Strategic Education (STRA) Q3 2026 Earnings Call Transcript

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DATE

Thursday, Nov. 5, 2026

CALL PARTICIPANTS

• Senior Director of Investor Relations - Terese Wilke
• President and Chief Executive Officer - Karl McDonnell
• Executive Vice President and Chief Financial Officer - Daniel Jackson

TAKEAWAYS

• Consolidated Revenue -- $325.1 million, representing a 1.6% increase driven by growth in Education Technology Services and higher revenue per student in U.S. Higher Education.
• Adjusted Diluted EPS -- $1.69 on a constant currency basis, an increase of 4% from $1.63 in the prior year period.
• ETS Revenue -- $42.8 million, growing 11.9% year over year due to expansion in Sophia Learning and higher employer-affiliated enrollment.
• Sophia Learning Performance -- Revenue increased 19.8% to $21.3 million, supported by a 22% increase in average total subscribers.
• USHE Enrollment -- 84,725 students, a 1.1% decline as growth in employer-affiliated students was offset by lower unaffiliated enrollment.
• Healthcare Portfolio -- Enrollment grew 9% year over year and now accounts for 54% of total U.S. Higher Education enrollment.
• ANZ Enrollment -- 17,101 students, a 9.1% decline resulting from Australian government restrictions on international student visas.
• Non-cash Impairment -- $134.1 million, recorded for the Australia/New Zealand segment due to lowered near-term growth expectations amid regulatory constraints.
• USHE Operating Margin -- 10.3%, a decrease from 10.7% in the prior year period as revenue growth was offset by continued investments.
• Student Retention -- 89.2% in U.S. Higher Education, marking a new all-time high for the segment.
• Workforce Edge Reach -- 83 corporate agreements covering approximately 4 million employees as of Sept. 30, 2026.
• Free Cash Flow -- $136.7 million for the first nine months of the year, up 8% from $127 million in the previous year.
• Share Repurchases -- $28.5 million utilized to repurchase 347,472 shares in the third quarter, bringing the nine-month total to $101.3 million.
• 2027 Growth Investments -- $50 million, targeted at Education Technology Services, U.S. healthcare licensure programs, and the Australian domestic market.
• 2027 Expense Guidance -- 2% growth in operating expenses, as approximately $25 million in productivity savings offset half of the planned investment costs.
• Employer-Affiliated Enrollment -- 34.7% of U.S. Higher Education enrollment, an increase of 200 basis points from 32.7% last year.
• FlexPath Enrollment -- 26% of U.S. Higher Education enrollment, with 73% of these students enrolled in healthcare programs.
• Cash and Liquidity -- $138.6 million in cash and marketable securities with no outstanding debt under the revolving credit facility.

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RISKS

• McDonnell stated, "Over the course of this year, the Australian government restrictions on international students have become materially more severe than we anticipated," noting that visa approvals have declined as much as 80% in some months.
• McDonnell reported that consolidated revenue for 2027 is likely to be flat with current-year levels due to current enrollment trends.
• McDonnell indicated that planned growth investments in 2027 will reduce operating margins at ETS by 300 basis points to 400 basis points.
• McDonnell stated that it appears unlikely full-year 2026 results will fall within the company's notional outlook due to deteriorating international enrollment in Australia.

SUMMARY

Strategic Education, Inc. (NASDAQ:STRA) reported third quarter results characterized by growth in its Education Technology Services and U.S. healthcare portfolios, offset by regulatory challenges in its Australian segment. Management announced a plan to increase growth investments by $50 million in 2027 to accelerate product development in high-demand areas. The company recorded a $134.1 million non-cash impairment in the Australia/New Zealand segment as international student visa restrictions proved more severe than expected. Despite these headwinds, the company maintained a debt-free balance sheet and reported that productivity savings would limit operating expense growth to 2% in the coming year.

• Management reported that Torrens University rose to sixth nationally in Australia for undergraduate teaching quality in the 2025 Student Experience Survey.
• CEO McDonnell stated that early demand for the new pre-licensure Bachelor of Science in Nursing and Radiologic Technology programs has exceeded initial assumptions.
• The company plans to open a new campus in Perth, Western Australia, in late 2027 to focus on healthcare, engineering, and construction sectors.
• McDonnell indicated that domestic new student enrollment in Australia grew 9% in both the second and third quarters, now representing nearly 70% of new enrollment in that segment.
• Management expects the decline in unaffiliated undergraduate business enrollment to continue moderating, with a potential return to growth by the end of 2027.
• The company reported that its healthcare enrollment from employer partners reached 38%, supporting a broader strategy to serve the healthcare talent needs of corporate clients.

INDUSTRY GLOSSARY

• FlexPath: A direct-assessment competency-based learning model that allows students to progress through degrees at their own pace.
• Workforce Edge: A platform for employers to manage education benefits and provide employees with access to degree and certificate programs.
• Sophia Learning: An online provider of low-cost, ACE-recommended general education courses for college credit.
• Constant Currency: A non-GAAP financial measure that excludes the impact of foreign exchange rate fluctuations to compare underlying business performance.
• QILT: Quality Indicators for Learning and Teaching, a national survey suite of higher education students in Australia.
• ACE: American Council on Education, an organization that recommends college credit for non-traditional learning experiences.

Full Conference Call Transcript

Operator: Welcome to Strategic Education's Third Quarter 2026 Results Conference Call. I will now turn the call over to Terese Wilke, Senior Director of Investor Relations for Strategic Education. Mrs. Wilke, please go ahead.

Terese Wilke: Thank you. Hello, everyone, and welcome to Strategic Education's conference call, in which we will discuss Third Quarter 2026 results. With us today are Karl 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 10-K, the 10-Q to be filed, and other filings with the Securities and Exchange Commission, as well as Strategic Education's future eight-Ks, 10-Qs, and 10-Ks. Copies of these filings and the full press release are available for viewing on our website at strategiceducation.com. Now, I'd like to turn the call over to Karl. Karl, please go ahead.

Karl McDonnell: Thank you, Terese, and good morning, everyone. Our third quarter results reflect continued strength in the parts of SEI where we have been investing for growth: Education Technology Services, our broad employer strategy, and our U.S. healthcare portfolio. The strength in these areas, however, was mostly offset in the third quarter by our Australia segment, where the environment has proved more challenging than we expected. This morning, I'll briefly review the quarter, then I'll walk through each of our segments. As I do, I'll discuss the opportunities behind our intent to make 2027 a year of increased growth investments.

As always, unless I note otherwise, my comments refer to adjusted results on a constant currency basis, and those results exclude the $134 million non-cash impairment of goodwill and intangible assets in Australia that we recorded this quarter, and which I will discuss with that segment. Third quarter revenue was $320 million, essentially flat with the prior year. We did hold operating expense growth to less than 1%, resulting in operating income of $50 million, a 2% decrease, and an operating margin of 15.7%, 30 basis points below the prior year. Earnings per share increased 4% to $1.69, reflecting a lower share count from share repurchases.

Through the first nine months of this year, free cash flow increased 8% to $137 million. Turning now to our segments. Education Technology Services continued its strong performance. Revenue grew 12% to $43 million. Operating income grew 14% to $18 million, and operating margin expanded 80 basis points to 42.5%. Sophia Learning average total subscribers grew 22%, and revenue grew 20% to $21 million. Workforce Edge ended the quarter with 83 corporate agreements covering approximately 4 million employees, and enrollments from Workforce Edge into Strayer or Capella grew 4% to roughly 4,000 students. SEI was recently named to Business Insider's 2027 list of most innovative companies, a recognition that reflects much of the work that is being done within ETS.

Given the strong demand across ETS, and given our desire to accelerate our product roadmap to serve that demand, our intent is to increase our growth investments in ETS in 2027. These investments will slightly reduce the ETS segment-level operating margin next year, but will also result in higher revenue growth in our current five-year plan, defend Sophia's market leadership position, and strengthen Workforce Edge's ability to sign new corporate clients. Turning now to U.S. Higher Education. Total U.S. Higher Education enrollment declined 1% to approximately 84,700 students, as growth in employer-affiliated enrollment was offset by lower unaffiliated enrollment. Revenue was essentially flat at $214 million, as higher revenue per student offset the enrollment decline.

Our productivity initiatives continued to hold operating expense growth to less than 1%, including continued investments in growth. Operating income was $22 million, a 4% decline, and an operating margin of approximately 10%. Student retention reached 89.2%, a new all-time high for U.S. Higher Education. Our healthcare portfolio continues to be the strongest source of growth in U.S. Higher Education. Healthcare enrollment grew 9% in the quarter and now represents 54% of total U.S. Higher Education enrollment, up from 49% a year ago, an increase of 500 basis points over the last year. Healthcare is also central to our broad employer strategy. Roughly 38% of our healthcare enrollment comes from employer partners, and employer-affiliated enrollment overall reached 35% of U.S.

Higher Education total enrollment, up 200 basis points from the prior year. We are now extending that portfolio into licensure track programs. Earlier this year, Capella enrolled the first cohort in its pre-licensure Bachelor of Science in Nursing program, and Strayer enrolled its first students in the new Associate of Applied Science in Radiologic Technology. Early demand for both programs has exceeded our initial assumptions. These two programs join Strayer's Licensed Practical Nurse diploma and Capella's expanded nurse practitioner portfolio, all aimed at the healthcare talent our employer partners increasingly need. To support that demand, we intend to also increase our growth investments in U.S. healthcare in 2027 with funding for new programs, clinical faculty, expanded clinical and instructional capacity.

This will allow programs like pre-licensure nursing and radiologic technology to grow at the pace their demand supports. Turning to Australia. Total enrollment declined 9% to approximately 17,100 students, and revenue declined 7% to AUD 64 million. The Australian team continued to manage costs well, with operating expenses down 4%, and operating income was AUD 10 million compared with AUD 12.5 million in the prior year, and an operating margin of approximately 16%. The decline is entirely a function of international enrollment. Over the course of this year, the Australian government restrictions on international students have become materially more severe than we anticipated.

New visa approvals for prospective students have slowed sharply, and in some months declining as much as 80% versus the prior year. In addition, the government has effectively closed the onshore transfer market by requiring international students already in Australia to obtain a new visa in order to change institutions. Given this environment, we have lowered our near-term growth expectations for the ANZ segment, which resulted in this quarter's $134 million non-cash impairment. Notwithstanding the headwinds on international enrollment, our domestic enrollment continues to fare well. Domestic new enrollment has grown every quarter this year, including 9% in each of the second and third quarters, and domestic students now represent close to 70% of new enrollment in Australia.

The quality of Torrens' academic experience remains strong and has shown significant improvement over the past year. We were pleased to see Torrens University's performance in the 2025 Quality Indicators for Learning and Teaching Student Experience Survey, the most comprehensive national survey of current higher education students in Australia. Torrens achieved widespread momentum across all undergraduate indicators, including a rise to sixth nationally for undergraduate teaching quality, up significantly from 19th the year before. At the postgraduate level, Torrens continues to lead at the top tier of Australian higher education, ranking in the top four nationwide for both skills development and peer engagement, alongside a seventh place ranking in postgraduate teaching quality.

This performance against national sector benchmarks reinforces Torrens' value proposition and supports student retention and long-term brand equity in industry-aligned education. The quality of Torrens' academic programs, combined with our own success in growing domestic enrollment, gives us confidence to increase our growth investments in Australia's domestic market in 2027. We are expanding our existing Adelaide campus and will launch several new health science programs, and we also plan to open a new campus in Perth in late 2027. Western Australia is the fastest-growing state in the country, with population growth 50% higher than the national average.

Greater Perth is projected to add more than a half a million residents over the next decade, and its economy is concentrated in the sectors where our new programs are focused, namely healthcare, engineering, construction, and defense. Perth will also position Torrens well for international recruitment from Asia when those constraints ease. Turning now to an update on our outlook versus our notional model. Given our current forecast for the balance of this year and the fact that the international enrollment environment in Australia deteriorated since the first half of the year, it appears unlikely our full-year results will fall inside of our notional outlook.

In terms of 2027, given that our forward revenue growth is mostly a product of current-year enrollment, we think the most likely outcome for consolidated revenue next year is to be flat with this year. We expect the cost of the growth investments that I have described this morning to be approximately $50 million in 2027. However, the productivity savings achieved this year will offset nearly half of that, such that year-over-year increase in operating expenses will be limited to just 2%.

Given that these incremental investments are targeted to support areas of proven strength at SEI, that is, our two high-growth, high-margin platform businesses, our U.S. healthcare portfolio, and our domestic market growth in Australia, we have a high degree of confidence in their ability to return the company to its notional growth rates in 2028 and beyond. Regarding capital allocation, in addition to our regular quarterly dividend, we repurchased approximately 347,000 shares during the quarter for a total of $28.5 million. We ended the quarter with $139 million of cash and marketable securities and no debt.

Finally, as always, I'd like to take this opportunity to thank all of my colleagues here at SEI for their ongoing commitment and support to our students and our corporate partners. With that, Victor, we'd be happy to take questions.

Operator: Thank you. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by. We'll compile the Q&A roster. One moment for our first question. Our first question will come from the line of Jeff Silber from BMO Capital Markets. Your line is open.

Jeff Silber: Thanks so much. Karl, really appreciate you giving us some insight into 2027. I was hoping I could just double-click on that a little bit. Is it possible to talk about the different segments? I say, overall, you think revenue most likely flat, but could we see growth in ETS offset by declines in the other two? From a margin perspective, where do you think you'd have the most impact in terms of declining margins potentially next year?

Karl McDonnell: I think we're absolutely going to have growth in ETS, Jeff. I suspect we'll have lower growth in U.S. Higher Education, driven by the strength of the healthcare portfolio that I just described. Overall, that'll be offset by the continuation of the restrictions in Australia, although we do expect that with the addition of the Perth campus, the expanded programs in Adelaide, launching several asynchronous online programs throughout Australia, we do expect that new student growth in Australia will be growing year-over-year in the back half of 2027.

Just given the headwinds that we've had, it's going to take a few quarters for that to translate into total enrollment growth, so I would expect that probably in the first part of 2028. From a margin standpoint, I would estimate that it could be in the range of 300 to 400 basis points at ETS, and a little less than that in U.S. Higher Education and Australia.

Jeff Silber: Okay, that's really helpful. I really appreciate that. Moving back to, I guess, the U.S., we had an elections earlier this week. I'm not asking you for your crystal ball, but given, guys, where you're located, you're probably closer to most in terms of what's going on and what potentially could go on. Any changes you're expecting with the changeover in Congress towards Democratic control?

Karl McDonnell: Well, I'd say that in the U.S., we have a high degree of confidence in sort of the regulatory and quality posture of both Strayer and Capella. We try to work constructively with any regulators or members of Congress or the administration, regardless of party affiliation, and we look forward to engaging with them once the new Congress is inaugurated in January.

Jeff Silber: Okay, fair enough. Thanks so much.

Karl McDonnell: Thanks, Jeff.

Operator: Thank you. Our next question will come from the line of Alex Paris from Barrington Research. Your line is open.

Alex Paris: Hi, guys. Thanks for taking my question. I too appreciate the granular detail by segment and the look at 2027. I just had a question on unaffiliated enrollment. Obviously, it was down 4%. That is actually an improvement from the second quarter by my math, when it was down 5.5%. But it has been down for eight consecutive quarters now, and you have consistently said you do anticipate returning to mid-single digits at some point, but it is not an area of focus. I get it. I am wondering, has there been an impact on the funnel from LLM, AI search, and so on? Could that be a contributing factor?

Karl McDonnell: Good morning, Alex. First of all, on unaffiliated enrollment, that's predominantly undergraduate business. It's an area that's important to us, but it's not one of our main strategic priorities in the way that healthcare is. You're right that the rate of decline moderated in the third quarter. We expect it to continue to moderate throughout 2027, perhaps even reaching break-even or growth by the end of 2027. In terms of LLM, it's certainly something that we're watching, but we've been focused on a quality of demand over quantity of demand for going on two years now. We don't peg rate of increase or decrease in any inquiry volume that we're getting as being most important.

We're looking at admission yield and sort of the acquisition cost to lifetime value, and both of those are near all-time highs. Obviously, we want to be relevant and favorably represented in any search medium that people are using, including LLMs, so we have a lot of people that are focused on it. But I can't say that we've really seen any adverse impact from it yet.

Alex Paris: What are you specifically doing to respond to the changes in the way students look at colleges and universities?

Karl McDonnell: It's a multi-function, multidisciplinary set of initiatives that we have. I don't really want to go into details on this call, but we do have a robust set of things that we're doing that we have a pretty high level of confidence will help position us well, not just in LLMs, but frankly, in any search medium that people may use.

Alex Paris: Obviously, it's important, but again, just to be clear, you've not really seen any material impact from the AEO as opposed to SEO on unaffiliated enrollment?

Karl McDonnell: Yeah, because, I mean, put yourself in our position, Alex. It would be next to impossible to ascribe any rate of change to LLM or any other single variable. We're happy with the demand that we're getting. In healthcare in particular, it's much stronger than what we expected. The growth of those new programs is far ahead of where we expected them to be, by as much as a year perhaps. But we're not ignoring it. We have people that are focused on it. We expect that over time, the evolution will become more apparent. I just would say it's very early, and we haven't been able to ascribe any changes to that specifically.

Alex Paris: Got you. My last question, quickly on ANZ. I appreciate you are controlling the controllables, campus expansions, new campuses, a focus on domestic. Is there any light at the end of the tunnel with regulatory? Obviously, this has been going on for a couple years now, and we thought that there'd be an improvement this year because of a lifting of the caps, but by slow rolling the visas, it's had an even more dramatic effect on international enrollment. Any additional color there would be great.

Karl McDonnell: I was a little surprised, frankly, that the transfer requirement to get a new visa was implemented. That was not something that we anticipated. It is what it is. Eventually, we're going to get to a new normal, a normalized rate of international enrollment. I think we're much closer to that as opposed to being further away from it.

If we continue to grow domestic growth in the high single digits as we're doing, or frankly, even in the low double digits when we add the additional capacity in Adelaide and Perth, eventually that's going to result in new student growth, which, as I said in my prepared remarks, I think could be in the latter half of next year, leading to total enrollment growth in the first part of 2028. Then if we get an easing of these restrictions, which some people in Australia think will happen over the coming several years, that will just be added sort of enrollment that we will get. We are not building a strategy around it.

We are accepting it for what it is and building all of our growth capital around the domestic market. Given, as I said, the strong performance of Torrens academically in the federal QILT survey, we think we are well-positioned to grow our domestic market share.

Alex Paris: Great. Appreciate the color. Thank you. I will get back in the queue.

Karl McDonnell: Thanks, Alex.

Operator: Thank you. Once again, that is star 11 for questions, star 11. Our next question will come from the line of Jasper Bibb from Truist Securities. Your line is open.

Jasper Bibb: Hey. Good morning, everyone. Apologies if I missed it, but I guess I just wanted to understand how you're thinking about EBIT margin expansions with 2026 at this point. I guess, for me, it would be helpful if you could kind of frame 4Q expectations so we have the right jumping off point for all the kind of helpful points that you probably gave us all.

Daniel Jackson: Hey, Jasper. Yeah, it might be a bad connection. I am not sure I got the full question. I think it was 2026 EBIT margin. Was that your question?

Jasper Bibb: Yeah. I apologize. I am switching to speakerphone now. Hopefully, you can hear me better, but

Daniel Jackson: Yeah, that is much better.

Jasper Bibb: I just wanted to understand kind of 4Q expectations so we have the right jumping off point for kind of all the 2027 comments you gave earlier on the call.

Daniel Jackson: Hey, Jasper, you're talking about margin, right?

Jasper Bibb: Yeah, margin or, I mean, revenue if you have it.

Daniel Jackson: Well, we don't give revenue, forward-looking revenue input. We have commented on margin, as you know, relative to the notional model of 200 basis points of expansion. Karl just mentioned that we're well off of that at this point. However, as we said last quarter, when you adjust for the FWO reserve we took in the second quarter, we're actually not too far off of the 200 basis points.

Jasper Bibb: Okay. I just maybe wanted to, if we could spend a little bit more time on just kind of what you are seeing in U.S. Higher Education right now and kind of how that is informing your expectations for 2027. Enrollment is down a little bit, but I think retention is going up, so I would assume new starts in the U.S. might be down more than enrollment right now. I guess, could you just kind of frame what you are seeing in new starts in the U.S. and how that informs your expectations for next year?

Karl McDonnell: Sure. Well, as I said, healthcare is very strong, growing almost double digits, 9% in the last quarter. That is well over half of our enrollments now, so we are confident that is going to continue to grow, and I suspect the growth rate will increase given the strength of the new pre-licensure programs. The undergraduate unaffiliated has been declining. Part of that is just a function that we have been deploying more of our growth capital into healthcare and not into undergraduate business. As Alex Paris noted, and I confirmed, the decline is moderating. We think it will continue to moderate.

So, net of everything that we are seeing, I suspect that we are going to have net positive new student enrollment growth in 2027, and the division as a whole will sort of mean revert toward mid-single digits as we work our way through the year.

Jasper Bibb: Okay. No, that makes sense. Maybe last one for me, the subscriptions at Sophia Learning just slowed a little bit from the second quarter. Is that kind of harder comps, or have you seen any impact on subs growth or retention from kind of the recent changes you made to the platform over the summer?

Karl McDonnell: It is almost entirely a function of anniversarying that large corporate client that we have. If you excluded that corporate client, direct-to-consumer subscription growth is still close to 20% and growing, holding that growth rate. So it is really a function of the anniversarying of that one client that is quite large.

Jasper Bibb: Okay. Understood. Thanks for taking the questions.

Karl McDonnell: Sure. Thank you.

Operator: Thank you. I'm not showing any further questions at this time. I'd like to turn back over to Karl McDonnell, CEO, for closing remarks.

Karl McDonnell: Thank you, everybody. We look forward to discussing our fourth quarter results with you in February.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

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