Strategic Education, Inc. (STRA) Earnings

Management highlights

- Overall Financial Performance * Consolidated Q2 2026 revenue grew 3% year-over-year to $330 million, with a 9% year-over-year increase in operating income to $53 million and an operating margin of 16% (up 90 basis points). Excluding the one-time ANZ labor charge, operating income grew 35% and operating margin hit 20%. * Adjusted earnings per share grew 16% to $1.76, and year-to-date operating cash flow grew 18% to $117 million. * Capital allocation: The firm repurchased 421,000 shares for $33 million in the quarter, with $141 million remaining in share repurchase authorization through the end of 2026, alongside regular quarterly dividend payments. - Strategic Operational Progress * ETS: Sophia Learning maintains strong double-digit growth despite scaling, and Workforce Edge received the 2024 Professional Development Solution Provider of the Year Award from the EdTech Breakthrough Awards program. * U.S. Higher Education: Capella University launched a new BSN pre-licensure program, which enrolled its first cohort in the quarter. Productivity initiatives delivered sustained effective cost control, and the firm is prioritizing employer-affiliated and healthcare-focused enrollment growth over unaffiliated non-healthcare enrollment. * ANZ: The firm continues to see healthy double-digit domestic student growth, and is investing in new programs and potential campus expansions to drive long-term growth, with a target of returning the segment to growth in 2027. The firm has already modified its instructional model to offset any future instructional cost increases from the labor matter ruling outcome.

Guidance

- Management expects the first quarter of 2026 to remain the low point for year-over-year revenue growth for 2026, with sequential improvement in revenue growth expected in the second half of 2026. - Management reaffirmed its commitment to 200 basis points of adjusted operating income margin expansion in 2026. The $13 million one-time ANZ charge was unforeseen, but management is confident the margin expansion target will be achieved even including the charge, and will definitely be achieved excluding the charge. - Over the longer term, management expects annual revenue growth to revert to a 5% average, aligned with the firm's 5-year notional model. It is possible but not certain full-year 2026 revenue will come in slightly below the notional model, primarily due to headwinds in the ANZ segment. - Management expects ANZ to return to growth in the first half of 2027, supported by healthy ongoing domestic student growth.

Segment performance

1. Education Technology Services (ETS): Revenue grew 15% year-over-year to $42 million, contributing ~12.7% of total consolidated Q2 2026 revenue. Operating income grew 30% to $20 million, representing nearly 40% of SEI's consolidated operating income. Operating margin rose 520 basis points to 46.2%. Within ETS, Sophia Learning revenue grew 27% to $21 million, with total average subscribers up 32%; Workforce Edge held 81 corporate agreements covering 4 million employees, with enrollments growing 21% to ~4,000 students. 2. U.S. Higher Education: Revenue increased 2% year-over-year, operating expenses decreased 3% to $XXXX. Operating income grew 56% to $32 million, contributing ~60.4% of total Q2 2026 operating income. Operating margin rose 500 basis points to 15% from 10% year-over-year. Employer-affiliated enrollment grew 8% to an all-time high 35% of total U.S. higher education enrollment, and healthcare enrollment grew 11% to 52% of total U.S. higher education enrollment. Student retention hit an all-time high of 89%. 3. Australia and New Zealand (ANZ): Revenue decreased ~3% year-over-year to $67 million, contributing ~20.3% of total consolidated Q2 2026 revenue. Total enrollment declined 5% year-over-year. Operating income was $1 million for the quarter, after a $13 million one-time reserve charge for the ongoing labor matter.

Risks & headwinds

- The firm faces an ongoing labor legal dispute in Australia over compensation for casual faculty grading time. The Australian Appeals Court ruled against the firm's interpretation that grading is included in existing contract compensation, and the firm has appealed to the Australian High Court. The $13 million reserve will cover compensation for affected faculty if the appeal is unsuccessful. While the firm has already modified its instructional model to offset future cost increases, an unfavorable ruling could still create unforeseen operational or financial impacts. - The ANZ international student segment faces headwinds from slower-than-expected Australian government visa processing, which has suppressed international enrollment growth even after the government raised the international student cap. - LLM-based search engines could potentially introduce bias against for-profit higher education institutions, which could impact student inquiry and enrollment volumes. - AI-enabled academic integrity risks exist for Sophia Learning courses, requiring ongoing investment in controls to maintain academic quality.

Analyst Q&A

• Q: Non-healthcare U.S. higher education enrollment has declined for some time; are LLM search biases against for-profits causing this, and how is the firm responding?

  A: Management says overall U.S. demand is stable, and student acquisition rates are flat to slightly down, which they are pleased with. LLM search bias has not been identified as an impact on inquiry volumes, and marketing teams are already working on strategies to ensure favorable LLM search placement for Strayer and Capella. The intentional slowdown in non-healthcare unaffiliated enrollment is part of the firm's deliberate strategy to prioritize employer and healthcare-focused enrollment, so this is not an unplanned decline.

• Q: There has been negative press about AI misuse on Sophia courses; what quality initiatives has the firm added, and is that what slowed Sophia's growth?

  A: Management notes Sophia's 27% revenue growth this quarter is very strong for a scaled business now approaching $80 million annual revenue, so growth has not meaningfully slowed. Academic integrity is a top company-wide priority, and Sophia was already updating academic integrity controls independent of recent press coverage. These enhancements will continue to be a key investment focus through the rest of 2026 and into 2027.

• Q: Why is ANZ revenue per student up sharply, even as enrollment lags expectations? When will the High Court rule on the labor appeal?

  A: The increase in revenue per student comes from a shift in enrollment mix toward higher-tuition domestic students, offsetting declining international enrollment. ANZ domestic new student growth is healthy near double digits, but international enrollment remains challenged by slow Australian visa processing, which has offset domestic growth to date. Management expects to hear whether the High Court will accept the appeal in September to early October 2026, with an update expected on the next quarterly call.

• Q: What is the current marketing mix for U.S. student acquisition?

  A: Around 35% of U.S. new students come through the proprietary, low-acquisition-cost Workforce Edge employer channel, which continues to grow. Roughly half of the total marketing budget is allocated to brand building activities, with the remaining half split across traditional paid search, out-of-home, and other traditional advertising channels. This mix has remained relatively stable for the past two years.