Welcome to Strategic Education's First Quarter 2019 Earnings Conference Call. I will now turn the call over to Terese Wilke, Manager of Investor Relations for Strategic Education. Ms. Wilke, please go ahead.

Thank you, Ashley. Good morning, everyone, and welcome to Strategic Education's conference call, in which we will discuss first quarter 2019 results. With us today to discuss results are Robert Silberman, Executive Chairman for Strategic Education; Karl McDonnell, President and Chief Executive Officer for Strategic Education; and Daniel Jackson, Executive Vice President and Chief Financial Officer for Strategic Education. Following remarks, we will open the call for questions. Please note this call may include forward-looking statements made pursuant to the Safe Harbor provision 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 this week 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. Q1 was a pretty straightforward quarter, not a lot to add from my perspective, but a lot of information. So, let me just turn it over to Karl and Dan for details on our operating and financial results, after which I will stay for as long as you have questions. Karl?

All right. Thank you, Rob. Good morning, everybody. We were very pleased with our first quarter results that we announced this morning. Our operating and financial results are incredibly solid and our merger integration remains on track to be completed this year. First, regarding our financial results, on a pro forma year-over-year basis, the company generated a 31% increase in net income, resulting in $0.38 of additional earnings per share. That performance was the product of solid revenue growth of 8%, combined with operating expense growth of just 2.4%. Our $198 million of operating expense was net of $7 million of realized merger synergies in the first quarter. This resulted in a 38% increase in operating income and our operating margin expanded 430 basis points. The operating margin expansion consists of 300 basis points as a result of merger synergies and 120 basis points from improved productivity in the business. Within our segments, Strayer's operating margin increased 390 basis points and Capella's increased 330 basis points. Our operating results remain quite strong at both Strayer and Capella Universities, where new student enrollment increased 13% and 15% respectively, while total enrollment increased to 11.5% at Strayer and 3.5% at Capella. Capella's FlexPath programs continue to perform exceptionally well, with new FlexPath enrollments increasing 52%, while total FlexPath enrollments grew 43%. FlexPath enrollments now represent one-third of all non-doctoral students at Capella. Strayer University opened two new campuses in the quarter, one in Fort Worth, Texas and the other in Mobile, Alabama, and the university remains on track to open an additional four to six new campuses in 2019 pending regulatory approvals. Capella's first student support center will open in Atlanta, Georgia in the second quarter, while its second new location in Orlando, Florida will now open in the third quarter. And finally, our merger integration remains on track to be completed this year. In the first quarter, we implemented run rate synergy savings of $13 million, bringing our cumulative total run rate savings to $37 million. Merger integration expense was $7 million for the first quarter and we expect an additional $8 million of integration expenses spread mostly evenly through the second, third and fourth quarters of 2019. And while I think it's likely we will continue to generate merger-related savings in 2020, the initially-communicated $50 million synergy target will be achieved this year. There continues to be widespread enthusiasm and collaboration across our organizations as our teams work together and deepen our best practice sharing. And again, I would like to thank and commend all of my colleagues across SEI for the tremendous commitment to our students and for all of their efforts that went into producing these results this morning. Dan?

Thank you, Karl. And good morning, everyone. First, I want to remind everyone that our consolidated results include three segments – the Strayer University segment consisting of Strayer University in the Jack Welch Management Institute; the Capella University segment, consisting solely of Capella University; and the Non-Degree Programs segment, which includes our coding boot camp businesses and Sophia. Note, also that our consolidated results exclude the financial results of Capella Education Company that occurred prior to August 1st, 2018. For a pro forma view of our first quarter 2019 segment-level results, please see the first quarter earnings release slide deck posted to the Investor Relations section of our website. I also want to remind everyone that our earnings release references as reported, or GAAP results, and adjusted or non-GAAP results. This format is intended to illustrate the financial performance of the core business as reflected in the adjusted numbers in addition to our GAAP results. Our adjusted results exclude amortization expense related to Capella assets acquired in the merger, transaction and integration costs associated with the merger, income from investments and partnership interests, and certain discreet tax adjustments. Please refer to the non-GAAP financial information included in the first quarter earnings release we issued this morning for additional information. In addition, as we commenced our first full year as a combined company, we are simplifying the presentation of our income statement to better align our financial reporting with how we think about expenses operationally. Instructional and educational support and admissions advisory expenses are now combined under instructional and support costs, and marketing and general and administration costs are now combined under general and administration. We will include, in our 10-Q later this week, a detailed illustration of how our previous expense line items map to the new line items. Now,…

Thanks, Dan. With that, operator, we'd be pleased to answer any questions.

Thank you. [Operator Instructions] And our first question comes from the line of Peter Appert with Piper Jaffray. Your line is now open.

Thanks. Good morning. The start performance continues to be very impressive for Capella, obviously. I assume it's the FlexPath. But for the Strayer University, anything you would call out in terms of the – either programmatic offerings, marketing programs, et cetera, that are driving the start performance? And your thoughts on the sustainability of it.

Sure. Good morning, Peter. The only thing that I might call out that would be different than our last quarter, we continue to open new campuses on the Strayer side. And all of those new campuses are performing well. As was the case last quarter, we still see pretty sound macro conditions. So, I think just a strong fundamental economy combined with continuing to open physical locations on the Strayer side is clearly aiding up on new student growth. On sustainability, as you know, we don't provide forward guidance. But as I've said, the macro conditions are quite favorable right now, and so we're optimistic heading into the rest of the year.

Got it. Thank you. And then, Karl, the continuing student – continuing enrollment growth at Capella, how do I interpret that? Is this just a function – the fact that's significantly lower than the new enrollment growth that you've seen for the last several quarters, is that just a function of shorter programs or anything else I should know?

Are you referring to their total enrollment, Peter?

No, I'm looking at the continuing enrollment was up 0.7%.

Yeah. It is a function of mix shift to FlexPath where, in some cases, particularly in the nursing program, students are getting through those programs in 12 months, 14 months. And so, over time, as Capella's new student enrollment continues to grow, I suspect that the continuing students will increase, but that will be offset to the extent that FlexPath is one of the primary drivers of growth because students are getting through those programs so much quicker.

Understood. And is there a significant difference in student acquisition cost for the FlexPath offering versus traditional offerings? And, therefore, would the margin profile of that offering be different?

No, they're relatively similar. A fair number of FlexPath enrollments, again, particularly nursing, come through corporate channels where there is a relatively low acquisition cost. So, they're relatively on par, Peter.

Got it. And then, lastly, Karl, just interested if – your thoughts, the margin performance has been better certainly than I had anticipated in the first couple of quarters of the transaction. I'm wondering if you're rethinking your expectations in terms of where the run rate margins could get in the next couple of years.

Well, it's not dissimilar from what we've talked previously. We estimated that the value of the $50 million synergies versus the Strayer pro forma standalone performance would be worth about 500 basis points, which gets you to roughly 20% margins. From there, as you know, we're focused on various productivity initiatives. And so, should our enrollment continue to grow, what we ultimately see is margins in the low to mid 20s.

Great. Okay. Thanks, Karl.

Thanks, Peter.

Thank you, Peter.

Thank you. [Operator Instructions] And your next question comes from the line of Corey Greendale with First Analysis. Your line is now open.

Hi. Good morning.

Good morning Corey.

Good morning. A couple of questions. On FlexPath, I think you said that new FlexPath students were up 50%. I don't know that we've had that number before. Can you give us a sense of how that – what that is relative to what it has been over the past year or so?

It was 52% this quarter and it's been growing. New FlexPath learners have been growing 30% plus for the last couple of years, Corey. I don't have the full history, but we're happy to dig that out for you.

Okay. It might be helpful. So, it sounds like it actually accelerated. Anything that you'd point to that would have helped with that?

Other than just the continued strength of the nursing program and FlexPath – that's both the largest and fastest growing program in FlexPath within Capella.

Okay. And I think that there has been some talk from the department – making it somewhat easier for universities to open direct assessment programs. Do you expect – so, I think the competitive environment has been relatively benign and that might start changing. Do you think you have enough of a head start there that you can kind of maintain the strength as competition may increase?

I think FlexPath is incredibly differentiated. It's got tremendous outcomes. There is strong word of mouth. So, we feel very good about FlexPath and we are very confident that that's a very differentiated program, notwithstanding the fact that others may attempt to do it. Capella has developed a real expertise in direct assessment and competency-based assessments. And I suspect FlexPath will just continue to get stronger and stronger as we go.

Hey, Corey. This is Rob. The only other thing I would say on that with regard to competitive pressures is that our experience is it's very difficult to do an academically-sound, well-run direct assessment program. And I think, in the short term, there may very well be, if there a lessening of regulations, more academic institutions attempting to do that. But over the long term, which is what we're focused on, I'm not particularly concerned that people will be able to build what Capella University has been able to build over the last five years with the same level of academic rigor, and that's what's really going to drive the performance of these programs.

That's fair. And given that you have that expertise in-house, any updated thoughts on Strayer University starting to offer direct assessment program?

It's something that we're actively considering. FlexPath is a very unique program that is a best fit for individual students who bring a lot of workplace competencies into the classroom, and we see that there may be some fit on the Strayer University side. It would have to go through two layers of approval. It would have to be approved first by Strayer's accreditor, Middle States, and then subsequently by the Department of Education. But it is something that we're actively considering, Corey.

Okay. And as long as we're on the regulatory point, it hasn't been a huge top-of-conversation of late, but as I'm sure you know there's some things that are being proposed and popping up at state level, including some things – I think some states are proposing, requiring institutions to spend at least 50% of revenue on instruction, which may not make heck of a lot of sense, if you can be more efficient doing some of the things you're doing with AI. So, anything going on at a state level that you're particularly focused on or concerned about?

We pay attention to all initiatives at any governmental level that would affect how we operate. But having been at this for a while, we know it's a very heavily regulated business and it ought to be given the availability of government credit that really propels students opportunity to get their educations. So, we keep track of everything, but there's nothing that's really popped out to us at this point that is significantly different from things that we've heard about before and will always operate the universities in compliance with whatever regulations are out there.

Got it. Well, nice work post-merger and I'll turn it over.

Thank you.

Thanks, Corey.

Thank you. Ladies and gentlemen, this concludes today's Q&A session. I would now like to turn the call back over to Rob for any closing remarks.

Thank you, operator, and thanks to everybody that participated. If you have other specific questions, please feel free to call Karl or Dan. And we look forward to speaking with you again in July. Thank you.

Well, ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a wonderful day.