Welcome to the Strategic Education's Third Quarter 2020 Results Conference Call. I will now turn the call over to Terese Wilke, Manager of Investor Relations for Strategic Education. Mrs. Wilke. Please go ahead.

Thank you. Good morning, everyone, and welcome to Strategic Education's conference call, in which we will discuss third quarter 2020 results and closure of the Australia/New Zealand acquisition we announced this morning. With us today are Robert Silberman, Executive Chairman; Karl McDonnell, President and Chief Executive Officer; and Daniel Jackson, Executive Vice President and Chief Financial Officer. This conference call is also available via webcast with a corresponding slide presentation. We encourage you to log into the webcast as the slide presentation is only available at this time for viewing via the webcast. You can access the webcast at strategiceducation.com in the Investor Relations section. After completion of the call, the slide presentation will be posted to the website. 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. And now I'd like to turn the call over to Rob. Rob, please go ahead.

Thank you, Terese, and good morning, ladies and gentlemen. In our earnings release this morning, we reported both our Q3 earnings results as well as announced the closing of our acquisition of Torrens University and related educational assets in Australia and New Zealand. I think it's important to note at the outset that the regulatory approval for this acquisition by the governments of Australia/New Zealand took less than 90 days in the midst of a worldwide pandemic. I believe that the speed of this approval is a testament to the high regard, which both those governments hold for the academic quality of Torrens University as well as their confidence in SEI's track record as a responsible steward of academic institutions. Now Karl will cover both of these announcements in his remarks this morning as well as share with you our view of the impact of the coronavirus pandemic on our operations. And I think more importantly, what our company will look like post this acquisition in 2021 and beyond. Now because there's a lot of material to cover, we're going to take a little more time this morning than we usually do in our introductory remarks before we open it up for questions. In fact, to assist you in following along, we've included some slides on this webcast, which Karl will refer to in his remarks. Those of you who are using the dial-in and want to see the slides should join the webcast now. And of course, we will stay as long as needed to answer any of your questions. Suffice it to say that 2020 has been an eventful year for our students, our faculty and our universities. I just want to say, on behalf of our Board of Directors, we could not be prouder of the way our entire organization has risen to this moment. Karl?

Thank you, Rob, and good morning, everyone. Today, we have a slightly different presentation of our earnings information, which is intended to provide you, our owners, with a more detailed view of our outlook for the current year as well as our preliminary view on 2021 notionally. And as Rob just said, my commentary will be accompanied by slides, which will be available on our website, strategiceducation.com, following this morning's call. And to contextualize 2020, I thought it would be helpful to start with SEI's 2019 results, which are here on Slide 3. In 2019, we educated 91,000 students, which generated just under $1 billion in revenue. And to educate those students, we spent $803 million in operating expenses, which then generated $194 million of adjusted operating income and $6.67 of adjusted earnings per share. Then in November of 2019, we hosted our Investor Day to lay out our plans for 2020, which included an expected 5% increase in total enrollment, roughly flat revenue per student, and that would yield at least a 10% increase in both adjusted operating income and EPS as well as expanding our operating margin. And actually, through the first half of 2020, as you can see here on Slide 5, we were well ahead of that plan. We had a 6% increase in both enrollment and revenue. And that growth, when you combine it with our disciplined approach to cost management, yielded a 30% increase in pretax income and a 28% increase in adjusted earnings per share. And you may recall in our last earnings call, I said that the third quarter was the first quarter in which the full impact of the pandemic and associated economic damage was felt by our company. Our 2 universities, Strayer and Capella, are experiencing substantially different effects from…

[Operator Instructions]. Your first question comes from the line of Jeff Silber with BMO Capital Markets.

I want to focus first on, I guess, your core business. The - last quarter, you had given us some color on new enrollment trends. I'm wondering if you can do the same thing right now. What is that tracking both at Strayer University and Capella University?

Well, we're still in the fourth quarter, obviously, but I can share that the new student enrollment trends at both Strayer and Capella are largely in line with the third quarter.

Okay. That's fine. And why do you think Capella outperformed your initial expectations you gave us last quarter?

Well, when we provided that initial forecast, it was very early in the quarter. We were cautiously optimistic that the traction that we were seeing early in the quarter would hold. Obviously, we weren't sure. We were very pleased that they ended up as strong as they did, up 4%. And as I said in my prepared remarks, they serve a student body that is more established professionally, 70% graduate, meaning everyone in a graduate program, obviously, already has a 4-year degree, and that's just a part of the economy that tends to fare better even in periods of economic distress, which is in contrast to the Strayer student body, which has that rather large portion of the student body that are first-time college students. And that part of the economy, we know tends to suffer the worst in periods where you have a sizable change in economic activity as we've had this year with the pandemic and the immediate shutdown of the economy.

Jeff, it's Rob. Just to even simplify it more, think about the fact that the Capella student is more likely to have been able to work from home. And the Strayer student is much less likely to have been able to work from home and much more subject to involuntary employment reductions, layoffs, et cetera.

Okay. That's actually very helpful. Can we talk a little bit about retention trends? I guess we can kind of back into it with your numbers, but it would be helpful if you just give us some color what's been going on at both schools?

In the third quarter, Strayer was down slightly. We had a slight increase in drops, which again, given everything that Rob just said, is not surprising to us that, that portion of the student body might be struggling a little bit more. Capella's retention has been relatively stable and flat.

Okay. Great. And if I could just sneak in one more. During the quarter, you announced the Workforce Edge product. Can you give us a little bit more color on exactly what this entails?

Sure. Workforce Edge is a technology platform that allows corporations to market education benefits broadly to their workforce in one place, so that an employee can log in and see all of the educational benefits that the company has negotiated on behalf of the workforce. And then click-through and be able to get information from a particular school and then carry forward and actually enroll as well as get administrative insights into what is the performance of people taking educational benefits within the schools, what's the participation rate and so forth. So that's the platform. What's wrapped around it is the consortia of institutions that we formed with Noodle Partners. So our institutions, Strayer and Capella, along with the 22 or 24 partner institutions with Noodle Partners performed - consists of an exclusive consortia that employees of these companies can participate with prenegotiated discount tuition. And we're going to launch our first client imminently here within the next week or so.

Next question comes from the line of Tobey Sommer with Truist Securities.

I had a couple of questions on Sophia. How do you think the growth you're forecasting for next year compares to competitors? And could you give us a little bit of color on the profile of the sign-ups and how you anticipate that profile evolving?

Sure. Well, first, on profile. These are what we believe to be people either preparing to attend college for the first time or existing college students who are looking for a low-cost alternative college tuition, where assuming that you successfully complete the course, you have the opportunity to transfer that credit into another institution. And I should just say that one of the benefits of attending either of our university, Strayer or Capella, is those students get free access to Sophia and can really reduce the cost of a degree by transferring in as many as 10 or 15 courses that are predominantly general education. In terms of growth, I can't speak to the growth of Sophia competitors. But we do expect that Sophia will have significant growth next year, as I said, 300% basically. And we would expect that to be able to continue to add paid subscribers given its very attractive price point of roughly $80 a month.

Okay. With respect to how your corporate programs are trending, what is the growth like - I mean how does it compare to your overall numbers? And you mentioned sort of a long-term decade-long goal. Does that mean you expect that to approach sort of 100% of the book or - in a decade? Or is it - could you give us some perspective on that?

Yes. So in Capella, in particular, through this year, employer solutions-related enrollments have been very strong, particularly in health care, where we've seen year-over-year increases for new students in excess of 30%. So well above with the nonemployer solution channel has been doing. Strayer hasn't been as strong, but we are seeing traction within strayer because Strayer has many enterprise-level employer solution partnerships, including national retailers like Best Buy or health care companies like CVS, Aetna and others, where the entire workforce is covered by an agreement. And our aspirational vision is sort of what you said, it is to transfer the burden of paying for college from the taxpayer for those people that use subsidize student lending to private sector employers via these large enterprise level agreements. Because, frankly, we see it as a win-win. It's a win for the employer because they can attract or retain a talented workforce. It's clearly a win for the employee/student because they get a debt-free degree. It's a win for society because we're helping to transfer the responsibility of payment away from the government and the taxpayer. So our vision is to replace 100% of our tuition from federally funded dollars into private sector funded dollars.

Last question from me and I'll get back in the queue. How do you see Strayer market share versus its sort of direct competitor set, given the demographic is more vulnerable to the high unemployment in this recession?

Yes. I mean I can't speak to what is the market share because I don't know necessarily the enrollment of the competitor set, which is a growing competitor set every day. But suffice it to say, in a period where we've seen double-digit declines in new students in a very short term, there's probably been an adverse impact. But we also, as I said, fully expect that, that demand will recover. I can't imagine the Strayer students being adversely impacted from employment or necessarily choosing to go somewhere else. I just think life events are such that they're just having to pause their education. And because the economy over the long term is such that you still need a 4-year degree to really begin earning a meaningful middle-class wage that's the confidence that we had that the demand will ultimately return when we get to a more normalized set of economic activity.

Yes. I think I read recently that the overall student enrollment in universities in the fall of '20 was down about 2%, which would include traditional universities, which obviously have fared much better. So I think working adult undergraduate, first-time college enrollment across the entire educational space is probably down at least as high as Strayer's has been. So I don't think it's much of an impact on market share. Overall, demand is down in a pandemic-created economic distress. And as Karl said, we're highly confident. We've seen this kind of wave before, and we've seen how Strayer University responds positively as you get labor force participation rate starting to increase again as the economy strengthens.

[Operator Instructions]. And you have no further questions at this time, and I will now turn the call back over to Mr. Silberman.

Thank you very much, operator, and thank you, ladies and gentlemen. We are available for questions if you have follow-up. We look forward very much to the coming year and the integration of the ANZ assets. And although it's late in the evening there, we want to welcome any of them - any of our faculty or staff who happen to be listening in and say that we couldn't be more excited to have you as part of the SEI community. And we will talk to all of you in February. Thanks very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.