Strategic Education Q2 Earnings Call Highlights

Key Points

• Second-quarter performance improved: Revenue rose 3% to $330 million, operating income increased 9% to $53 million, and adjusted EPS climbed 16% to $1.76. Excluding a $13 million Australia labor-related charge, operating income would have risen 35%.
• Education Technology Services led growth: ETS revenue increased 15% and operating income rose 30%, driven by Sophia Learning’s 32% subscriber growth and Workforce Edge enrollment gains. The segment now contributes nearly 40% of consolidated operating income.
• Australia remains a headwind: Australia and New Zealand enrollment fell 5% amid international enrollment and visa-processing challenges, while the labor matter resulted in a $13 million reserve. Management expects the business to return to growth in early 2027, while still forecasting stronger-than-targeted EBIT margin expansion.

Strategic Education NASDAQ: STRA reported second-quarter results marked by growth in its Education Technology Services business, improved profitability in U.S. higher education and continued efforts to return its Australia and New Zealand operations to growth, executives said during the company’s earnings call.

President and Chief Executive Officer Karl McDonnell said second-quarter revenue increased approximately 3% from the prior year to $330 million on a constant-currency basis. Operating expenses rose about 1.5%, including a $13 million one-time charge tied to a labor matter in Australia. Excluding that charge, operating expenses would have declined 3% year over year to $265 million, according to McDonnell.

Operating income was $53 million, up 9% from the prior-year period, while operating margin improved 90 basis points to 16%. Excluding the Australia-related charge, operating income would have increased 35% and operating margin would have been 20%, McDonnell said. Adjusted earnings per share rose 16% to $1.76, while year-to-date cash flow from operations increased 18% to $117 million.

Education Technology Services Growth

The company’s Education Technology Services, or ETS, division reported revenue growth of 15% to $42 million and a 30% increase in operating income to $20 million. The segment’s operating margin expanded 520 basis points to 46.2%.

Sophia Learning’s average subscriber base grew 32%, while revenue increased 27% to $21 million. McDonnell said the business is continuing to grow strongly despite reaching a larger revenue base.

During the question-and-answer session, McDonnell addressed concerns about the use of artificial intelligence in online coursework. He said Strategic Education takes academic integrity and assessment quality seriously across its portfolio and that Sophia’s management team had already been developing enhancements to its academic-integrity controls before recent media coverage on the subject.

“That’s something that we will continue to focus on,” McDonnell said, adding that academic-integrity enhancements would remain an investment priority for Sophia through the balance of 2026 and into 2027.

Workforce Edge ended the quarter with 81 corporate agreements covering 4 million employees. Enrollments from Workforce Edge into Strayer University or Capella University increased 21% to roughly 4,000 students. McDonnell said ETS now accounts for nearly 40% of Strategic Education’s consolidated income from operations.

U.S. Higher Education Margin Improvement

In U.S. higher education, employer-affiliated enrollment rose 8% and reached an all-time high of 35% of total enrollment, an increase of nearly 300 basis points from the previous year. Healthcare enrollment increased 11% and represented 52% of U.S. higher education enrollment.

Capella University launched a pre-licensure Bachelor of Science in Nursing program during the second quarter, enrolling its first cohort in July, McDonnell said.

U.S. higher education revenue increased 2%, supported by higher revenue per student as well as lower scholarships and discounts. Executive Vice President and Chief Financial Officer Daniel Jackson said revenue per student also benefited from students taking more classes, though he noted that both course load and scholarship levels can vary by quarter. For the full year, the company continues to expect approximately flat revenue per student.

Operating expenses in the segment declined 3%, which management attributed to productivity initiatives. Operating income rose 56% to $32 million, and the segment’s operating margin increased to 15% from 10% in the prior-year quarter. Student retention reached an all-time high of 89%.

McDonnell said the company’s overall demand environment was “stable to pretty good,” with student acquisition rates flat to down. He said Strategic Education has not identified large language model searches as a material issue affecting student inquiries, though its marketing teams are working to ensure Strayer and Capella are favorably represented in such searches.

The company’s marketing emphasis remains focused on employer partnerships and healthcare. McDonnell said unaffiliated enrollment on the Strayer side has not been a marketing priority, while non-healthcare enrollment growth is not currently a central part of the company’s marketing strategy.

Australia Labor Matter and Enrollment Trends

In Australia and New Zealand, total enrollment declined 5% and revenue fell just under 3% to $67 million. The segment reported operating income of $1 million after the $13 million reserve related to an ongoing labor matter involving casual faculty at Torrens University Australia.

The matter concerns whether grading time should be included within casual faculty teaching contracts or paid separately. McDonnell said an Australian court initially ruled in the company’s favor, but an appeals court later determined that grading time should be separately compensated. Strategic Education has appealed to the High Court of Australia and established the reserve in the event the appeal is not heard or the appellate ruling is upheld.

McDonnell said the company has already modified its instructional model and does not expect the change to increase instructional expense. Management expects to learn whether the High Court will take the case in September or early October.

Domestic new-student growth in Australia has approached double digits, McDonnell said, but has not yet offset international enrollment declines. He cited challenges in the onshore transfer market and slower Australian visa processing, even in markets the government considers to have a high concentration of genuine students.

The company reached its enrollment cap in Australia last year, and the cap was subsequently raised by about 3%, McDonnell said. He added that Strategic Education could benefit if visa approvals accelerate during the second half, as they did last year. Management expects the Australia business to return to growth in the first part of 2027 if domestic enrollment momentum continues.

Capital Allocation and Outlook

Strategic Education repurchased approximately 421,000 shares for $33 million during the quarter in addition to paying its regular quarterly dividend. The company had about $141 million remaining under its share repurchase authorization through year-end.

McDonnell said the company may fall somewhat below its longer-term notional revenue-growth model for 2026, primarily because of Australia. However, he said he was “more than confident” that the company would exceed the model’s target of 200 basis points of EBIT margin expansion, potentially even including the Australia labor charge.

Looking further ahead, McDonnell said he expects revenue growth to revert toward the company’s approximately 5% long-term model over the period between the second half of 2026 and the following year.

About Strategic Education (NASDAQ:STRA)

Strategic Education, Inc is a publicly traded higher education services holding company headquartered in Herndon, Virginia. Through its primary operating subsidiaries, Strayer University and Capella University, the company delivers degree programs and professional development opportunities to working adults. Its offerings span undergraduate and graduate degrees, certificates, continuing education, and workforce training in fields such as business, technology, health services, education, and public administration.

Strayer University, with a network of physical campuses across the United States complemented by an online platform, provides associate’s through doctoral degrees designed to accommodate non-traditional students.

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