Detailed Narrative
Overall Financial Performance
Strategic Education reported a solid second quarter with revenue increasing approximately 3% year-over-year to $330 million. Operating expenses rose by 1.5%, but excluding a one-time📎 $13 million charge related to an Australian labor matter, expenses would have decreased by 3%. Operating income grew 9% to $53 million, resulting in a 16% operating margin, a 90 basis point improvement. Adjusted EPS increased 16% to $1.76, and year-to-date cash flow from operations rose 18% to $117 million.
Education Technology Services (ETS) Division Strength
The ETS division continued its strong performance, with revenue growing 15% to $42 million and operating income increasing 30% to $20 million. The operating margin for ETS reached 46.2%, up 520 basis points. Sophia Learning saw total average subscribers grow 32% and revenue increase 27% to $21 million. Workforce Edge expanded its reach to 81 corporate agreements covering 4 million employees, with enrollments into Strayer or Capella University growing 21% to approximately 4,000 students. ETS now contributes nearly 40% of SEI's consolidated income from operations.
U.S. Higher Education Momentum
U.S. Higher Education demonstrated increased momentum, with employer-affiliated enrollment growing 8% to a new all-time high of 35% of total U.S. Higher Education enrollment. Healthcare enrollment, a key component of the employer strategy, grew 11% and now represents 52% of all U.S. Higher Education enrollment. Revenue for the segment increased 2%, driven by higher revenue per student and lower scholarships and discounts. Operating income surged 56% to $32 million, and operating margin improved by 500 basis points to 15%. Student retention reached an all-time high of 89%.
Australia and New Zealand Performance and Labor Matter
In Australia and New Zealand, total enrollment declined 5%, and revenue decreased just under 3% to $67 million. Operating income was $1 million, net of a $13 million charge to create a reserve for an ongoing labor matter. This charge relates to a dispute over whether grading time should be compensated separately for casual faculty. While an initial court ruling favored SEI's interpretation, an appeals court overturned it. SEI has appealed to the Australian High Court and expects a decision on whether the case will be heard in September or early October. Modifications to the instructional model have been made to mitigate future expense increases regardless of the High Court's ruling.
Capital Allocation and Share Repurchase
The company continued its capital allocation strategy, repurchasing approximately 421,000 shares for a total of $33 million during the quarter, in addition to its regular quarterly dividend. As of the end of Q2, $141 million remained on the share repurchase authorization, valid through the end of the year.