Has growth slowed in Sophia, and what are the 'quality-enhancing initiatives' being implemented in response to negative press regarding AI use by students?

Sophia's growth is strong, even with the law of large numbers. The company takes academic integrity seriously and was already working on enhancements to academic integrity controls independently of recent articles. This will remain a priority for platform investments. “We're really pleased with Sophia's growth. You're getting into the law of large numbers now. It's one thing to grow 30-plus percent when you're a $20 million business to be able to maintain that at an $80 million business, I think, is pretty strong.”

Why was the $13.7 million Australia labor charge not added back to adjusted results, and when is the High Court ruling expected?

The charge was not adjusted out because, assuming an unfavorable outcome, these grading costs would technically become part of the ongoing cost base, even though mitigation plans are in place. The company expects to hear whether the High Court will take the appeal in September or early October. “Our practice when we adjust out expenses is to only adjust out expenses that we believe are both onetime and will not be part of the cost base moving forward. Assuming an unfavorable outcome from this appeal process, which is what the accounting is based on, we will technically have grading costs in our cost base moving forward.”

Why was revenue per student up sharply in ANZ, and is it due to a domestic versus international trade-off, especially given slow visa approvals?

The increase in revenue per student is due to a mix shift towards domestic students, who have very healthy new student growth approaching double digits. International enrollment, particularly the onshore transfer market, is challenged by slow visa approvals from the Australian government, which is currently offsetting domestic growth. “The mix shift -- shifting more towards domestic from international. We continue to have, I would describe as very healthy domestic new student growth approaching double digits.”

STRA

Strategic Education (STRA) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Consumer Staples· Jul 29, 2026

Source: earnings call transcript

Executive summary

Strategic Education Q2 FY26 — Strong ETS Growth and U.S. Higher Ed Momentum

Strategic Education delivered a solid Q2 FY26, marked by significant strength in its ETS division and increased momentum in U.S. Higher Education. The company is making meaningful progress in returning its Australia business to growth in 2027, despite current headwinds from a one-time labor charge and slow visa approvals. Management remains confident in achieving its long-term EBIT margin expansion targets.

Highlights

Q2 revenue increased approximately 3% from the prior year to $330 million.
Operating income was $53 million, a 9% increase from the prior year, with operating margin at 16% (or 20% excluding a one-time charge).
Adjusted earnings per share were $1.76, a 16% increase from the prior year.
Education Technology Services (ETS) division grew revenue 15% to $42 million and operating income by 30% to $20 million, with operating margin increasing to 46.2%.
U.S. Higher Education operating income increased 56% from the prior year to $32 million, and the operating margin increased by 500 basis points to 15%.

Concerns

Operating expenses included a one-time charge of $13 million related to a labor matter in Australia.
Australia and New Zealand total enrollment declined 5% in the second quarter, and revenue decreased just under 3% to $67 million.
The Australian government has slowed visa approvals, impacting international enrollment in Australia.

Guidance & targets

Category	Target	Timeline	Confidence
EBIT margin expansion	200 basis points high materiality	FY26 and FY27	High
Revenue growth	roughly 5% high materiality	next 12 months	High

Segment performance

Segment	Revenue	YoY	QoQ	Margin
Education Technology Services (ETS) Strong growth in both revenue and operating income, with significant margin expansion. Sophia Learning and Workforce Edge continue to be key drivers. ETS now represents nearly 40% of SEI's consolidated income from operations. Sophia Learning total average subscribers: 32% growthSophia Learning revenue: $21MWorkforce Edge corporate agreements: 81Workforce Edge employees covered: 4 millionWorkforce Edge enrollments into Strayer or Capella: 4,000 (21% growth)	$42M	15%	—	$20M operating income (46.2% margin)
U.S. Higher Education Revenue growth driven by higher revenue per student and lower scholarships/discounts. Significant operating income and margin improvement due to effective cost control. Employer-affiliated and healthcare strategies are performing well, with student retention at an all-time high. Employer-affiliated enrollment: 8% growth (35% of total)Healthcare enrollment: 11% growth (52% of total)Student retention: 89%	increased 2%	2%	—	$32M operating income (15% margin)
Australia and New Zealand Enrollment and revenue declined, impacted by challenges in the international market and slow visa approvals. Operating income was significantly affected by a $13 million one-time charge related to a labor matter. Domestic student growth remains healthy, approaching double digits. Total enrollment: 5% decline	$67M	decreased just under 3%	—	$1M operating income

Product announcements

Product	Type	Timeline	Details
BSN Prelicensure program	launch	launched during Q2 FY26, first cohort enrolled this month

Risks & headwinds

Australia labor matter legal dispute ongoing, High Court decision expected September/October

$13 million one-time charge

Mitigation:Created a reserve; made modifications to instructional model to avoid future expense increases.

Slow visa approvals in Australia Q2 FY26 and ongoing

Impacted international enrollment, contributing to 5% total enrollment decline in ANZ

Mitigation:Focus on domestic student growth and investments in new programs/campuses; monitoring government actions.

Potential LLM bias against for-profit sector ongoing

Not quantified, not yet identified as an issue for SEI

Mitigation:Marketing teams are working on strategies to ensure favorable returns through LLM searches for Strayer and Capella.

What to watch in Q3 FY26

Australia High Court ruling on labor matter

September/early October

Current Appeals court ruled against SEI; appeal to High Court pending

Target Decision on whether High Court will hear the case, or final ruling

Why it matters

This will determine the final financial impact and instructional model adjustments for the Australia segment.

We expect we will hear whether or not they intend to take the case probably in September, early October.

Find out whether STRA delivers this. Inve re-checks your case every morning.

Q&A highlights

Why is non-healthcare enrollment shrinking, and are LLMs contributing to declines in student inquiries for the for-profit sector?

Non-healthcare enrollment is not a marketing priority as the company leans into employer-affiliated and healthcare strategies. The overall demand environment is stable to good, and LLM bias has not been identified as an issue impacting search or inquiries, though marketing teams are working on strategies for favorable LLM returns.

“to answer your specific questions about search being impacted or inquiries being impacted by LLM, that's not something that we've identified as being an issue.”

asked by Jeffrey Silber · answered by Karl McDonnell

2 min read 5 chapters

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.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.