Thank you. Hello, everyone, and welcome to Strategic Education's conference call in which we will discuss second 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. These 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.

Now, I'd like to turn the call over to Karl. Karl, please go ahead.

Thank you, Terese, and good morning, everyone. SEI's second quarter financial results, which we released this morning, demonstrate continued significant strength in our ETS division, increased momentum in US higher education, and meaningful progress in returning our Australia business to growth in 2027.

Before I go through the results themselves, I just want to remind everyone that I'm referring to our adjusted financial results and from a constant currency standpoint. SEI's second quarter revenue increased approximately 3% from the prior year to $330 million.

Our operating expenses increased by approximately 1.5% from the prior year, but this is inclusive of a one-time charge related to a labor matter in Australia dating back to the close of the transaction in 2020, and which I will comment on when we discuss the Australia segment's results momentarily. Excluding this non-recurring expense, our operating expenses would have been $265 million, or a reduction of 3% from the prior year.

Operating income was $53 million for the quarter, a 9% increase from the prior year, and our operating margin for the quarter was 16%, a 90 basis point improvement from the prior year. Again, excluding the one-time Australian charge of $13 million, operating income would have increased by 35%, and our operating margin would have been 20%.

Adjusted earnings per share were $1.76, a 16% increase from the prior year. Year-to-date cash flow from operations increased 18% from the prior year to $117 million.

Overall, it was a very solid quarter financially. Now turning to our segments.

Our Education Technology Services division grew revenue 15% to $42 million, and operating income by 30% to $20 million, while operating margin increased to 46.2%, an increase of 520 basis points. Sophia Learning total average subscribers grew 32%, and revenue increased by 27% to $21 million.

Workforce Edge ended the quarter with 81 corporate agreements covering 4 million employees, and enrollments from Workforce Edge into either Strayer or Capella University grew 21% to roughly 4,000 students. We were proud to recently announce that Workforce Edge was selected as winner of the Professional Development Solution Provider of the Year award in the eighth annual EdTech Breakthrough Awards program that recognizes top companies and solutions in the global education technology market.

ETS now represents nearly 40% of SEI's consolidated income from operations. Turning now to US higher education.

Employer-affiliated enrollment grew 8% and reached a new all-time high of 35% of total US higher education enrollment, an increase of nearly 300 basis points from the prior year. Healthcare enrollment, which again is a key component of our employer strategy, grew 11%, and now represents 52% of all US higher education enrollment.

As part of our healthcare expansion strategy, I'm pleased to announce that during the second quarter, Capella University launched a BSN pre-licensure program, which enrolled its first cohort this month. US higher education revenue increased 2% in the quarter, driven by higher revenue per student and lower scholarships and discounts.

Our productivity initiatives continue to enable very effective cost control, with operating expenses down 3% from the prior year. US higher education operating income increased 56% from the year to $32 million, and the operating margin increased by 500 basis points to 10% from—I'm sorry, up from 10% last year to 15% this year.

US higher education student retention increased last quarter to 89%, representing an all-time high for this metric. Turning now to Australia and New Zealand.

Total enrollment declined 5% in the second quarter, and revenue decreased just under 3% to $67 million. Operating income was $1 million in the quarter, but this is net of the $13 million charge we took to create a reserve related to an ongoing labor matter dating back to the close of the transaction in 2020.

At issue is whether grading time should be included in our casual faculty contracts, or should that portion of the work be compensated separately? Our view, which is the view that has been in place at Torrens since its inception, and therefore was in place when we closed the transaction, is that grading is part of teaching the course, and therefore should be included in our casual faculty contracts.

Casual faculty is the equivalent to adjunct faculty here in the US. The Australian Fair Work Ombudsman, assisting a former Torrens instructor, challenged this view in court, and the court sided with us, ruling in favor of our interpretation.

Later, the Australian appeals court overturned this ruling, making a determination that grading time should be compensated separately. We have appealed this ruling to the Australian High Court, and have created a reserve to compensate faculty members affected by this ruling should our appeal not be heard by the High Court, or should the High Court affirm the appellate court's ruling.

Independent of the High Court's ruling, we have already made modifications to our instructional model such that we do not anticipate any increases in our instructional expense as a result of this change. We continue to be encouraged by domestic student growth in Australia, and are making investments in new programs and potential campus additions to further grow the domestic student population.

Just a note on capital allocation. In addition to our regular quarterly dividend, we repurchased approximately 421,000 shares during the quarter for a total of $33 million.

As of the end of the second quarter, we have approximately $141 million remaining on our share repurchase authorization through the end of this year. As always, I'd like to thank all of my colleagues here at SEI for their ongoing commitment to our students and our employer partners.

With that, Kevin, we'd be happy to take questions.

Thank you so much. Wanted to first start with the US Higher Education division.

You pointed out your healthcare enrollment, which has been really strong, but I guess if we back out the non-healthcare enrollment, that has been shrinking for a while. I know there's been others in the industry that have talked about students searching using LLMs that may have some inherent bias against the for-profit sector.

I'm wondering, are you seeing any of that? Is that the reason for those declines?

If so, are you doing anything about that?

Good morning, Jeff. I would describe our overall demand environment as being stable to pretty good.

Our student acquisition rates are flat, and in some cases down, we're pretty pleased with that. We do have marketing teams that are working through various strategies to ensure that both Strayer and Capella universities are favorably returned through LLM searches, which of course is an ongoing and longer-term issue.

To answer your specific questions about search being impacted or inquiries being impacted by LLMs, that's not something that we've identified as being an issue.

Is there any specific reason why you're seeing those declines?

It's not so much declines as it is for us that we're leaning heavily into our strategy of employer, healthcare. From a marketing standpoint, on the Strayer side, unaffiliated enrollment hasn't been a priority for us.

Non-healthcare, we're happy to have those programs grow, but it's not really a part of our marketing strategy at this point.

Understand. Let me switch over to ETS, and again, I'll focus on Sophia.

We've seen some negative press regarding how students have been using AI to complete some of those courses, and I think you've added what I saw quoted as quality-enhancing initiatives to offset this. Can you tell us a little bit about what you're doing?

Is that why we've seen growth slow a bit in Sophia?

We're really pleased with Sophia's growth. You're getting into the law of large numbers now.

It's one thing to grow 30-plus percent when you're a $20 million business, to be able to maintain that at an $80 million business, I think, is pretty strong. We take academic integrity and quality of assessments very seriously across the entire portfolio, not just at Sophia.

In fact, independent of the article that you're referencing, the Sophia management team was already working to put enhancements into our academic integrity controls. That's something that we will continue to focus on, and it will be a priority for the investments that we make in the Sophia platform through the balance of this year into next year.

Great. I'll jump back in the queue.

Thanks so much.

Thanks, Jeff.

Hi, guys. Thanks for the opportunity to ask questions.

Congrats on the strong quarter versus expectations, which was really a lot stronger considering you didn't add back the Australia charge to adjusted results, which I would have thought that you would have. On an apples-to-apples basis, definitely was revenue better than expected, but so were earnings.

Just a couple of follow-up questions on US higher ed, and then ANZ. First off, on US higher ed, the enrollment was in line or better than expected.

Employer-affiliated was up 8.6%. Unaffiliated was still down, but there was a sequential improvement.

My question is really about revenue per student, which was up 2.8% by my math year-over-year despite growth in employee-affiliated. I think, Karl, you noted that you had lower scholarships and discounts.

Any color you can provide us there?

Hey, Alex. It's Dan.

You nailed it. It was primarily related to lower scholarships, but also higher classes per student.

That's both at US higher ed and Australia/New Zealand, and as we said in the past, both those metrics can be variable from quarter to quarter, for the full year, we continue to expect roughly flat revenue per student.

You want to talk about the charge not being adjusted?

Alex, on your comment on the charge, our practice when we adjust out expenses is to only adjust out expenses that we believe are both one-time and will not be part of the cost base moving forward. Assuming an unfavorable outcome from this appeal process, which is what's the accounting is based on, we will technically have grading costs in our cost base moving forward.

To Karl's earlier point, we've already got a plan to mitigate any significant incremental expense related to it. It's still technically part of our cost base.

I know it's difficult to predict, but when would you expect to hear back from the Australia High Court on your appeal?

We expect we will hear whether or not they intend to take the case probably in September, early October.

We should have an update on the next call. Then regarding Australia/New Zealand, enrollment was a little bit below expectations, my estimate and FactSet consensus, I know you don't guide on that number.

Revenue per student was up sharply, and then up 8.4% by my math. Why is that?

Is that a domestic versus international trade-off?

It is. The mix shifting more towards domestic from international.

We continue to have, I would describe as very healthy domestic new student growth approaching double digits. That's been the case for the past year plus.

The international, particularly the onshore transfer market internationally, is just much more challenged, combined with the fact that, for whatever reason, the Australian government has slowed visa approvals even below what would be required to get an institution to their cap. That could change between now and the end of the year, but we'll have to wait and see.

The strong growth in domestic so far hasn't been enough to offset the declines that we have in international, which, as long as that domestic market continues to grow as healthy as it is, we expect to be growing in the first part of next year.

That's great. Despite raising the cap, the the Australian on higher education in Australia, including Torrens, they're slow-rolling the visa approvals?

Yes.

Yeah.

We reached our cap last year. The cap was raised by 3% roughly.

At the current rate, we'd be under our cap. Last year, in the second half of the year, we saw an acceleration of visa approvals, so that pattern could repeat this year, in which case we'd do a little bit better.

Far, for whatever reason, the processing time of visas, even in countries where you have high density of genuine students, and that's an Australian government term, it's just much slower, for some reason.

Great, that's helpful. Last quick question.

On the last call, you were asked about the notional model as it applies to 2026, and you said while revenue could or will be below that notional model this year, that you're very committed to 200 bps of adjusted operating income margin improvement. Did you foresee the $13.7 million charge, or is that included in that optimism of hitting that 200 bps for the year, or would the 200 bps be the 200 bps plus the haircut by the $13.7 million charge?

Just remember that when we describe our notional model, it's a notional model over a five-year period, and it can be up and down in any one given year. To my comments in the first quarter, just given what we're seeing in Australia primarily, I think it's possible, if not probable, that for the full year we'd be a little bit under that notional model on revenue.

I'm very confident that we will outperform the notional model's 200 basis points of EBIT margin expansion, potentially even including the $13 million FWO charge, and if you exclude it, most definitely we would. To answer your question, no, it's not something that we saw coming.

We've been following the court cases, obviously, and when we won the initial ruling, we were confident that that was going to prevail through the appellate process, and for whatever reason, it didn't. Now we're just waiting for the High Court to make their ruling, and we'll adjust our instructional strategy once we hear from them.

That does it for me. Thanks.

Thanks a lot for that additional robust color. Appreciate it.

Thanks, Alex.

Hey, good morning, everyone. Wanted to maybe follow up on the customer acquisition topic Jeff raised earlier.

I'm not sure how much detail you can give here, but could you share I guess the mix of how you're reaching students in the US today? Maybe kind of general breakdown between employer channel, paid search, referrals, brand marketing, things like that?

I don't have that level of granularity, Jasper, with me, but just big picture, we said that about 4,000 students are coming to us through Workforce Edge. That's a completely proprietary channel of new students for us.

There's almost no acquisition costs for those. That's more than a third of our total student population in the US and growing.

We expect to continue to be advantaged there. Just broadly speaking, and you could follow up with Dan after the call if he can get specifics, but broadly speaking, roughly half of our advertising or marketing budget is spent on brand-building activities.

We want both Capella and Strayer to be top of mind for prospective students who might be searching for whatever degree that they might be interested in. Then the other half is a mixture of traditional paid search, could be out-of-home, just kind of the traditional advertising channels.

That, as far as I know, for the last at least two years has been relatively stable as a mix of dollars. I think, generally speaking, the mix of students follows closely to the mix of dollars.

Thanks. That all makes sense.

I know you don't guide formally, but just wondering maybe if you have any more detail on the cadence of revenue in the next two quarters. Last call, I think you mentioned 1Q would be the bottom for year-over-year revenue growth through the year.

On a constant currency basis, do you think revenue growth continues to improve into the back half of the year? I guess what would be the drivers of any expectations for the back half of '26?

Obviously we'll have to wait and see. I still feel good about the comment you're referencing, that last quarter would be the low point in terms of revenue growth.

There's some seasonality in the back half of the year. As I just said when answering Alex's questions, the Australian government is slower than what they have been, I can't predict visa approvals and so forth.

Between now and a year from now, I'm very confident that revenue growth will revert to the mean of roughly 5%, which is the anchor of our notional model. As I also just said, I'm more than confident in the 200 basis point EBIT margin expansion over this year, next year.

That's how I think about the notional model relative to both '26 and '27.

Makes sense. Thank you for taking the questions.

Thanks, Jasper.

Great. Thank you, everybody, for participating today, and we look forward to talking with you again next quarter.