Executive Summary / Key Takeaways

• Strategic Education ($STRA) is leveraging its Education Technology Services (ETS) segment and deep employer partnerships as a primary growth engine, driving significant revenue and operating income expansion, particularly in Q1 2025.
• The company's differentiated technology platforms, including Sophia Learning and Workforce Edge, provide quantifiable benefits like lower costs and enhanced student pathways, creating a competitive moat and fueling employer-affiliated enrollment growth in its U.S. Higher Education (USHE) segment.
• Despite facing regulatory uncertainties in Australia/New Zealand (ANZ) impacting international enrollment, STRA is strategically pivoting towards domestic growth in the region and maintaining a focus on disciplined cost management across segments.
• Recent financial results, including 5% consolidated revenue growth and 16% adjusted operating income growth in Q1 2025, align with management's long-term notional model targeting mid-single-digit revenue growth and 200 basis points of adjusted operating margin expansion over several years.
• Key risks include evolving regulatory landscapes in both the U.S. and Australia, which could impact enrollment and operational flexibility, requiring ongoing adaptation and compliance efforts.

Strategic Education: Forging the Path Between Learning and Employment

Strategic Education, Inc. ($STRA) operates at the intersection of education and workforce development, positioning itself as a provider of high-quality, job-ready skills and post-secondary education primarily for working adults. The company's structure is built around three core segments: U.S. Higher Education (USHE), encompassing institutions like Capella and Strayer Universities; Education Technology Services (ETS), focused on employer partnerships and technology platforms; and Australia/New Zealand (ANZ), anchored by Torrens University. This diversified portfolio reflects a strategic evolution, including acquisitions like Torrens University and the perpetual license for the Jack Welch Management Institute, aimed at expanding reach and relevance in a dynamic education landscape.

The competitive environment for STRA is multifaceted, involving direct rivals like Stride Inc. (LRN), Grand Canyon Education (LOPE), Adtalem Global Education (ATGE), and Laureate Education (LAUR), as well as indirect competitors offering alternative learning pathways. While peers like LOPE demonstrate higher profitability margins (LOPE's net margin around 25% vs. STRA's 9.14% TTM) and LRN shows faster overall revenue growth (11% in 2024 vs. STRA's 4.6% in Q1 2025), STRA differentiates itself through its deep focus on employer partnerships and its proprietary technology platforms. The company's strategy emphasizes leveraging these relationships and technological capabilities to drive enrollment, enhance student outcomes, and improve operational efficiency.

A critical differentiator for STRA lies in its technology platforms, notably Sophia Learning and Workforce Edge. Sophia Learning offers low-cost, online general education courses, serving as both a direct-to-consumer product and a foundational component of employer partnerships. This platform provides a quantifiable benefit through a subscription model that can enable significantly lower per-student costs compared to traditional university courses, potentially offering a material efficiency edge in delivery costs. Management highlights Sophia's high net promoter score and strong growth, with average total subscribers increasing by 37% and revenue by 36% in Q1 2025, indicating strong product-market fit and effective marketing investments.

Workforce Edge acts as a full-service education benefits administration solution, streamlining access to STRA's programs for employees of partner companies. This platform is central to the company's employer-affiliated enrollment strategy. The number of corporate partners continues to grow, reaching 78 in Q1 2025, collectively employing approximately 3.9 million individuals. Enrollments through Workforce Edge into Strayer or Capella increased nearly 50% in Q1 2025, reaching around 2,300 students. The expansion of the Best Buy (BBY) partnership in February 2025 to offer no-cost degrees through Strayer's Degrees@Work program, coupled with Best Buy becoming a Workforce Edge client, exemplifies the deepening of these strategic relationships. These technology-enabled partnerships represent a significant competitive moat, driving a growing portion of USHE enrollment (31.2% in Q1 2025, an all-time high) and positioning STRA favorably against competitors who may lack such integrated employer solutions.

Performance Reflecting Strategic Momentum

Strategic Education's first quarter 2025 results underscore the impact of its strategic focus, particularly the strength of the ETS segment. Consolidated revenue increased 5% year-over-year to $303.6 million, while adjusted operating income saw a more substantial 16% increase, reaching $41.7 million. This resulted in an adjusted operating margin of 13.6% and adjusted diluted earnings per share growth of 16% to $1.29.

Segment performance reveals the key drivers. The USHE segment saw a modest 0.8% increase in revenue to $221.0 million, with total enrollment slightly up at 87,854. While overall enrollment growth was relatively flat, employer-affiliated enrollment continued its strong trajectory, growing 7% and offsetting lower unaffiliated enrollment. USHE operating income grew 6.9% to $30.0 million, benefiting from higher revenue per student and cost management efforts, despite increased investments in branding and higher bad debt expense (which remained stable at 4.2% of revenue).

The ETS segment was the standout performer, with revenue soaring 45.2% to $34.3 million and operating income increasing 37.3% to $13.8 million. This growth was directly attributed to the success of Sophia Learning subscriptions and the expansion of Workforce Edge through new employer partnerships and increased affiliated enrollment. The segment's operating margin remained robust at 40.3%, even as the company invested in increased marketing and staffing to support future growth, particularly for large new partners.

The ANZ segment experienced a slight 0.6% decrease in total enrollment to 20,082 in Q1 2025. Revenue increased 1.9% to $48.3 million (6% on a constant currency basis), primarily driven by pricing improvements. The segment reported an operating loss of $2.1 million, a slight improvement from the prior year, which management noted is typical for the first quarter due to fewer instructional days during the Australian summer. The enrollment decline was driven by lower international student numbers, impacted by recent Australian regulatory changes affecting visa processing and transfer student verification. In response, STRA is strategically increasing its focus and marketing efforts on the domestic Australian market to drive future growth.

Liquidity remains solid, with cash, cash equivalents, and marketable securities totaling $197.6 million as of March 31, 2025. Net cash provided by operating activities was $67.7 million in Q1 2025. The company maintains access to a $250.0 million revolving credit facility, with no outstanding borrowings as of the end of the quarter, and was in compliance with all covenants. Capital allocation priorities include investing in the business, shoring up the balance sheet (having paid down debt related to the ANZ acquisition in 2024), and returning capital to shareholders. The company paid $14.8 million in dividends in Q1 2025 and repurchased $32.0 million of common stock, with $196.5 million remaining in the repurchase authorization through December 31, 2025.

Outlook and Navigating the Landscape

Management's outlook is framed by its notional operating model, which anticipates mid-single-digit enrollment normalization over the long term and aims for approximately 200 basis points of adjusted operating margin expansion over several years. While not providing specific annual guidance, the Q1 2025 results, particularly the strong adjusted operating income growth, are seen as aligning with this long-term trajectory. The company plans continued investment in the ETS segment and ANZ domestic marketing, with expense growth expected to be managed to support the targeted margin expansion.

However, the path forward is not without challenges, particularly concerning regulatory environments. In the U.S., the company's institutions are subject to complex and evolving regulations, including those related to Title IV funding, state authorization (like potential changes to SARA policies), and compliance with Title IX and Title VI. Recent developments, such as proposed changes to SARA policies, new negotiated rulemaking topics for Title IV, and significant legal/enforcement activity around Title IX and Title VI (including court challenges and new investigation teams), highlight the ongoing regulatory scrutiny faced by post-secondary institutions. While STRA is not a party to all related lawsuits, adverse outcomes or changes in enforcement priorities could impact operations, enrollment, or financial condition.

In Australia, the government's shift from proposed international student caps to managing immigration through visa processing speed presents a new variable. While potentially more favorable than hard caps, this approach could still lead to delays or limitations on international enrollment, as seen in the Q1 2025 results due to new verification requirements for transfer students. STRA's strategic pivot to emphasize domestic enrollment in ANZ is a direct response to this evolving landscape, aiming to build a more resilient growth profile in the region.

Conclusion

Strategic Education's investment thesis is increasingly centered on the accelerating growth of its Education Technology Services segment and the strategic advantage derived from its deep employer partnerships and differentiated technology platforms like Sophia Learning and Workforce Edge. These assets are proving effective in driving employer-affiliated enrollment and contributing meaningfully to consolidated revenue and operating income growth, aligning with the company's long-term financial targets. While regulatory complexities in both the U.S. and Australia pose ongoing risks and require careful management and strategic adaptation, STRA's focus on high-quality, career-aligned education for working adults, supported by its technological capabilities and expanding employer network, provides a compelling foundation for future performance. Investors should monitor the execution of the domestic growth strategy in ANZ and the continued expansion and profitability of the ETS segment as key indicators of STRA's ability to execute on its strategic vision and deliver value.