Phoenix Education Partners, Inc. (PXED) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to Phoenix Education Partners Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Beth Coronelli, Vice President of Investor Relations. Please go ahead.

Thank you. Welcome to the Phoenix Education Partners Third Quarter Fiscal 2026 Earnings Conference Call. Speaking on today's call are Chris Lynne, our Chief Executive Officer; and Blair Westblom, our Chief Financial Officer. Before we begin, I would like to remind everyone that certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on current market, competitive and regulatory expectations and are subject to risks and uncertainties that could cause actual results to vary materially. Listeners should not place undue reliance on such statements. We undertake no obligation to update publicly any forward-looking statements after this presentation. The risks related to these forward-looking statements are described in our filings with the SEC, including our most recent Form 10-K, Form 10-Q and other public filings. We will also discuss certain non-GAAP financial measures. You should consider our non-GAAP results as supplements to, and not in lieu of, our GAAP results. Reconciliations to the most directly comparable GAAP measures can be found in our earnings release and SEC filings. Unless otherwise noted, comments in the call will focus on comparisons to the prior year period. We also direct you to the supplemental earnings slides provided on the Phoenix Education Partners website. I'll now turn the call over to Chris.

Thank you, Beth, and good afternoon, everyone. We appreciate you joining us today as we discuss our third quarter fiscal 2026 results and the continued execution of our long-term strategy. Guided by our mission, we remain focused on helping students achieve meaningful educational and career outcomes through flexible and affordable programs designed for working adults. The pace of change continues to accelerate as artificial intelligence reshapes how people work and the skills employers need. This environment aligns directly with our long-standing focus on working adult learners. For nearly 5 decades, University of Phoenix has helped students adapt, grow, and succeed through periods of economic and technological transformation. Today, we are building on that legacy by continuing to enhance the learning experience, incorporating employer-informed curriculum and preparing learners with in-demand skills, creating greater opportunities for career mobility. As we celebrate our 50th anniversary this year, we are reminded that our ability to evolve alongside the needs of learners and employers has been one of our defining strengths. That same commitment to innovation and adaptability continues to guide our strategy today. Turning to our results. The third quarter reflected continued progress across our strategic priorities. Revenue and enrollment were generally consistent with prior year, supported by continued strength in retention and healthy growth in employer-supported enrollment. Retention remains one of the strongest indicators of value students place on the University of Phoenix experience. The sustained improvement we've achieved reflects multiyear investments across the learner journey, including technology-enabled support, personalized engagement, flexible learning pathways and skills-aligned curriculum. Together, these efforts continue to support student retention and the long-term durability of our enrollment base. During the quarter, we accelerated the successful launch of our Built for Real Life campaign, an evidence-based omnichannel campaign that highlights our differentiation through the attributes working adults value most, exceptional flexibility, affordable tuition and practical career-relevant education, all supported by consistently high levels of student and alumni satisfaction. At University of Phoenix, our AI strategy is centered on 3 priorities: elevating the learner experience, equipping students with the AI skills employers increasingly value, and enhancing how we operate across the university. During the quarter, we made exciting progress expanding AI-enabled learning and AI skill development for students, which I'll discuss in more detail later in my remarks. We also continue to scale AI to drive operational efficiency across the university, including the launch of our One Team Assistant, which provides AI-generated summaries, including status and next-best actions to help our advisers best support our students. Our students continue to benefit from skills aligned curriculum. To date, students have earned more than 1.1 million digital skills badges, providing another way to demonstrate verified, workforce relevant skills to current and prospective employers. We continue to see growing demand for learners and employers for education aligned with evolving workforce and technology needs. Approximately 36% of our third quarter enrollment came through employer-supported relationships, up from approximately 33% a year ago, reflecting the growing alignment between our educational offerings and employer needs. This alignment is reflected in feedback from employers. I'm happy to report that results from a recent employer research survey conducted by The Harris Poll indicated that 98% of employers surveyed reported overall satisfaction with University of Phoenix graduates. During the quarter, we further expanded our work with employers to support upskilling, career mobility and talent development. University of Phoenix was recently recognized by Wabash, a New York Stock Exchange-listed provider of end-to-end supply chain solutions, as a 2025 platinum supplier for its collaboration in supporting workforce development and operational priorities. We believe this recognition reflects the value of helping employers align learning, skills development and business needs while helping organizations build the workforce capabilities they need to succeed. Looking ahead, we will continue expanding our academic portfolio to meet evolving workforce needs with new offerings planned across several high-demand disciplines and more flexible pathways designed to make degree completion faster and more affordable. This includes the approval and planned fall launch of one of our first 3-year bachelor's degree paths in the College of Social and Behavioral Sciences and Criminal Justice Administration. In today's workforce, preparing learners for an AI-enabled workplace is central to helping them develop practical career-relevant skills they can apply throughout their careers. Recent findings from the University of Phoenix Career Institute Career Optimism Index underscore the importance of continuous learning and AI skill development. The study found that about half of workers say AI increases their confidence in pursuing new career opportunities, while more than half report greater confidence in developing new skills and adapting to evolving workplace technologies. Our goal isn't simply to teach students how to use AI tools. It's to prepare working adults to succeed as AI continues to transform the workplace. We are integrating generative AI throughout our curriculum to help students develop practical AI skills they can apply on the job. We're continuously expanding AI-powered learning experiences and now offer AI skill building modules in every course. We are currently enhancing teaching and learning through support tools and advanced AI training for faculty, expansion of our Socratic dialogue tool that simulates real-world professional scenarios and have an AI agent that provides 24/7 support for writing and math. Earlier today, we announced a collaboration with OpenAI, an exciting opportunity to accelerate this work. Working with OpenAI, we plan to advance AI-powered learning, explore collaborative research and expand access to AI technologies that help working adult learners develop the skills they need for an increasingly AI-enabled workplace. As part of this relationship, we plan to provide eligible students with access to ChatGPT, giving them a hands-on experience with AI as they continue developing those skills throughout their education. As search and discovery continue to rapidly evolve, we remain focused on how prospective learners explore, evaluate and ultimately choose University of Phoenix as they look for ways to advance their education and careers. We believe our strong brand, leading position across social media among our peer set, career-relevant content, media expertise and broad digital presence provide a solid foundation in this changing environment. This foundation has provided strong support for adjustments to our digital acquisition strategies to meet the evolving needs of prospective learners who increasingly use AI in their search process. The recent launch of the Built for Real Life campaign has been one of our more successful campaigns and is an important evolution in how we communicate what differentiates University of Phoenix. It has been effective at maintaining strong demand for our brand and is designed to provide authoritative, evidence-based content around the most important decision factors in a manner that influences AI-powered search. We will continue to adapt our approach to meet learners wherever they are making decisions about their education. I also want to briefly touch on the Department of Education's recent fraud prevention initiatives. As I've discussed on previous calls, we support the department's efforts to strengthen fraud prevention and protect the integrity of the federal student aid system. Importantly, the department's enhanced controls and the recent initial data we've reviewed from the department has reinforced our confidence in the effectiveness of the fraud detection and identity verification processes we already had in place. Before I close, I'd like to welcome Robert Brackenbury to the Phoenix Education Partners Board of Directors. Robert brings extensive leadership and governance experience, most recently serving as Deputy Chief Investment Officer for the State of Michigan Retirement System, where he helped oversee more than $170 billion in pension and trust assets for a fund with a long-term track record of outperformance amongst large public pension funds. Combined with a decade of higher education leadership experience, Robert brings valuable perspective, and we look forward to his contributions to our Board. As we look to the future, an important part of our growth strategy and capital allocation approach is evaluating opportunities that complement our core business, enhance our ability to serve learners and employers and strengthen our long-term value proposition. Playing a key role in leading these efforts, I'd also like to welcome Michael Cochran as our Senior Vice President, Corporate Development. Michael brings extensive transaction and strategic advisory experience, most recently as an Executive Director at Morgan Stanley, where he served as a key leader supporting the company and its return to the public markets. As we enter the final quarter of 2026, we remain focused on executing against our strategic priorities, supporting student success, strengthening employer relationships and helping learners build the skills they need to succeed in a rapidly evolving workforce. The progress we continue to see in student outcomes reinforces our confidence in our strategy. Supported by a strong financial foundation, disciplined execution and continued investment in our students, we remain confident in our long-term trajectory and our ability to create value for learners, employers and shareholders. With that, I'll turn the call over to Blair.

Thank you, Chris. I'll begin with a review of our third quarter financial results, followed by updates on our balance sheet, capital allocation and fiscal 2026 outlook. For the third quarter, net revenue was $271.8 million compared to $271.7 million in the prior year period. Average total degreed enrollment increased 0.6% for the third quarter to approximately 85,300 students compared to 84,800 in the prior year, with continued strength in retention. Net income attributable to Phoenix Education Partners was $39.2 million or $1.01 per diluted share compared to $53.8 million or $1.42 per diluted share in the prior year. The decrease was primarily driven by higher share-based compensation expense associated with our IPO, which increased $7.8 million compared to the prior year period, an increase in advertising expense and higher strategic alternatives, restructuring and other expense. Adjusted EBITDA for the quarter was $78.1 million compared to $83.4 million in the prior year, a decrease of 6.4%. Adjusted diluted earnings per share was $1.43 in the third quarter compared to $1.57 in the prior year. Adjusted EBITDA margin for the third quarter was 28.7% compared to 30.7% in the prior period, primarily driven by higher advertising expense, which increased $6.6 million in the third quarter to support the accelerated launch of the Built for Real Life campaign. This was partially offset by lower bad debt expense due to higher retention. For the first 9 months of fiscal 2026, net revenue was $756.3 million, an increase of 0.9% compared to $749.8 million in the prior year. Average total degreed enrollment increased 2.2% for the first 9 months to approximately 84,500 students compared to 82,700, reflecting continued strength in retention. Net income attributable to Phoenix Education Partners was $65.4 million or $1.69 per diluted share compared to $116.4 million or $3.08 per diluted share in the prior period, with the year-over-year decrease primarily due to share-based compensation expense associated with our IPO. For the first 9 months, adjusted EBITDA increased 1.2% to $188.1 million compared to $185.8 million in the prior year. And adjusted diluted earnings per share was $3.40 compared to $3.49 in the prior year. Adjusted EBITDA margin for the first 9 months was 24.9% compared to 24.8% in the prior year period. These results reflect the increase in net revenue as well as lower bad debt expense, primarily due to higher retention. Our results continue to benefit from strong retention trends and disciplined cost management, which we believe support long-term margin expansion, scalability and strong cash generation. We continue to maintain a strong balance sheet with substantial liquidity and no outstanding debt. As of May 31, 2026, our cash and cash equivalents and marketable securities were $269.4 million compared to $194.8 million as of August 31, 2025. The increase was principally due to $116.7 million of cash generated from operating activities, which was partially offset by $17.4 million of cash paid for dividends and dividend equivalents, $15 million of capital expenditures, as well as net cash paid to settle share-based awards and common stock repurchases. Our capital allocation priorities remain focused on investing in student outcomes, technology-enabled capabilities and strategic growth opportunities while maintaining financial flexibility and returning capital to shareholders. In April, our Board of Directors approved and we announced a $50 million stock repurchase program. In the third quarter, we repurchased approximately 135,000 of our common shares for an aggregate purchase price of $4 million at an average of $29.29 per share. As of quarter end, we had approximately $46 million remaining available for repurchases. Today, we announced another quarterly dividend of $0.21 per share payable on August 14. We expect to continue to pay quarterly dividends in subsequent quarters of $0.21 per share which equates to $0.84 per share annually, subject to Board approval. We also continue evaluating select M&A opportunities that complement our workforce-aligned capabilities, learner experience, and employer ecosystem while maintaining financial discipline. Turning to our fiscal 2026 outlook. Based on our expectations for the remainder of the year, we anticipate net revenue will be in the $1.02 billion to $1.025 billion range. While the revised outlook primarily reflects the transitional impact of our digital enrollment strategies as we adapt to an evolving search and discovery environment, we remain confident in the long-term demand for University of Phoenix and our ability to successfully execute our strategy. We are also raising and tightening our fiscal 2026 adjusted EBITDA guidance and now expect adjusted EBITDA to be in the range of $246 million to $250 million. This updated outlook reflects disciplined cost management and the benefits of our strategic and operational initiatives, including technology and AI-enabled capabilities that continue to support efficiency, scalability and student outcomes. We continue to operate from a position of financial strength, supported by healthy cash flow generation, a debt-free balance sheet and disciplined capital allocation. These attributes provide the flexibility to continue investing in our strategic priorities while supporting long-term value creation. I'll now ask the operator to begin the question-and-answer session.

[Operator Instructions] And our first question comes from the line of Greg Parrish with Morgan Stanley.

Maybe just help level-set here, like what -- especially on enrollment growth, what's changed versus the initial expectations that you've had? What's going on in the market that maybe was different than 9 months ago? I know you talked about search changes, talked about the last quarter. I think that's the only thing you mentioned again today. I mean, is this all search changes or maybe anything else to call out? And what's structural versus what's temporary? Maybe just help us there.

Thanks, Greg. I'll take that question. Really, first and foremost, I think it's important to point out that we're not seeing weaker demand for our programs. In fact, demand for University of Phoenix's brand remains strong. One of the measures we follow for years is branded search on Google. And we can see that we continue to be one of the top 2 brands across the competitive set, and we are top in terms of growth year-over-year. So the interest is there. As you alluded, what we are seeing is a change in how prospective students evaluate their options. We're seeing longer and more iterative evaluation processes as AI-powered search becomes more a part of the evaluation journey. And that's really the driver of the near-term impact. And what I'll say about is we've been preparing for the shift for a long time. So this is a transition. For example, we talked about our Built for Real Life campaign that we accelerated into Q3. That campaign is designed to make our differentiators highly visible. There's many claims across the most important attributes that adult learners care about from exceptional flexibility, affordability, transparency, career-relevant education and really consistently high student and alumni satisfaction. And that is one of the things we're doing to make sure that those evidence-based differentiators are put out on the digital platforms in a way that the AI-powered search picks it up and presents us favorably based on those differentiators with our competitors. And so we've been doing a lot alongside those types of issues, but that has created near-term impact. Now long term, strategically, we believe this change in the search environment is going to be a favorable thing for institutions that have built credible evidence around their differentiation. And that's where we see ourselves well-positioned in the market. So we see this as a transition and it's a shift that we've been working through, which is why we modestly reduced our revenue outlook for the year. Now in terms of other factors, it's probably worth mentioning that we did have a very temporary level of friction on enrollment related to, I mentioned in my remarks, the unusual enrollment activity. That's all really good news for us. We've talked about the control structures we put in place. Those continue to be validated. But one thing that did happen this prior quarter that I've mentioned in previous calls that we were anticipating is the Department of Ed has rolled out their system of new detection and verification controls as part of the FAFSA process. And in that process, they have risk identifiers now that they share with institutions that are signals at different levels of risk around potential unusual enrollment activity or what they call potential identity fraud or ghost students. The good news is anything that they flagged in their process, and they flagged all of -- or they looked at all of the 2026 and 2027 applications at which, because we're a non-term continuously enrolling institution, we actually had over 70,000 applications that had been filled out by either current students or prospective students in the enrollment process. Not all of those students by any means were flagged, but the ones that were flagged were very consistent with our internal control. So that was a validator that we've got robust controls and as does the department, which is a good thing. But that did create some friction because with the new regulations, when students are flagged, institutions are required to take them through a process. And because they did a look back, we had sort of a one-time process at which we had to work through these students. And that's behind us. And I wouldn't say it was anything meaningful. I didn't mention it in my remarks as a result. But given you asked the question if there was anything else related to what we communicated, that was another factor.

Yes. Yes. Okay. Fantastic. And maybe like just taking all that forward and then maybe just a refresh on like thinking of how you think about and your team, the long-term growth rate of this business. How do you see that evolving? And then as we go into 2027, do you expect to be within your long-term framework in 2027?

Yes. Well, we're not giving the outlook for fiscal ' 27 on this call. We will be sharing that on our next earnings call. But in terms of the long-term outlook, we still feel that our previous communications on the long-term outlook for the business are consistent with today. We are in the middle of a shift in how search is conducted. But it's worth saying that, like, we've set a very strong foundation. Most importantly, our brand demand is high, and that's really a paramount matter. And then it's really about setting up our differentiators in a way that search engines that are being utilized by prospective students can pick up our differentiators. And like I said earlier, we think over the long term, this is actually going to be a strength for universities that have clear differentiators that they've earned in the marketplace. We see satisfaction across all the key attributes that adult learners care about, most importantly, the relevancy of our curriculum. So we think that, that's going to play out in a positive way over the longer term. And so we feel good about where we're at. The other thing worth mentioning in terms of the near-term impact is we have other channels that continue to perform very well that have no impact on AI search. We're seeing healthy growth in our B2B channel. We continue to expect that to grow because we've not only been very effective with our account management processes across our 2,500-plus employers. We continue to build more strategic relationships with employers like the example I shared with Wabash in my remarks. And so that will continue to drive success. We also see very healthy demand continue to come to the university. And we've continuously improved our ability to meet that demand effectively with personalization, leveraging AI and technology throughout the enrollment process where we're seeing continued improvements in conversion of that demand into what become new students for the university. So all of those things give us confidence in our long-term expectations.

Great. And if I may just slip in one modeling -- quick modeling question, and then I'll pass it off. Just stock-based comp coming out of the IPO is a little elevated. This quarter it was 3%. Maybe just help us what's the right level of stock-based comp as a percent of revenue to think about just in the go-forward model?

Greg, it's Blair. Thanks so much for the question. So our Q3 2026 share-based comp expense was $8.5 million. And as mentioned on previous calls, a little less than half of SBC is associated with the modification of pre-IPO stock options, not new stock. And the majority of the remaining expense is associated with shares granted at IPO or post-IPO. When you take a look at year-to-date expense of $47.6 million of SBC, that includes a number of different components. Approximately $31 million is related to the modification of stock options, of which $4 million was incurred in Q3. Then you have approximately $3 million in unrestricted share grants to a very limited number of employees and less than $1 million from pre-IPO awards. The only ongoing component of that is approximately $13 million from newly granted awards at IPO or post-IPO that generally vest over 3 years. And then as always, I direct you to our fiscal '25 Form 10-K and our Q3 '26 Form 10-Q. You can see a significant portion of noncash SBC is due, as I mentioned, to the monetization of pre-IPO options.

And our next question comes from the line of Jasper Bibb with Truist Securities.

Just wanted to get a little bit more color on the enrollment growth rate. I think in the prepared remarks, you talked about strength in retention kind of supporting the 1% enrollment growth. I know you don't disclose it, but can you provide, like, a little bit of color on what you're seeing in new starts so far this year and in the past quarter?

Yes. Well, we don't disclose new starts. But one thing that I'll point out, Jasper, that we've mentioned on past calls is from a revenue growth perspective, we did have a higher propensity of students that didn't retain beyond the earlier courses last year. I kind of walked through the background on that and shared that we were not experiencing that coming into this year. And that has been consistent. And the impact of that from a year-over-year revenue growth rate was anticipated to be higher in Q2 and Q3. So that masks a little bit of the actual growth from a revenue perspective. In terms of new student growth, we feel good about the demand we're seeing. We do have this near-term impact as we have been navigating some of these early changes in search. But as I said earlier, we feel good about the demand we're seeing. We also feel good about the response that we've had. I mean one thing that's worth mentioning is we planned for a lot of the response for a long time right now, knowing that search is changing. And we're seeing the impact of the foundational changes we put in place to make sure that we're getting picked up properly with our differentiation in AI-powered search. And we manage that across thousands of prompts, and we can see the traction as we shift into this new environment. So we see strong demand. We're seeing good progress there. And I would just caution you to look at the growth rate overall for revenue this quarter as being a little bit masked by that year-over-year issue I mentioned earlier.

And then I had an expense question. I just -- I think the advertising expense grew about 16% year-over-year in the quarter. I know that can bounce around a little, but can you just talk about maybe the drivers of the increase in advertising this quarter? Was that kind of related to the AI shift you've talked about? And do you expect, I guess, the spending on advertising to moderate at all in the fiscal fourth quarter?

Yes, certainly, Jasper. We incurred $6.6 million higher advertising expense in Q3 versus the same period prior year, and that's as we adapt to changes in how prospective learners discover, evaluate, and ultimately choose higher education. We did ultimately make the decision to accelerate the Built for Real Life campaign, which is designed to differentiate the University of Phoenix for working adults while strengthening the top-of-funnel awareness and consideration. And we believe this and other marketing initiatives will support long-term growth in enrollment. That, coupled with anticipated expansion of our direct channels, including employer affiliated enrollment, we believe these investments will enhance our acquisition efficiency over time.

One thing, Jasper, that's probably worth mentioning is the acceleration of that Built for Real Life campaign, that was actually pretty phenomenal work across our marketing team. The reason we did that. That was planned to be launched later in the year, closer to fall. But because it was built on broad evidence supported claims, we decided we should launch it sooner given the impact of AI-powered search because not only has it -- and it's been very effective at driving strength in our brand demand, but it's also built and designed to help optimize for AI-powered search. So that was -- we did spend higher, but part of that was accelerating that decision earlier in the year.

And our next question comes from the line of Alex Paris with Barrington Research.

First question is back at the time of the IPO, and I'm not sure if you published it since, you sort of broke down enrollment by fields of study. At the time, 63% was business and IT. I look at it as 3 buckets: 31% health care and related that would include social and behavioral as well as health care professionals and nursing and then 4% education. I'm wondering year-to-date or in the third quarter or however you like to answer the question, where has been the area of strength and areas of less strength?

Yes. Thanks for the question. Yes, we're seeing -- we have a diversified portfolio of programs. They're aligned in demand fields. There's different levers that seem to contribute more to growth at different periods of time. I don't have -- and maybe Blair does have a recent breakdown, but it's pretty similar to what you described. However, we have seen stronger growth in health care. I mean the macro trends there have been strong. I think the closest barometer of what's going on in the marketplace is really looking at where we're seeing growth with our employers. Health care is just under 1/3 of our B2B relationships. Now that's health care organizations. We're seeing strong growth in our health care-related programming, but we're also seeing growth in other non-health care-related programming as a result of that part of the sector growing. And so that's another element that we see is when you're in growing verticals, and we have several, health care being one of them, that are growing healthily. You see growth of, really, all of our programs in those verticals. But I would say health care, the areas that you mentioned have been growing at a higher rate than other programs. But the skills-aligned curriculum, and we're seeing growth across different parts of our portfolio as well across the B2B network. And we think that's reflective of both the demand we're seeing on B2C or demand that we expect to see in certain parts of B2C as the differentiators that employers are responding to become clearer to the broader consumer base.

Great. That's helpful. I appreciate that. And then just a question and comment on guidance. Given your updated guidance, revenue slightly below your prior guidance and adjusted EBITDA narrowed and slightly above your prior guidance. I think the year is going to kind of come in where you said it was last quarter. You had said -- if you look at the midpoint of the new guidance, it's at the low end of the prior guidance. And if you look at the midpoint of the updated guidance, it's at the high end of the prior guidance. And that actually suggests 3.4% revenue growth in the fourth quarter, 5.8% adjusted EBITDA growth in the fourth quarter at the midpoint. So it looks like we're kind of at that long-term growth algorithm, mid-single-digit top line, maybe a little bit below and then mid-single-digit plus earnings. Is there any reason to think that long-term algorithm wouldn't hold for fiscal 2027?

That's a very good breakdown of the facts, but we're not providing an outlook for fiscal '27 now. So I mean, for now, I'll just hold to my comments earlier that we're comfortable with the long-term expectations that we've indicated previously. But we're going to close out the year here and be ready to share more about fiscal '27 in the next earnings call.

Great. And then the last question, just to sneak in here is regulatory. And we've talked about regulatory on the prior several calls with the One Big Beautiful Bill, negotiated rule making and then some of those rules like grab loans and earnings accountability going into effect July 1. There were some positives there, kind of a delayed effectiveness on earnings accountability. But more recently, there's been some word out of the Department of Education that they're not done. They're going to do some more negotiated rule making this fall, one of which is taking a look at the 90-10 rule, which applies only to for-profits. With your number at about 88%, I know that's comfortably below the limit. What are your thoughts or what are you hearing about 90-10 changes coming?