same period in 2010. Capital expenditures were $18.1 million for the 6-months ended June 30, 2011, compared to $22.6 million for the same period in 2010. As previously announced, the Company entered into an amended and restated revolving credit and term loan agreement on April 4, 2011. This credit facility, which is secured by the assets of the company provides $100 million revolving credit facility and $100 million term loan facility, with a maturity date of March 31, 2014. Proceeds from the term loan were used to pay off the $80 million outstanding at March 31, 2011, under the original revolving credit facility. At June 30, 2011, the company had $100 million outstanding under its term loan and $15 million outstanding under its revolving credit facility. During the 3-months ended June 30, 2011, the Company used $55.5 million to repurchase approximately 434,000 shares of stock at an average price of $127.73 per share, as part of a previously announced stock repurchase authorization. During the 6-months ended June 30, 2011, the Company used $182.7 million to repurchase approximately 1,370,000 shares of stock at an average price of $133.32 per share. The company's remaining authorization for stock repurchases was $25 million at June 30, 2011. During the 6-months ended June 30, 2011, the company paid regular quarterly dividends of $25.2 million or $1 per share for each of the quarterly dividends. For the second quarter 2011, bad debt expense as percentage of revenues was 4.1% compared to 3.6% for the same period in 2010. Days sales outstanding was 12 days at the end of the second quarter of 2011, compared to 11 days at the end of the second quarter of 2010. Rob?
Robert Silberman
Thanks, Mark. Karl, you want to hit the operational results and comment on the summer enrollment as well.
Karl McDonnell
Sure. Total enrollment for the summer academic term was 47,790 students, a decrease of 8% versus the prior year. New student enrollments decreased 21% and continuing enrollments decreased 5%. Our continuation rate in the quarter declined 390 basis points. Enrollment at mature campuses decreased 9%, declined 3% at new campuses and global online students decreased 12%. Enrollments from corporate and institutional alliances grew 8% and as a result, students from corporate and institutional alliances have increased from 20% to 25% of our total student body. In addition, we added 4 new agreements during the quarter, including the agreements with Sysco Corporation, a nationwide food distribution company, as well as the BIC Corporation. Also today, we announced that we have opened 3 new campuses for the fall academic term, including 2 in Chicago, which is both a new state and a new market as well as one in Dallas, Texas, which is our 4th in that market. With these 3 campuses, we have completed our planned 8 new campuses for 2011. And in October, we'll announce our new campus plans for 2012. Lastly, in terms of student mix, approximately 70% of our students are enrolled in undergraduate degree programs with Business and Accounting, representing roughly 2/3 of that population. Graduate programs continue to comprise 1/3 of our overall student mix. Rob?
Robert Silberman
Thanks, Karl. Just a couple of comments on the Q2 financials from my perspective going back to Mark's comments. At first, at $2.53, we did earn $0.16 -- $0.16, $0.17 more than our forecast of 90 days ago. Over that large positive variance was caused entirely by lower share count from share repurchases that we executed during the quarter. Our actual revenue and expense lines were right on Mark's and my target. So, that explains the large variance. Using the share account that we had reported at the end of the first quarter, we would have earned $2.38, which was right where we said we would be in the second quarter. Second, while net income was down 17% in the quarter, distributable cash flow in the quarter was actually flat with last year at about $14 million, and that's as a result of Mark and Karl and their teams doing both a great job at working capital management and slightly lower CapEx.
Turning to a brief update on the growth strategy. Many of you will remember that our strategy is based on 5 objectives: The first is to maintain enrollment in the company's mature markets; the second is to invest our human and financial capital in opening new campuses, particularly in new states and markets; third, is to continue to build our online offerings; fourth, increase our corporate and institutional alliances; and the fifth and final objective, is to effectively redeploy are owner's capital. Karl has already covered the update on the first 4 objectives. On the capital redeployment, as Mark mentioned, we did announced our regular quarterly dividend of $1 per share and also that we have repurchased approximately $55 million worth of our common stock during the second quarter, and that was at an average price of around $128 per share. That brings our share repurchases during calendar year 2011 to approximately 10% of the outstanding shares of the company at the start of the year. On the earnings outlook for the third quarter of 2011, based on the 8% decrease in the university's enrollment for the summer term, we expect earnings per share between $1.04 and $1.06 in the third quarter and that's again, using the share count at the end of Q2. And approximately 1,000 basis points of operating margin decrease versus the prior year. You'll remember summer term is seasonally lower for us, and so the incremental margin impact of both increases or decreases in enrollment have always been larger in the summer term. Finally, on the Department of Education's recently published gainful employment regulation. While we're still reviewing all 450-some pages, and awaiting both clarifications and data from the Department in certain areas, which they have said they are going to provide, based on what we have seen, we remain comfortable that all of our academic programs will meet the requirements of this rule and we currently contemplate no major changes to either our academic offerings or our business model on the basis of this rule.
And with that, operator, we'd be pleased to answer any questions.
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