Welcome to Strategic Education Q1 2023 Results Conference Call. I will now turn the call over to Therese Wilkie, Director of Investor Relations for Strategic Education. Ms. Wilkie, please go ahead.
Thank you. Hello, everyone, and welcome to Strategic Education's conference call, in which we will discuss Q1 2023 results. With us today are Robert Silberman, Chairman, 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 8-Ks, 10-Qs, and 10-Ks. Copies of these filings and the full press release are available for viewing on the website at strategiceducation.com. Now I'd like to turn the call over to Karl. Karl, please go ahead.
Thank you, Therese, and good morning, everyone. Our Q1 financial results that we reported this morning were basically right in line with our expectations. You may recall that during our last earnings call, we said that a couple of timing-related issues would impact our Q1 results and that we expected our revenue to be roughly flat on a year-over-year basis and our expenses to be up approximately 5%, and that's exactly where we landed. Our US Higher Education division grew its total enrollment in the Q1 by 2.3% from the prior year. This is the first enrollment growth since the Q3 of 2020 and is the result of continued strong new student growth at both Capella and Strayer, as well as continued growth in our employer-affiliated enrollments.
Total employer-affiliated enrollment grew 13% at Capella, 25% at Strayer, and 17% across all of US Higher Education, substantially outpacing the growth in our non-employer-affiliated enrollments. These employer enrollments now comprise 26.3% of all US Higher Education enrollments, which is a 330 basis point gain from 2022. Revenue in US Higher Education increased just over half of 1% to $197 million. Revenue per student decreased slightly from the prior year, primarily as a result of the ongoing strength in our employer-affiliated enrollments, as I just noted. The overall demand environment in the US continues to be quite strong, and like last year, we are forecasting full-year new student growth at both Strayer and Capella Universities.
Our Education Technology and Services division generated a 25% increase in revenue and a 23% increase in operating income for the Q1. ETS's operating margin contracted slightly to 31.8% from 32.3% in the prior year as we continue to invest in both Sophia and Workforce Edge. Average Sophia total paid subscribers grew 24% in the Q1, and Sophia revenue increased 36%. SEI enrollments from Workforce Edge increased 230% from the prior year to 986 enrollments. In the Q1, SEI had a total... Oh, excuse me. I just made the same point.
It's okay.
Our Q1 results in Australia and New Zealand are unfavorably impacted by the previously announced adjustments to the academic calendar at Torrens University, which split their total first-term enrollment between Q1 and Q2. This calendar adjustment is the primary driver of the 8% decrease in revenue on a constant currency basis. We continue to be encouraged by the steadily improving operating environment in Australia and are looking forward to the second half of the year, which will be the first fully normalized period for international student immigration in Australia since the start of the pandemic in 2020.
Finally, I'd like to extend an offer to all of our owners to attend our Investor Day, which will be held on November 7th at the Palace Hotel in New York City. Additional details will become available as we get closer to the date. With that, Kevin, we'd be happy to take questions.
Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to remove yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Jeff Silber with BMO. Your line is open.
Thanks so much. I believe on last quarter's call you gave some guidance for 2023 in terms of revenues and enrollments going up mid-single digits and operating expenses going up low single digits. Can we revisit that? Is that something you're still looking for?
Based on our current trends continuing, Jeff, we would expect our revenue to be up around mid-single digits. We said that we would expect expenses in that scenario to be up no more than 3%. If by chance our revenue increases more than mid-single digits, we'd have a slight uptick in expenses due to the variable nature of instructional results or instructional expense as a result of having more students.
That makes sense. If I could switch to the different segments, can we get a little bit color on US Higher Education enrollment trends by either program type or degree type?
Well, FlexPath at Capella continues to be a major source of growth. It continues to be very popular, continues to increase as a mix of overall US higher education enrollments. At Strayer, I'd say the growth is across the board, predominantly at the undergraduate level. As I said in my prepared remarks, at both Strayer and Capella, the bulk of the strength is coming from our employer-affiliated enrollments, both new and total growth.
In terms of any specific program type to call out?
Well, within the corporate channel, healthcare remains the strongest channel for Capella. At Strayer, it would be our business program, which remains our largest program. The strength is relatively even and across the board.
All right, great. If I could just sneak in one more. It looked like enrollment trends at Australia and New Zealand worsened a little bit from what we've seen. Is there anything going on specifically then? If we can get any guidance for the rest of the year, that'll be great.
No. Nothing beyond what we said that would happen as a result of splitting their first term enrollment between the first and Q2. It was down modestly in the Q1. I think the way that we'll look at it is when we get through the Q2, we'll be able to normalize that, and we'll have a better sense for what their enrollment growth looks like through that part of the year.
Karl, listen.
Okay.
The actual shift pushes that bolus all the way to the Q4, right? The additional students and the revenue will hit in the Q4 versus the Q2.
Yeah, the bulk of the revenue that we'll get from the continuation of those students will hit in the back half of the year and specifically, Jeff, in the Q4.
Okay, that's really helpful. I'll jump back in the queue. Thanks so much.
Yeah.
One moment for our next question. Our next question comes from Alex Paris with Barrington Research. Your line is open.
Hi, guys. Thanks for taking my questions. First question on the ANZ segment. On the last call, you noted that the Australian government has ruled that all students on active visas must be in country and attending classes full-time by June, which you see as a potential catalyst for the second half, you know, getting back, as you just said, to the truly normalized results. Any changes there, either in terms of the Australian government or your expectations?
No, no change. That rescinding of that visa waiver is due to take effect on June first, and we continue to see that as a positive catalyst for ANZ enrollment moving forward.
Gotcha. Just following on Jeff's question, enrollment was down 6.3% in ANZ. Revenues were down about 14% or 8% on constant currency. Those are both a little bit below my unguided expectations. Were they in line with your expectations?
Yeah, I would say they were in line, Alex. The thing you have to remember is the prior year comparable didn't have a split first term. It's kind of noisy from that standpoint. I would wait until we get our Q2 enrollment, look at it holistically through the first half of the year to get a better sense of their enrollment trajectory.
Great. Thanks. A couple of clarifications. Restructuring costs in the quarter were $5.6 million, which, you know, I didn't really have an assumption there at all in my model. Given that your OpEx increase was in line with what you had said, you had obviously factored that in. Is that where you expected it to be? A little higher than I would have thought. I guess it was lease impairment charges associated with the restructuring. What are your expectations? Are we kinda through that or is there more to come on that front?
Alex, this is Dan. Yeah, that was exactly what we had expected. We don't necessarily plan it out quarter by quarter. We're looking opportunistically where we can consolidate real estate. When we see that opportunity, we take it, and that's what you're seeing in those restructuring charges.
Gotcha. Do you see other opportunities for consolidation over the balance of the year and in the next year?
Nothing like what we just took advantage of, but there could be some smaller opportunities later this year.
Okay, good enough. Lastly, just in going through your 10-K recently that was filed on February 27th, you had said with regard to 90/10 that the 2022 calculation hadn't been finalized. Have they been finalized at this point and what are they?
The 22 is not final yet. We report that information to the department by the end of June, so we don't have anything to report to you now, but other than that, we expect to be compliant.
Gotcha. Obviously, in 2021, Strayer was about 83%, Capella was 67%. Do you have much exposure at either Strayer or Capella to VA and TA?
We have a little bit more exposure at Strayer on VA than we do at Capella. As Dan just noted, we don't expect to have any compliance-related issues on 90/10. Given the strength of our corporate channel moving forward, we would expect that our 90/10 would get better over time.
Gotcha. Very helpful. Appreciate the color. That's all for me.
Thanks, Alex.
Thanks, Alex.
Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. One moment for our next question. Our next question comes from Heather Balsky with BofA. Your line is open.
Hi, good morning. Thank you for taking our question. I just wanna touch base with you. You know, we've gotten some questions with regards to the education department looking at OPMs or online program management companies. I thought it'd be helpful just to kind of talk to you about sort of any way that you may work with an OPM and what you think regulatory changes, you know, could look like or, you know, could they have any impact? Thanks.
Well, of course, we're not an OPM in any respect. We don't work with OPMs. We don't expect to be impacted at all from any of the department's rulemaking or other policy making with respect to Online Program Managers. That would also include their recent language on third-party servicers. It's not something that we really expect to impact us at all, Heather.
Great. Thank you.
All right. I'm not showing any further questions at this time. I'd like to turn the call back to Karl for any closing remarks.
Thank you, everyone. We appreciate your time today and look forward to talking to you next quarter.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.