Strategic Education, Inc. (STRA) is a leading provider of innovative educational solutions, catering to the diverse needs of students and professionals across the United States and international markets. With a rich history spanning decades, the company has established itself as a trusted name in the industry, delivering high-quality education and empowering individuals to achieve their personal and professional goals.
Company History and Background
Founded in 1996 as Capella Education Company, Strategic Education has grown to become a leading player in the higher education sector. The company initially focused on graduate-level programs, offering master's and doctoral degrees through its Capella University subsidiary. In 2007, it expanded its offerings by acquiring Sextant Education, Inc., which operated Sextant University, adding bachelor's and associate's degree programs to its portfolio. A significant milestone occurred in 2018 when Capella Education Company merged with Strayer Education, Inc., creating one of the largest providers of online and campus-based post-secondary education in the United States. The merged entity was renamed Strategic Education, Inc., continuing to operate both the Capella University and Strayer University brands.
Core Segments and Operations
The company operates through three core segments: U.S. Higher Education (USHE), Education Technology Services (ETS), and Australia/New Zealand (ANZ). Each of these segments plays a crucial role in the company's strategy, contributing to its overall success and growth.
The USHE segment, which includes Capella University and Strayer University, offers flexible and affordable certificate and degree programs, primarily catering to working adults. These institutions are accredited by recognized higher education accrediting bodies, ensuring the quality and rigor of their academic offerings. As of the latest quarter, the USHE segment reported a 4.8% increase in enrollment compared to the same period in the previous year, reflecting the strong demand for its programs. The segment also includes the Jack Welch Management Institute MBA, which is a unit of Strayer University, as well as non-degree web and mobile application development courses through Hackbright Academy and Devmountain, which are units of Strayer University.
The ETS segment, on the other hand, focuses on developing and maintaining partnerships with employers to build comprehensive education benefit programs. These programs provide employees with access to affordable and industry-relevant training, certificate, and degree programs. During the third quarter of 2024, the ETS segment experienced a 26.2% increase in revenue, driven by the growth in Sophia Learning subscriptions and higher employer-affiliated enrollment. The employer relationships developed by this segment are an important source of student enrollment for Capella University and Strayer University, and a significant portion of the revenue attributed to this segment is driven by the volume of enrollment derived from these employer relationships.
Expanding its global footprint, Strategic Education's ANZ segment, which includes Torrens University, Think Education, and Media Design School, operates in Australia and New Zealand. This segment has also demonstrated strong performance, with a 5.1% increase in enrollment in the third quarter of 2024 compared to the same period in the prior year. The ANZ segment's revenue grew by 11.9% on a constant currency basis during the nine-month period ending September 30, 2024. The company's expansion into Australia and New Zealand came through the acquisition of Torrens University and associated assets in 2020, diversifying SEI's revenue streams and providing exposure to international education markets. The ANZ segment offers certificate and degree programs in business, design, education, hospitality, healthcare, and technology through campuses in Australia, New Zealand, and online.
Financials and Liquidity
Strategic Education's financial performance has been solid, with the company reporting consistent revenue growth and improved profitability in recent years. In the latest reported quarter, the company's revenue increased by 7% to $305.96 million, while its net income grew by 50% to $27.75 million. The company's operating cash flow increased by 80% to $51.49 million, and free cash flow grew by 77% to $42.07 million.
For the full fiscal year 2023, Strategic Education reported revenue of $1.13 billion and net income of $69.79 million. The company generated operating cash flow of $117.12 million and free cash flow of $80.18 million for the year.
The company maintains a strong liquidity position with $195.89 million in cash and equivalents as of September 30, 2024. Strategic Education has no debt, as evidenced by its debt-to-equity ratio of 0. The company also has access to a $350 million Revolving Credit Facility, which had no outstanding balance as of September 30, 2024. With a current ratio and quick ratio of 1.34, Strategic Education demonstrates a healthy ability to meet its short-term obligations.
Challenges and Industry Dynamics
However, the company is not without its challenges. The highly regulated and competitive nature of the education industry, coupled with changing student preferences and technological advancements, requires Strategic Education to continuously adapt and innovate. The company's ability to navigate these complexities and maintain its competitive edge will be crucial to its long-term success. Strategic Education has faced various regulatory and legal challenges common to the for-profit education industry. In 2014, the U.S. Department of Education implemented new "gainful employment" regulations that placed restrictions on for-profit education programs. While Capella and Strayer were able to navigate these regulations, the uncertainty surrounding them led to enrollment declines across the sector.
Additionally, SEI has had to defend against lawsuits related to student borrower defense claims, which allege that the universities misled students about job prospects and earnings. In January 2024, Capella University received notice that the Department of Education received approximately 6,700 borrower defense to repayment applications with claims for forgiveness of loans taken out at the university. Strayer University received similar notice for approximately 1,900 applications. Furthermore, in April 2022, the Consumer Financial Protection Bureau (CFPB) took the position that it has supervisory authority over STRA and indicated it was considering whether to cite violations related to student loan servicing and collections practices. STRA cooperated with the CFPB's inquiry.
Furthermore, the company's international operations, particularly in Australia and New Zealand, face potential headwinds related to regulatory changes and political uncertainties. The proposed international student caps in Australia, if implemented, could have a significant impact on Torrens University's enrollment and operations, which the company is closely monitoring. The COVID-19 pandemic has also created challenges for the Australian and New Zealand operations as international student enrollment declined due to travel restrictions.
Growth Strategy and Future Outlook
Despite these challenges, Strategic Education remains committed to its growth strategy, investing in technology, brand-building, and strategic partnerships to drive further expansion and enhance the student experience. The company's focus on employer-based education programs and the growth of its Sophia Learning platform showcases its adaptability and responsiveness to evolving market trends.
The company's leadership has expressed optimism about the future, stating that they are "pleased with the performance across our segments and we continue to focus on the success of our students and aim for a strong finish to 2024." Strategic Education expects expenses to remain at the current run rate through the balance of the year. Regarding operating margin, the company indicated that the operating margin expansion for the full year 2024 is likely to be at the higher end of the previously provided 150-175 basis point range.
The for-profit and alternative higher education industry has seen moderate growth in recent years, with a compound annual growth rate (CAGR) of around 4-6% as demand for flexible, affordable education options has increased. This trend aligns well with Strategic Education's focus on providing accessible and industry-relevant education programs.
Conclusion
In conclusion, Strategic Education, Inc. (STRA) has positioned itself as a leading provider of quality education, catering to the diverse needs of students and professionals both in the United States and internationally. With a robust business model, a diversified portfolio of educational offerings, and a commitment to innovation, the company is well-positioned to navigate the dynamic landscape of the education industry and continue its growth trajectory. The company's strong financial performance, solid liquidity position, and strategic focus on employer partnerships and technology-driven solutions provide a foundation for future success.
However, investors should remain mindful of the regulatory challenges and competitive pressures facing the for-profit education sector. The ongoing legal and regulatory scrutiny, including borrower defense claims and potential CFPB actions, could pose risks to the company's operations and reputation. Additionally, the evolving landscape of international education, particularly in Australia and New Zealand, may present both opportunities and challenges for Strategic Education's global expansion efforts.
As the company continues to adapt to changing market conditions and student needs, its ability to maintain enrollment growth, improve operational efficiency, and navigate regulatory complexities will be crucial in determining its long-term success. Investors should closely monitor Strategic Education's performance across its three segments, its ability to leverage employer partnerships, and its success in integrating technology into its educational offerings to make informed decisions about the long-term potential of this education services provider.