Washington, D.C.-based education company, Strayer Education, Inc. (STRA) reported mixed second-quarter 2014 results on Jul 31. Earnings per share beat the Zacks Consensus Estimate, while revenues missed the same. However, the company’s share prices spiked about 8% as investors appreciated consistent increase in new enrollment levels. Also, the company expects total enrollment to rebound in 2015, which further backed investor confidence.
Strayer Education’s second-quarter 2014 adjusted earnings of $1.29 per share surpassed the Zacks Consensus Estimate of $1.25 by 3%. We believe that the earnings beat was driven by solid margin and lower bad debt expenses in the quarter. The earnings beat was also driven by lower outstanding share count. However, earnings declined 9.0% from the year-ago level of $1.42 per share due to a year-over-year double-digit decline in revenues in the quarter.
Total revenue in the quarter fell 15% from the comparable prior-year quarter to $112.7 million due to a year-over-year decline in total enrollment and lower revenue per student in the quarter. Total revenue lagged the Zacks Consensus Estimate of $115 million by 1.6%.
Revenue per student decreased 4.7% during the quarter owing to lower tuition from new undergraduate students.
Enrollment Discussion
Strayer University’s total enrollment declined 6% to 36,403 students for the summer term due to an 8% decline in continuing student enrollments. Total enrollment declined 11.9% sequentially from 41,327 students in the spring term. However, new enrollments rose 2%, higher than 1% increase in the prior quarter.
Strayer has been witnessing weak total enrollment trends due to continued unemployment, overall economic downturn and a subsequent decline in student demand. However, the company has been taking several initiatives to drive new enrollments. This includes a 20% cut in tuition rates of undergraduate students for the winter term of 2014. The company also introduced the Graduation Fund in mid-2013, which offers one free course for every three programs completed successfully. These initiatives have been resulting in new enrollment increase for the last two quarters.
Operating margin rose 140 basis points to 21.3% due to cost saving measures. Operating margin also improved sequentially from a 40 basis points increase in the last quarter. Bad debt expense as a percentage of revenues was 3.2% in the second quarter, lower than 4.3% in the year-ago quarter and prior quarter.
Other Financial Details
Strayer Education ended the quarter with cash and cash equivalents of $136.1 million as of Jun 30, 2014, higher than $126.2 million as of Mar 31, 2014.
In the second quarter of 2014, the company did not repurchase any shares. As of Jun 30, 2014, the company had $70 million worth of shares left under its share repurchase authorization, which can now be bought back until Dec 31, 2014. In the past few quarters, however, the company made significant share repurchases, resulting in almost a 1% decline in shares outstanding in the quarter.
Improved Outlook
Strayer Education updated its outlook for 2014 and 2015 in order to incorporate the recent changes in enrollment trends.
Strayer Education continues to expect revenue per student to decline in the range of 4% to 5% for full year 2014 with total student mix shift towards lower undergraduate tuition. The company expects similar trends of revenue per student to continue in 2015. Total enrollments are expected to decline in 2014, owing to a 13% decline in new student enrollment in 2013 and fewer students continuing their education in 2014.
However, on the back of the recent enrollment trends, the company expects total enrollment to turn positive in the second quarter of 2015. Revenue is expected to turn positive 2 to 3 quarters later. Revenue for full year 2015 is expected to decline in low single digits.
Strayer Education currently carries a Zacks Rank #2 (Buy).
DeVry Education Group Inc. (DV) is a better-ranked stock in the education industry with a Zacks Rank #1 (Strong Buy). Investors can also consider Grand Canyon Education Inc. (LOPE) and Capella Education Company (CPLA), both carrying a Zacks Rank #2.
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