Thank you for joining us for the Stride, Inc. Fourth Quarter Fiscal 2023 Earnings Call. Tim Casey, Vice President of Investor Relations, will now start the conference.

Thank you, and good afternoon. Welcome to Stride's fourth quarter earnings call for fiscal year 2023. With me on today's call are James Rhyu, Chief Executive Officer; and Donna Blackman, Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a presentation that can be found on the Stride Investor Relations website. Please be advised that today's discussion of our financial results may include certain non-GAAP financial measures. A reconciliation of these measures is provided in the earnings release issued this afternoon and can also be found on our Investor Relations website. In addition to historical information, this call may also involve forward-looking statements. The company's actual results could differ materially from any forward-looking statements due to several important factors as described in the company's latest SEC filings. These statements are made on the basis of our views and assumptions regarding future events and business performance at the time we make them, and the company assumes no obligation to update any forward-looking statements made during this call. Following our prepared remarks, we will answer any questions you may have. I will now turn the call over to James. James?

Thanks, Tim, and good afternoon, everyone. The past few years have brought change and disruption to how people live, work, entertain and learn, among other things. There is no doubt to me, however, as these challenges and opportunities present themselves, core primary education will remain key to our society. The latest disruption seems to be generative AI and how it will change every aspect of our lives and all facets of the economy, including education. But we must also recognize that change is a constant and I believe the best organizations embrace change. I believe that this iteration of change will have a massive impact on our industry. First and foremost, I think we need to appreciate that K-12 education as we know it today will not be going away anytime soon. In fact, I think AI has the ability to transform K-12 education in a very positive way that will enable our students to accelerate and personalize their learning in ways we have dreamed about but not really achieved previously. For example, when we consider the training and education required to become a computer engineer, well, maybe we should be teaching some of those skills in high school but not in terms of computer programming, but instead in terms of navigating the functional output of the code that AI will provide for them. Since Stride was founded over 20 years ago, it has been at the forefront of personalized learning for students. And AI has the ability to personalize student feedback, assessments and content at the individual level like nothing before. AI-powered content can provide customized lessons to students based on their learning style and free up teachers to spend more time with students and less time on administrative tasks. And giving teachers more time to actually teach will allow them to spend individual time with students and provide a human connection. The relationships that teachers build with students are incredibly important for student outcomes, and AI-powered learning will allow those to flourish. Ultimately, I believe that giving teachers an incredible AI toolkit will be beneficial for both students and teachers. So how does Stride fit into the developing AI landscape? For starters, we are embracing AI, both for internal efficiency gains as well as for external customer-facing products. We don't have any announcements to make today. The landscape of AI is quickly evolving, and we want to be sure to take a measured and long-term approach and not just hop on the bandwagon for headlines' sake. We will provide a more in-depth view on how we are approaching AI at an upcoming Investor Day. We do need to recognize a couple of things in our approach. First is that students and teachers will be adopting generative AI regardless of what the establishment stance is. Recent surveys already confirm this. Our job will be to ensure that we provide interactive learning experiences that build up the durable skills students will need to adapt to the evolving demands of the marketplace. Ensuring we prepare students with the skills they can take with them through their entire careers is incredibly important. We've already been applying AI internally to supplement many of the ongoing efficiency efforts we've talked about before. We believe we can continue to increase productivity and automate many of the routine administrative tasks for both teachers and corporate employees. We will also continue to improve the user experience with AI-powered chatbots while removing friction in our admission and enrollment funnel. It should also allow us to generate content from assessments to practice materials to full courses much faster than previously. We will begin to roll out additional personalized learning tools to further strengthen student outcomes. We can use AI-powered programs to track progress and intervene earlier when a student is struggling. This will allow us to provide personalized learning at greater scale and real time, resulting in stronger student outcomes. Teachers will remain core to our offerings. While AI is good at following instructions and completing tasks, you need teachers to foster creativity and develop critical thinking skills. Teachers can encourage students to explore new ideas, solve problems, use data, create models and provide mentorship in ways AI cannot. Now I also want to talk about our improved operations and execution from this year and the results that demonstrate the success we've had. It was a record year for us on a number of fronts. We had record revenue, adjusted operating income and adjusted EBITDA. We topped $700 million in Career Learning revenue, including more than $100 million in our adult learning business, both records. We had our best in-year retention ever. We saw more demand in-year than ever before, finishing the year with more enrollments than we started with for the first time in our over 20-year history. Our earnings per share was also a record at almost $3 per share. While we really talk about EPS, we trade at a P/E ratio in the low teens. For a company that is growing near double digits for multiple years, has a very attractive future growth profile and TAM, we believe that is a fairly low multiple and represents a great value. These results reinforce our belief that families view us as an option when they feel like their current school's not delivering what they need. And increasingly, families now recognize that they have a choice when it comes to their child's education and they are choosing us. And when families come to us, they remain incredibly satisfied. I've mentioned our Net Promoter Score previously. And this year, we achieved a Net Promoter Score of 68 for our schools. Of all of our achievements, our Net Promoter Score might be the one I'm most impressed with. It shows that our efforts are translating to a more satisfied customer. And all of these metrics indicate we are delivering for our customers, and they have led to improving in-year retention, which is at its highest level ever. We also won some incredible awards for our business and content this year. We won the EdTech Breakthrough Award for Online Education Solutions Provider of the Year. We captured a bronze Stevie Award from the American Business Awards for our Minecraft Worlds! education product and a gold Stevie for MedCerts' human anatomy course. We were also shortlisted for EdTech Company of the Year by Global Business Tech Awards. And the list goes on. On top of all the accolades we receive, we continue to launch innovative partnerships and programs across our schools. MedCerts and Coursera launched a partnership to bring in-demand health care courses to Coursera's global learners. We deepened our relationship with Southern New Hampshire University to lower the cost of tuition for graduates of eligible Stride-powered programs. And we announced a new initiative at our career program in Colorado to offer a free and reduced lunch program to all eligible students. This will allow these students to get access to nutritious meals while still learning from home on Stride. These are just to name a few. All of the incredible work that the team has put in to improve our curriculum continue to offer innovative and engaging partnerships is paying off. Now I realize everybody is also wanting to hear about how our fall enrollment season is shaping up. And as I mentioned earlier, this initial data comes with a caveat that it is still very early on our enrollment season. We've made some good progress, and even though it's early, we've seen some positive indications. A couple of examples. We launched a new k12.com website, which is our consumer site for enrollments, and we are seeing some initial positive conversion trends from that site. We've also improved our messaging and even incorporated some generative AI to enable us to more rapidly deploy and test different messaging. Additionally, our strong in-year enrollment and retention in fiscal year '23 means that we finished the year in a good position to retain students for the upcoming school year. Given this data, we are well positioned to return to enrollment growth for the first time since the pandemic. And when I became CEO, I said my number one goal is to ensure we grow every year, and I believe we are currently on track to do so. Before I conclude, I want to reiterate a singular position I have. We are here to embrace change and innovation. We want to disrupt the status quo. Stride can change the future. Thank you so much for your time today, and I'll turn the call over to Donna. Donna?

Thank you, James, and good afternoon, everyone. I'll start with a recap of our reported results for the full fiscal year. Revenue for the year was $1.837 billion, an increase of 9% over the prior fiscal year. Adjusted operating income was $201 million, up 7%, and capital expenditures were $66.5 million, a slight decrease from last year. Once again, we were able to beat the expectations we provided in our guidance last quarter for revenue and profitability. I'm incredibly proud of our results. We were able to deliver revenue and profitability growth even while facing inflationary headwinds. More importantly, we did this while continuing to deliver strong academic results for the students we serve. Let me provide more detail on our results for the year. Career Learning remains a strong growth driver for us, increasing more than 70% this year to $706 million. In our middle and high school business, revenue totaled $586.8 million on enrollments for the year of 65,900. Enrollments were up 57% from last year. Revenue per enrollment finished the year up 16.3% to $8,885. Adult learning revenues came in at $119.2 million, up over 30% from last year. General Education revenues finished the year with revenue of $1.131 billion, down 11% from last year. Gen Ed enrollments for the year were 112,300. Revenue per enrollment increased to $9,270, up 14.4% from last year. We finished the year with gross margins of 35.2%, just slightly down from last year. We were able to significantly mitigate inflationary pressures this year and believe there are still opportunities for additional margin improvements in the coming year. We are still confident we can achieve our long-term gross margin target of 36% to 39% by 2025. For the year, selling, general and administrative expenses were $481.6 million, up 9.5% from last year. This increase was largely driven by our growth in adult learning as well as investments in new products and additional marketing costs. Stock-based compensation expense was $20.3 million. Interest expense totaled $8.4 million. Our full year tax rate was 26.3%. Adjusted operating income for the year was $201 million, up $12.9 million from last year. Adjusted EBITDA for the year was $296.2 million, up $23.1 million. Profitability increases were driven by increases in revenue per enrollment, the efficiency efforts and growth in adult learning. Diluted earnings per share totaled $2.97, up $0.45 from fiscal 2022. Capital expenditures for the year totaled $66.5 million. Free cash flow, defined as cash from operations less CapEx, totaled $136.6 million. There's a slight decrease from last year, mostly attributable to timing. We ended the year with cash and cash equivalents of $410.8 million. Overall, fiscal year 2023 was a strong year for Stride. In the face of strong inflationary headwinds and a challenging enrollment comparison to the pandemic-driven years of 2022 and 2021, we were still able to grow both revenue and profitability, all while continuing to deliver strong student outcomes and finishing the year with more enrollments than we began with, a first in the company's history. As you know, each year at this time, we get asked about current enrollment trends, and we always say it's too early to predict our overall enrollment for the current year. James provided some early indicators we are looking at, but I think it's incredibly important to understand that historically, August and September are our busiest months. This means it's an incredibly busy time for Stride and that there remains some uncertainties around enrollment for the upcoming school year. So while the current trends lead us to believe we will increase overall enrollments from last year, there's still a lot of work to be done. With that in mind, as we typically do, we will wait to provide formal guidance when we report our first quarter results in October. However, I do want to provide some initial thoughts. With the current early enrollment and revenue per enrollment trends, we believe we are well positioned to continue to grow both revenue and profitability for the full year. Revenue per enrollment will continue to be favorable, though not at the rate we saw last year. We think it will be more in line with the historical trend of between 1% and 3%. Revenue and profit seasonality should be in line with historical trends, excluding the pandemic years of 2022 and 2021. We think that gross margins should improve next year, driven by the annualization of some of the efficiencies we put in place this year. SG&A expenses and CapEx spend will increase slightly as we continue to invest in growth drivers. Our interest expense, tax rate and stock-based compensation should be similar to fiscal year '23. Taken together, we anticipate another year of improving profitability, keeping us on track to achieve our fiscal year 2025 target. I look forward to providing further additional information on our long-term trajectory during our fall Investor Day. Thank you all for your time today. Now I'll turn it over to the operator for Q&A.

Your first question comes from the line of Jeff Silber with BMO Capital Markets.

I just want to clarify something. I think you mentioned that, although it's early, you believe you'll return to overall enrollment growth in fiscal '24. This comment was not necessarily regarding the different segments, Gen Ed versus Career Learning; we are just discussing the total picture. Is that correct?

Yes, that's correct.

Thank you for clarifying that. I understand you are not providing specific numbers, but in previous calls in August, you discussed some early enrollment indicators regarding inquiries, and I was wondering if you could share any additional insights as you have in past years.

Yes. Generally speaking, we view demand as essentially tied to our application volumes. So far this enrollment season, our application volumes are stronger than last year, which is a positive sign for expected enrollment growth. Last August, I was careful in my comments about anticipating growth this fiscal year without specifically mentioning enrollment growth. However, I am now indicating that we expect enrollment growth this fiscal year, which is a shift from last year. Within the demand, we continue to see strong conversion rates, suggesting we are generating higher quality demand, and we are seeing improvements in that area. Overall, as we assess the situation today, we feel optimistic about enrollment growth for the fall.

One thing I'd add, Jeff, is that we're still very early in the process and the enrollment season. However, I've mentioned all year that we experienced strong in-year enrollment growth this year. We ended the year with strong retention in-year enrollment, so we're starting from a stronger place. Again, it’s still very early, but this gives us some insight into why we believe we'll see enrollment growth next year.

All right. That's really helpful. If I can just sneak one more in. James, I really appreciate your initial discussion about the impact of generative AI on the business. And again, I know it's way too early, but if you can give us some insight in terms of things that we might be seeing being rolled out over the next year or two, whether it's internally or externally, I think that will be helpful.

Yes. I believe that almost every company is considering how generative AI can influence their operations, both in terms of internal efficiency and external product improvements. We anticipate a positive impact on both fronts. We are strong advocates for the benefits generative AI can bring to the K-12 online school experience. While we are not planning to launch specific products in the near future, we have some ideas in mind. Our teachers will remain central to our product, and I don't foresee generative AI replacing the essential connections that teachers form with students anytime soon. However, generative AI could alleviate much of the administrative burden on teachers, allowing them to dedicate more time directly to students. This includes tasks like grading and attendance management, leading to increased efficiency that would enhance the student experience. We are also committed to providing a teacher-centered experience. Our goal is to make teachers' jobs easier, which will ultimately improve students' experiences. On the backend, we are already experiencing significant benefits in content creation, whether for curriculum or marketing. We see major efficiencies unfolding, particularly in the customer enrollment journey, which is becoming smoother. Internally, we have implemented a concept I call a modern-day hack, encouraging every employee to engage with generative AI solutions to address company challenges. We are utilizing crowd-sourcing within our organization to discover innovative ways to tackle issues. We are still in the early phases of this initiative, and while I don't have major announcements today, we are very excited about the potential to drive growth through generative AI.

Your next question comes from the line of Greg Parrish with Morgan Stanley.

I'll spare you the enrollment question, I think we covered it well. I just want to talk about marketing this year versus prior years. I think you talked on a few calls about being a little bit more aggressive than you have in the past, also maybe some missteps last summer. And you highlighted a few in your prepared remarks utilizing AI. If you could unpack that a little bit, talk about what you're doing different this summer and some of the early successes you might be seeing.

Yes, I believe we faced some operational challenges in our marketing program last year, and I take responsibility for that. Some of those challenges were related to our discipline in making investment decisions, including which channels to focus on. When we noticed a decline in volumes, we needed to have the discipline to refine our investments rather than making scattershot attempts in hopes of increasing those volumes. This year, I credit Donna for instilling considerable discipline within the company, and we're noticing improved returns as a result of our more disciplined operational spending. It's a significant improvement from last year. As Donna points out, we still have a long journey ahead this season, and we must remain focused and disciplined. For us, all marketing is an investment aimed at achieving a return, and we're striving to attract the right customers and deliver appropriate messages. On the creative front, we have successfully utilized generative AI for some of our messaging, which has been both a valuable learning experience and productive. I believe we will continue to improve in this area. Operationally, we've taken a positive step forward in our marketing efforts this year, but there remains room for further enhancement. We are definitely more disciplined now, investing for a better return, and our creative outputs have improved as well. Our A/B testing platform has also improved significantly. Overall, we are seeing incremental improvements through greater discipline, and I expect this will lead to gradual progress over the next couple of years.

Great, that's helpful. And I wanted to ask, I know it's tough to answer but a competitor of yours, Connections launched Career Pathways, which I think is a form of flattery, given the success that you've had in that business. But how does that change, if at all, the competitive dynamic? And then how do you sort of maintain differentiation in the market to districts that you serve?

Yes. I believe that during my time with the company, it's well-known that Connections has been a strong competitor in the market. They tend to follow trends quickly, and that approach has served them well. They have managed to avoid some mistakes that we, as pioneers, may have made. I have great respect for their efforts in this space. This market presents opportunities for both of us as it continues to grow. Their presence helps us improve as well. However, there are many other competitors alongside Connections, indicating that the market has expanded and evolved significantly. Connections contributes positively to the marketplace, as do the other players out there. We are looking forward to what Connections is doing, and the fact that they are often following our lead validates our strategies. I believe the market is large and prosperous enough for all of us.

Great. And I'll just slip one more in. And maybe if you can give us an update on staffing capacity heading into the year. And then last year, you sort of gave us some color on wages there. I don't know if it's too early to do that as well.

Yes. Staffing has been a challenge within the industry, and there are ongoing shortages of teachers, with school districts still facing difficulties. However, I believe we are in a somewhat better position now compared to the past couple of years. We are increasingly becoming an attractive option for teachers who wish to remain in the profession but feel frustrated with their current situations. This could give us a competitive long-term advantage. What we offer teachers is quite appealing; they have the opportunity for innovation and can engage in various activities. Our teachers also enjoy impressive career paths with us, focusing on meaningful aspects of their work without being sidetracked by other issues. I believe we have a significant competitive edge in the teacher market that will remain strong. As we introduce more tools, particularly generative AI resources for teachers, we expect to see continued variation in how school districts adopt these technologies. This variability works to our benefit since we will support our teachers with these tools. Overall, I am optimistic about our position in the teacher market and our relationship with educators.

And to answer your question about the wages, and so as you know, we saw a big increase in our wages last year in line with inflation, which we were largely able to mitigate by some efficiency efforts that we put forth. We think we'll still see some increases in wages this year, certainly not to the extent that we did last year. And we'll continue to deploy efficiency efforts to mitigate the impact of those increases.

Your next question comes from the line of Stephen Sheldon with William Blair.

Nice work to end the year, and I appreciate the early enrollment commentary. It's very helpful. I guess more qualitatively, what have you seen in terms of enrollment demand heading into the fall, specifically for Career Learning programs? And I'd also be curious if you've seen anything notable over the last year or so about the verticals that students are pursuing within those programs. For example, are some paths like IT or health care way more frequently being pursued than others? Just curious what you're seeing there.

Yes. We continue to see strong demand for our career programs, and there is significant interest. Many corporations are now recognizing that college degrees are not always necessary; instead, skills are what employers are looking for in many high-paying jobs, which is a shift from the traditional perception that this mainly applies to white-collar jobs. This trend is becoming increasingly recognized. We see continued strength in the health care sector, especially within our adult education businesses. However, the technology fields are experiencing some softening. Traffic statistics and search terms from tools like Google Analytics indicate a decline in certain technology-related fields. This appears to be an industry-wide trend. While we are performing better than many of our competitors, we are still noticing some softness. However, I don’t believe this will significantly impact our overall business in the long term. The industry, particularly in adult certification boot camps for technology, may be seeing a bit of a slowdown. Nevertheless, we have two leading assets in that space that continue to perform well, and we remain optimistic about their ability to exceed market performance.

Got it. That's very helpful. And then James, I think you've been optimistic about more states potentially opening up to allow virtual alternatives and choice in K-12. So it'd be great to get an update on that front. And if you still think there could be more states that open up to Stride's solutions over the next few years as we look out.

Yes, for sure. And I think the way that our thinking has evolved on the state question, I think, is very positive for us, meaning it used to be that our ability to enter a state was somewhat one or two dimensional. And I think that now the ability for us to look at states in a more multidimensional way over the next couple of years is going to bear some fruit. That could be in a unique district partnership that we haven't deployed before. Definitely, we see a lot more state demand. That state demand is materializing in sort of some different ways, though. And so I think we're going to be able to take advantage of that. So I am bullish that over the next few years, we will open up in more states.

And to answer your question about the initial fiscal 2024 comments, I think you said you expect SG&A and CapEx to increase slightly. So I just want to clarify on that comment. Is that more about absolute dollars increasing slightly or more about looking at those as a percentage of revenue?

Absolute dollars.

There are no further questions. This does conclude today's conference call. Thank you very much for joining. You may now disconnect.