Strategic Education's Courtroom Drama Masks an Improving Core

A $13M Australian labor charge dominates headlines, but ETS and U.S. Higher Ed momentum point to a business that keeps compounding.

STRA · Earnings Call · 2026-07-29

A Lesson in Labor Law

Strategic Education’s Q2 results came with an asterisk: a $13 million charge to create a reserve for an Australian labor dispute over whether grading time should be compensated separately for casual faculty. As CEO Karl McDonnell explained, “At issue is whether grading time should be included in our casual faculty contracts or should that portion of the work be compensated separately.” — Karl McDonnell, President and Chief Executive Officer · 2026-07-29 The company lost an appeal and is now waiting on the Australian High Court, with a decision expected by early October. Management was quick to downplay the impact: they’ve already modified the instructional model and expect grading time changes not to increase instructional expense.

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.
Karl McDonnell, President and Chief Executive Officer · 2026-07-29

But beneath the legal noise, the operating engine is humming. Revenue grew ~3% to $330M, and adjusted EPS rose 16%. The Education Technology division continues to compound, with Sophia Learning subscribers up 32% and revenue up 27%; Workforce Edge now covers 4M employees and won a major industry award. U.S. Higher Ed saw employer-affiliated enrollment hit an all-time high of 35% of the mix, and healthcare enrollment now represents over half of the U.S. book. “Our productivity initiatives continue to enable very effective cost control,” — Karl McDonnell, President and Chief Executive Officer · 2026-07-29 said McDonnell, as operating margin expanded 500bps to 15% in the division.

The View From Down Under

The High Court case is the newest wrinkle in a region that has been squeezed by regulatory caps on international students. Australia/New Zealand revenue fell 3% and total enrollment declined 5%, but domestic new-student growth remains "very healthy," approaching double digits. The international visa pipeline has been slow—a trend flagged in the prior quarter. On the Q1 call, McDonnell noted, “The Australian government has begun to slow down visa approvals even when you are below your cap.” — Karl McDonnell, President and Chief Executive Officer · 2026-04-23 That friction continues, but with the domestic market strengthening, the company expects to return to growth in 2027. Analysts have pressed on whether the unaffiliated enrollment decline is structural or a function of LLM-driven search bias. Management says they haven't seen it, but they are proactively managing their brand presence. “It's not so much declines as it is for us that we're leaning heavily into our strategy of employer health care.” — Karl McDonnell, President and Chief Executive Officer · 2026-07-29 This is a recurring theme; in February, McDonnell described the productivity effort with “We have an overall productivity effort that has 3 subcategories... internal productivity... enhance revenue... student outcomes.” — Karl McDonnell, President and Chief Executive Officer · 2026-02-26 That focus on both revenue and cost is driving margin expansion. The numbers support the narrative. Operating margin for the company came in at 16% in Q2, up 90bps year-over-year (ex the charge, 20%). That's consistent with the long-term goal of 200bps annual expansion under the notional model. The company has delivered steady margin expansion even with ANZ headwinds, and the U.S. Higher Ed segment’s margin jumped to 15%, more than offsetting the Australian drag. The stock remains near its 52-week high, up about 2.7% over the past 90 days, trading at ~1.5x revenue and ~10.5x operating income—well below historical averages, but with a cleaner balance sheet (net cash of ~$255M). The buyback continued with $33M spent in the quarter. The real story is that the casual faculty ruling is a known, quantified, and likely-mitigated risk. The underlying businesses—ETS and employer-linked higher ed—are firing. With the High Court session pending and the Australia growth inflection expected next year, the risk is more about timing than trajectory.