Laureate Education Inc
NASDAQ:LAUR
Earnings Call Analysis
Q3-2023 Analysis
Laureate Education Inc
The company is capitalizing on Mexico's rise as a significant trading partner to the USA, seeing over 40% year-to-date growth in direct foreign investment. This environment is ripe for higher education given the need for reskilling and upskilling the labor force. Even after a previous year with a 17% new enrollment increase, Mexico achieved a solid 4% growth in new enrollments this year, contributing significantly to revenue growth.
Facing economic challenges from political instability and weather, Peru's GDP is expected to contract slightly in 2023, with recovery expected in 2024. Despite these issues and higher attrition rates, the company's strategic emphasis on educational value has led to enrollment and revenue growth, showcasing the resilience of its business model in tougher economic conditions.
The company reaffirms its full-year 2023 financial outlook, keeping predictions within the previous guidance range. A notable highlight is the declaration of a special cash dividend of $0.70 per share, with the third quarter's robust cash flow enabling this shareholder-friendly move.
The third quarter saw an 8% year-over-year increase in organic constant currency revenue, although adjusted EBITDA slightly declined due to planned expense shifts and lease exit costs tied to real estate optimization in Mexico. Nevertheless, year-to-date financials indicate an 11% and 10% rise in revenue and adjusted EBITDA respectively.
While maintaining guidance within the previously framed boundaries, the company narrows its expected range, reflective of recent foreign exchange rate trends. Despite facing currency headwinds and higher attrition rates in Peru, the enrollment volume is predicted close to the lower bound of prior estimates.
The company forecasts a student enrollment count at about 447,000, with revenues between $1.457 billion to $1.465 billion, marking a considerable growth of 17% to 18% as reported, and a more moderated 10% on an organic constant currency basis. Adjusted EBITDA is expected to range from $410 million to $416 million. For Q4, they are projecting revenue within $382 million to $390 million and adjusted EBITDA between $123 million to $129 million, indicating upcoming margin expansion.
Finalizing the quarter with a very low net debt position and successfully refinancing its credit facility speaks to the company's strong financial position. These moves underscore its ability to reward shareholders through dividends and manage its obligations effectively.
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Good day, and thank you for standing by. Welcome to the Third Quarter 2023 Laureate Education, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Morse, Senior Vice President, Finance. Please go ahead.
Good morning, and thank you for joining us on today's call to discuss Laureate Education's third quarter 2023 results. Joining me on the call today are Eilif Serck-Hanssen, President and Chief Executive Officer; and Rick Buskirk, Chief Financial Officer. Our earnings press release is available on the Investor Relations section of our website at laureate.net. We have also posted a supplementary presentation to the website, which we will be referring to during today's call. The call is being webcast, and a complete recording will be available after the call.
I'd like to remind you that some of the information we are providing today, including, but not limited to, our financial and operational guidance constitutes forward-looking statements within the meaning of applicable U.S. securities laws. Forward-looking statements are subject to risks and uncertainties that may change at any time, and therefore, our actual results may differ materially from those we expected. Important factors that could cause actual results to differ materially from our expectations are disclosed in our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission, our 10-Q filed earlier this morning, as well as other filings made with the SEC.
In addition, all forward-looking statements are based on current expectations as of the date of this conference call, and we undertake no obligation to update any forward-looking statements. Additionally, non-GAAP measures that we discuss, including, among others, adjusted EBITDA and its related margin, total debt, net of cash and free cash flow are also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation. Let me now turn the call over to Eilif.
Thank you, Adam, and good morning, everyone. Today, we are pleased to report strong financial performance for the third quarter, along with the results from the recently completed primary enrollment intake for Mexico and the smaller secondary intake for Peru. Third quarter revenue was $362 million, and adjusted EBITDA was $78 million. Both metrics were in line with the guidance range we provided during the second quarter earnings call.
For Mexico's primary enrollment intake, new enrollments grew 4%, and that's on top of the 17% increase we achieved during the prior year's intake, which benefited somewhat from the COVID recovery volumes. We are very pleased with the enrollment performance in Mexico and the momentum we are experiencing in that market. We've seen strong performance across both brands as well as our face-to-face and fully online delivery mode.
Over the past 2 years, new enrollments in Mexico has increased over 20% during the primary intake. For Peru's smaller secondary intake, new enrollments increased 2% as compared to prior year. As a reminder, Peru's primary intake occurred earlier this year in March and their next large enrollment cycle will take place during the first quarter of 2024.
In Mexico, we are experiencing favorable macroeconomic trends. This year's GDP growth has been upward revised by the IMF to 3.2%, a notable improvement from the initial expectations at the beginning of the year. And this increased growth has been driven really by 2 factors: first and foremost, increased private consumption, and secondly, from early investments relating to the nearshoring trends.
The nearshoring opportunity has contributed to over 40% year-to-date growth in direct foreign investment into Mexico. And Mexico has now overtaken China as the largest trading partner of the United States. We believe that higher education will be a sector that benefits from nearshoring, as employers in Mexico will require reskilling and upskilling of their labor force. And we believe that Laureate is well positioned to capitalize on this opportunity. Specifically, we are the largest private operator of higher education in Mexico with an extensive suite of STEM and business degree program offerings as well as a large portfolio of short courses.
Further, inflationary pressures have subsided in Mexico. The inflation rate is now nearly half of what it was last year, dropping from a high of 8.7% in September of 2022 to the current rate of approximately 4.5%, marking 8 consecutive months of declining inflation. Overall, we are very positive on the operating environment in Mexico and our business is performing very well.
Peru's economic landscape currently reflects a more subdued environment compared to Mexico. It is now anticipated that Peru's GDP for 2023 will experience a slight contraction, impacted by a series of events, including political disruption and severe weather. This has led to some pressure on the consumer with families and students taking a cautious approach to spending. During the recent secondary intake, we did observe an increase in students posting their studies. But overall, families and students continue to prioritize educational spending due to the strong economic incentives from having a university degree.
In Peru, like Mexico, inflation has improved, falling for 8 consecutive months to 5% in September. While this is a positive trend, the inflation rate remains above the 3% stated target level. Most economists are predicting a return to positive GDP growth in 2024. Despite the challenges in the Peruvian market throughout 2023, our business model has performed well with continued growth in enrollment and revenues. This resilience underscores the strength of our brands and product offerings in Peru.
The completion of the third quarter intakes in Mexico and Peru give us high visibility for the balance of the year. We are pleased to reaffirm our constant currency revenue and adjusted EBITDA outlook for the full year 2023, within the previously guided range.
Later in our prepared remarks, Rick will provide more details on the updated guidance, including the impact from foreign currency rates, which have weakened a bit in the past few months. We are also pleased to announce today a special cash dividend of $0.70 per share or approximately $110 million to be paid on November 30. Having just completed the enrollment intake and/or a seasonally high cash growth third quarter, we are well positioned to continue our track record of returning capital to our shareholders, a priority for our organization.
That concludes my prepared remarks. Over to you, Rick, for the financial overview of the quarter and full year 2023 outlook.
Thank you, Eilif. As a reminder, campus-based higher education is a seasonal business. Although the third quarter is a large intake period, from a P&L perspective, it is seasonally low as classes are out of session for much of the quarter. Let's start with Pages 10 and 11, which highlight our operating and financial performance for the third quarter and year-to-date. New enrollments and total enrollments were both up 6% for the quarter when compared to the prior year period. Pricing at a brand and degree level was in line with expectations. And when combined with year-to-date volume performance is covering our implied cost of inflation as anticipated.
During the recent intake, we did experience a positive mix impact on average revenue per student versus expectations, primarily driven by Mexico. Revenue in the third quarter was $362 million and adjusted EBITDA was $78 million. On an organic constant currency basis, revenue for the third quarter increased 8% year-over-year. Adjusted EBITDA declined slightly year-over-year and was in line with the guidance range we provided for the quarter's performance. The decrease was attributable to the shifting of expenses from the first half of the year, as discussed on our prior call, and additional costs related to lease exits as we continued to focus on optimization of our real estate footprint in Mexico.
When combined with the first half and still on an organic constant currency basis, our overall performance for the 9 months ended in 2023 resulted in revenue growth of 11% and adjusted EBITDA increase of 10%.
Let me now provide some additional color on the performance of Mexico and Peru, starting with Page 13. Please note that all comparisons versus prior year are on an organic and constant currency basis. Let's start with Mexico. We are very pleased with Mexico's primary intake performance. As a reminder, Mexico grew new enrollment 17% in last year's primary intake. We signaled in our previous calls that this would create a hard comparison in the second half of this year, but that we still expected to deliver year-over-year growth during the intake. That growth came in as new enrollments increased 4% timing adjusted.
As Eilif noted, over the past 2 years, new enrollments have increased 21% in Mexico during its primary intake, driven by double-digit growth in both our premium and value brands and across both our face-to-face and fully online offerings. For the third quarter, Mexico's revenue grew 6% versus the prior year. Adjusted EBITDA declined $5 million as expected due to shifting of expenses referred to earlier and lease exit costs. On a year-to-date basis, revenue growth of 13% was driven by a 10% increase in average total enrollments and 3% of price mix.
Adjusted EBITDA increased 19% year-to-date versus the prior year period, driven by revenue flow-through and productivity gains, partially offset by return to campus expenses. We believe that our strategy to expand margins in Mexico to above 25% in the next couple of years is well underway.
Let's now transition to Peru on Slide 14. During the smaller intake cycle just completed, new enrollments in Peru increased 2% versus the prior year period and total enrollments grew 4%. As Eilif noted in his opening remarks, Peru is currently experiencing some pressure on the consumer. Accordingly, we did experience higher attrition during the recently completed secondary intake. The impact was felt across the entire sector.
Despite the macroeconomic conditions, we are still delivering strong top line growth due to a solid primary intake earlier in the year and disciplined pricing approach. For the third quarter, Peru's revenue growth was up 10%. Adjusted EBITDA increased 3%, reflecting the expected impact of return-to-campus expenses and additional investments in our health science and digital offerings.
On a year-to-date basis, revenue growth of 10% was driven by a 6% increase in average total enrollments and a 4% increase of price mix. Adjusted EBITDA was up 1% versus the prior year to date with the decline in margins as expected, as incremental revenue flow-through was partially offset by expenses associated with return to face-to-face classes at our campuses.
Let me now briefly discuss our balance sheet position. Laureate ended September with $131 million in cash and $135 million in gross debt for a net debt position of only $4 million. During the quarter, we refinanced our corporate revolver, extending its maturity through September 2028, while reducing the size of the commitment to be more appropriate for what is needed for our organization post transformation. Key terms under the revolver, including pricing were largely unchanged. Our strong balance sheet and extended revolver maturity supported our Board's decision to declare the special cash dividend of $0.70 per share today.
Moving on to our updated outlook for 2023, starting on Page 15. We are maintaining revenue and adjusted EBITDA expectations for the full year on a constant currency basis within the previously guided range. However, we have narrowed the range given only the fourth quarter remains in the year. On the foreign currency component, though still very favorable for the year, FX rates have declined since the time of our second quarter earnings call. As a result, we are reducing the full year FX benefit to reflect current spot rates. As a reminder, we consistently provide guidance on a spot FX rate basis.
During the recent intake, we did experience a positive price and mix impact, but that was offset by higher attrition rates in Peru related to the macroeconomic softness in that market. As a result, we now expect total enrollment volume closer to the low end of our previous range. Based on current spot FX rates, we now expect full year 2023 results to be as follows: total enrollment to be approximately 447,000 students, reflecting growth of approximately 6% versus 2022. Revenue to now be in the range of $1.457 billion to $1.465 billion, reflecting growth of 17% to 18% on an as-reported basis and 10% on an organic constant currency basis versus 2022. Adjusted EBITDA to now be in the range of $410 million to $416 million, reflecting growth of 21% to 23% on an as-reported basis and 14% to 16% on an organic constant currency basis versus 2022.
Now moving to the fourth quarter guidance. For the fourth quarter of 2023, we expect revenue to be in the range of $382 million to $390 million. Adjusted EBITDA to be in the range of $123 million to $129 million, with strong margin expansion expected during the fourth quarter.
That concludes my prepared remarks. Eilif, I am handing it back to you for closing comments.
Thank you, Rick. We are on track to deliver on our commitment for 2023 with strong top line growth, continued margin expansion and improved free cash flow. The financial results we have reported for the first 9 months of this year demonstrate the resiliency of Laureate's business model and the strength of our local brands.
Operator, that concludes our prepared remarks, and we are happy to now take any questions from the participants.
[Operator Instructions] I'm showing no questions at this time. This concludes today's conference call. Thank you for participating, and you may now disconnect.