Welcome to Strategic Education's third quarter 2026 results conference call. I will now turn the call over to Terese Wilke, Senior Director of Investor Relations for Strategic Education. Mrs. Wilke, please go ahead.

Thank you. Hello, everyone, and welcome to Strategic Education's conference call in which we will discuss third quarter 2026 results. With us today are 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 our website at strategiceducation.com. and now I'd like to turn the call over to Karl. Karl, please go ahead.

Thank you, Terese, and good morning, everyone. Our third quarter results reflect continued strength in the parts of SEI where we have been investing for growth. Education technology service, our broad employer strategy, and our U.S. healthcare portfolio. The strength in these areas, however, was mostly offset in the third quarter by our Australia segment where the environment has proved more challenging than we expected. This morning I'll briefly review the quarter and then I'll walk through each of our segments. As I do, I'll discuss the opportunities behind our intent to make 2027 a year of increased growth investments. As always, unless I note otherwise, my comments refer to adjusted results on a constant currency basis and those results exclude the $134 million non-cash impairment of goodwill and intangible assets in Australia that we recorded this quarter and which I will discuss with that segment. Third quarter revenue was $320 million, essentially flat with the prior year. We did hold operating expense growth to less than 1% resulting in operating income of $50 million, a 2% decrease and an operating margin of 15.7%, 30 basis points below the prior year. Earnings per share increased 4% to $1.69, reflecting a lower share count from share repurchases. Through the first nine months of this year, free cash flow increased 8% to $137 million. Turning now to our segments, education technology services continued its strong performance. Revenue grew 12% to $43 million, operating income grew 14% to $18 million, and operating margin expanded 80 basis points to 42.5%. Sophia Learning average total subscribers grew 22% and revenue grew 20% to $21 million. Workforce Edge ended the quarter with 83 corporate agreements covering approximately 4 million employees, and enrollments from Workforce Edge into Strayer or Capella grew 4% to roughly 4,000 students. SEI was recently named to Business Insider's 2027 list of most innovative companies, a recognition that reflects much of the work that is being done within ETS. Given the strong demand across ETS and given our desire to accelerate our product roadmap to serve that demand, Our intent is to increase our growth investments in ETS in 2027. These investments will slightly reduce the ETS segment-level operating margin next year, but will also result in higher revenue growth in our current five-year plan, defend SOFIA's market leadership position, and strengthen Workforce Edge's ability to sign new corporate clients. Turning now to U.S. Higher Education. Total U.S. higher education enrollment declined 1% to approximately 84,700 students as growth in employer-affiliated enrollment was offset by lower unaffiliated enrollment. Revenue was essentially flat at $214 million as higher revenue per student offset the enrollment decline. Our productivity initiatives continue to hold operating expense growth to less than 1%, including continued investments and growth. Operating income was $22 million, a 4% decline, and an operating margin of approximately 10%. Student retention reached 89.2%, a new all-time high for U.S. higher education. Our healthcare portfolio continues to be the strongest source of growth in U.S. higher education. Healthcare enrollment grew 9% in the quarter and now represents 54% of total U.S. higher education enrollment, up from 49% a year ago, an increase of 500 basis points over the last year. Healthcare is also central to our broad employer strategy. Roughly 38% of our healthcare enrollment comes from employer partners, and employer-affiliated enrollment overall reached 35% of U.S. higher education total enrollment, up 200 basis points from the prior year. We are now extending that portfolio into licensure track programs. Earlier this year, Capella enrolled the first cohort in its pre-licensure Bachelor of Science nursing program, and Strayer enrolled its first students in the new Associate of Applied Science and Radiologic Technology. Early demand for both programs has exceeded our initial assumptions. These two programs joined Strayer's licensed practical nurse diploma and Capella's expanded nurse practitioner portfolio all aimed at the healthcare talent our employer partners increasingly need. To support that demand, we intend to also increase our growth investments in U.S. healthcare in 2027 with funding for new programs, clinical faculty, expanded clinical and instructional capacity. This will allow programs like pre-licensure nursing and radiologic technology to grow at the pace their demand supports. Turning to Australia. Total enrollment declined 9% to approximately 17,100 students and revenue declined 7% to $64 million. The Australian team continued to manage costs well with operating expenses down 4% and operating income was $10 million compared with $12.5 million in the prior year and an operating margin of approximately 16%. The decline is entirely a function of international enrollment. Over the course of this year, the Australian government restrictions on international students have become materially more severe than we anticipated. New visa approvals for prospective students have slowed sharply and in some months declining as much as 80% versus the prior year. And in addition, the government has effectively closed the onshore transfer market by requiring international students already in Australia to obtain a new visa in order to change institutions. Given this environment, we have lowered our near-term growth expectations for the A and Z segment, which resulted in this quarter's $134 million non-cash impairment. Notwithstanding the headwinds on international enrollment, our domestic enrollment continues to fare well. Domestic new enrollment has grown every quarter this year, including 9% in each of the second and third quarters, and domestic students now represent close to 70% of New Enrollment in Australia. The quality of Torin's academic experience remains strong and has shown significant improvement over the past year. We were pleased to see Torin University's performance in the 2025 Quality Indicators for Learning and Teaching Student Experience Survey, the most comprehensive national survey of current higher education students in Australia. Torin's achieved widespread momentum across all undergraduate indicators, including a rise to sixth nationally for undergraduate teaching quality, up significantly from 19th the year before. At the postgraduate level, Torin continues to lead at the top tier of Australian higher education, ranking in the top four nationwide for both skills development and peer engagement, alongside a seventh place ranking in postgraduate teaching quality. This performance against national sector benchmarks reinforces Torin's value proposition and supports student retention and long-term brand equity in industry-aligned education. The quality of Torin's academic programs, combined with our own success in growing domestic enrollment, gives us confidence to increase our growth investments in Australia's domestic market in 2027. We are expanding our existing Adelaide campus and will launch several new health science programs and we also plan to open a new campus in Perth in late 2027. Western Australia is the fastest growing state in the country with population growth 50% higher than the national average. Greater Perth is projected to add more than a half a million residents over the next decade and its economy is concentrated in the sectors where our new programs are focused, namely healthcare, engineering, construction and defense. Perth will also position Torrens well for international recruitment from Asia when those constraints ease. Turning now to an update on our outlook versus our notional model. Given our current forecast for the balance of this year and the fact that the international enrollment environment in Australia deteriorated since the first half of the year, it appears unlikely our full year results will fall inside of our notional outlook. In terms of 2027, given that our forward revenue growth is mostly a product of current year enrollment, we think the most likely outcome for consolidated revenue next year is to be flat with this year. We expect the cost of the grossed investments that I have described this morning to be approximately $50 million in 2027. However, the productivity savings achieved this year will offset nearly half of that such that year-over-year increase in operating expenses will be limited to just 2%. Given that these incremental investments are targeted to support areas of proven strength at SEI, that is our two high-growth, high-margin platform businesses, our U.S. healthcare portfolio, and our domestic market growth in Australia, we have a high degree of confidence in their ability to return the company to its notional growth rates in 2028 and beyond. Regarding capital allocation, in addition to our regular quarterly dividend, we repurchased approximately 347,000 shares during the quarter for a total of $28.5 million. We ended the quarter with $139 million of cash and marketable securities and no debt. And finally, as always, I'd like to take this opportunity to thank all of my colleagues here at SCI for their ongoing commitment and support to our students and our corporate partners. and with that, Victor, we'd be happy to take questions.

Thank you. To ask a question, you will need to press Star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 1-1 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Jeff Silver from BMO Capital Markets. Your line is open.

Thanks so much. Karl, really appreciate you giving us some insight into 2027. I was hoping I could just double click on that a little bit. Is it possible to talk about the different segments? I say, you know, overall, you think revenue most likely flat, but could we see growth in ETS offset by declines in the other two? And then from a margin perspective, where do you think you'd have the most impact in terms of declining margins potentially next year?

I think we're absolutely going to have growth in ETS, Jeff. I suspect we'll have lower growth in U.S. higher education, driven by the strength of the healthcare portfolio that I just described. Overall, that'll be offset by the continuation of the restrictions in Australia, although we do expect that with the addition of the Perth campus, the expanded programs in Adelaide, launching several asynchronous online programs throughout Australia. We do expect that new student growth in Australia will be growing year over year in the back half of 27. And just given the headwinds that we've had, it's going to take a few quarters for that to translate into total enrollment growth, so I would expect that probably in the first part of 28. And from a margin standpoint, I would estimate that it could be in the range of 300 to 400 basis points at ETS. A little less than that in U.S. higher education in Australia.

Okay, that's really helpful. I really appreciate that. Moving back to, I guess, the U.S., you know, we had an election earlier this week. I'm not asking you for your crystal ball, but given, you know, guys, where you're located, you're probably closer to most in terms of what's going on and what potentially could go on. Any changes you're expecting with the changeover in Congress towards democratic control?

Well, I'd say that in the U.S., we have a high degree of confidence in sort of the regulatory and quality posture of both Strayer and Capella. We try to work constructively with any regulators or members of Congress or the administration, regardless of party affiliation, and we look forward to engaging with them once the new Congress is inaugurated in January.

Okay, fair enough. Thanks so much.

Thanks, Jeff.

Thank you. And our next question will come from the line of Alex Paris from Barrington Research. Your line is open.

Hi, guys. Thanks for taking my question. And I, too, appreciate the granular detail by segment and the look at 2027. I just had a question on unaffiliated enrollment. It was down 4%. It's actually an improvement from the second quarter by my math when it was down 5.5%. But it's been down for eight consecutive quarters now. You've consistently said you do anticipate returning to mid-single digits at some point, but it's not an area of focus. I get it. I'm wondering, has there been an impact on the funnel from LLM, AI Search and so on? and could that be a contributing factor?

Good morning, Alex. First of all, on unaffiliated enrollment, that's predominantly undergraduate business. It's an area that's important to us, but it's not one of our main strategic priorities in the way that healthcare is. You're right that the rate of decline moderated. in the third quarter. We expect it to continue to moderate throughout 2027, perhaps even reaching breakeven or growth by the end of 2027. And then in terms of LLM, it's certainly something that we're watching, but we've been focused on a quality of demand over quantity of demand for going on two years now. So we don't tag rate of increase or decrease in any inquiry volume that we're getting as being most important. We're looking at admission yield and sort of the acquisition cost to lifetime value. And both of those are near all-time highs. Obviously, we want to be relevant and favorably represented in any search medium that people are using, including LLMs. So we have a lot of people that are focused on it. But I can't say that we've really seen any adverse impact from it yet.

What are you specifically doing to respond to the changes in the way students look at colleges and universities?

It's a multi-function, multi-disciplinary set of initiatives that we have. I don't really want to go into details on this call, but we do have a robust set of things that we're doing that we have a pretty high level of confidence will help position us well not just in LLMs but frankly in any search medium that people may use.

Obviously it's important but again just to be clear you've not really seen any material impact from the AEO as opposed to SEO on unaffiliated enrollment.

Yeah because I mean put yourself in our position Alex it would be next to impossible to ascribe any rate of change to LLM or any other single variable. We're happy with the demand that we're getting. In healthcare in particular, it's much stronger than what we expected. The growth of those new programs is far ahead of where we expected them to be by as much as a year, perhaps. But we're not ignoring it. We have people that are focused on it. We expect that over time, the evolution will become more apparent. I just would say it's very early and we haven't been able to ascribe any changes to that specifically.

Gotcha. Then my last question quickly on ANZ. I appreciate you are controlling the controllables, campus expansions, new campuses, a focus on domestic. But is there any light at the end of the tunnel with regulatory? Obviously this has been going on for a couple of years now. and we thought that there'd be an improvement this year because of a lifting of the caps, but by slow rolling the visas it's had an even more dramatic effect on international enrollment. Any additional color there would be great.

I was a little surprised, frankly, that the transfer requirement to get a new visa was implemented. That was not something that we anticipated. It is what it is. Eventually, we're going to get to a new normal, a normalized rate of international enrollment. I think we're much closer to that as opposed to being further away from it. And if we continue to grow domestic growth in the high single digits as we're doing, or frankly, even in the low double digits when we add the additional capacity in Adelaide and Perth, eventually that's going to result in new student growth, which as I said in my prepared remarks, I think could be in the latter half of next year. leading to total enrollment growth in the first part of 28. And then if we get an easing of these restrictions, which some people in Australia think will happen over the coming several years, then that'll just be added sort of enrollment that we'll get. We're not building a strategy around it. We're accepting it for what it is and building all of our growth capital around the domestic market. And given, as I said, the strong performance of Torrens academically in the federal quilt survey, We think we're well positioned to grow our domestic market share.

Great. Appreciate the color. Thank you.

I'll get back in the queue.

Thanks, Alex.

Thank you. Once again, that's Star 1-1 for questions. Star 1-1. Our next question comes from Jasper Bibb from Truer Securities. Your line is open.

Hey, good morning, everyone. I apologize if I missed it, but I guess I just wanted to understand how you're thinking about EBIT margin expansion with 26 at this point. I guess, for me, it would be helpful if you could kind of frame work through expectations. We have the right jumping off point for all the kind of helpful points that you gave us.

Hey, Jasper. Yeah, it might be a bad connection. I'm not sure I got the full question. I think it was 26 EBIT margin. Was that your question?

Yeah, I apologize. I'm switching to speakerphone now. Hopefully you can hear me better.

Yeah, that's much better.

I just wanted to understand kind of 4Q expectations so we have the right jumping off point for kind of all the 27 comments you gave earlier on the call.

Hey, Jasper, you're talking about margin, right?

Yeah, margin or, I mean, revenue if you have it.

Yeah, well, we don't give revenue, forward-looking revenue input. We have commented on margin, as you know, relative to the notional model of 200 basis points of expansion. Karl just mentioned that we're well off of that at this point. However, as we said last quarter, when you adjust for the FWO reserve we took in the second quarter, we're actually not too far off of the 200 basis points.

Okay. And then I just maybe wanted to spend a little bit more time on just kind of what you're seeing in U.S. higher ed right now and kind of how that's informing your expectations for 27. Enrollment's down like a little bit, but I think retention's going up. So I would assume new starts in the U.S. might be down more than enrollment right now. I guess could you just kind of frame what you're seeing in new starts in the U.S. and how that informs your expectations for next year?

Sure. Well, as I said, healthcare is very strong, growing almost double digits, 9% in the last quarter. That's well over half of our enrollments now, so we're confident that that's going to continue to grow, and I suspect the growth rate will increase given the strength of the new pre-licensure programs. The undergraduate unaffiliated has been declining. Part of that is just a function that we've been deploying more of our growth capital into healthcare and not into undergraduate business. As Alex noted, I confirmed the decline is moderating. We think it will continue to moderate. So, net of everything that we're seeing, I suspect that we're going to have net positive new student enrollment growth in 27. And the division as a whole will sort of mean revert toward mid-single digits as we work our way through the year.

Okay. That makes sense. Maybe last one for me to Subscriptions at Sophia just slowed a little bit from the second quarter. Is that kind of harder cops or have you seen any impact on subs growth or retention from kind of the recent changes you made to the platform over the summer?

It's almost entirely a function of anniversarying that large corporate client that we have. If you excluded that corporate client, direct-to-consumer subscription growth is still close to 20% and growing, holding that growth rate. So it's really a function of the anniversary of that one client that's quite large.

Okay, understood. Thanks for taking the questions. Sure, thank you.

Thank you. I'm not showing any further questions at this time. I'd like to turn back over to Karl McDonnell, CEO, for closing remarks.

Thank you, everybody. We look forward to discussing our fourth quarter results with you in February.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.