Stride, Inc. Q1 FY2024 Earnings Call

Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Stride First Quarter Fiscal 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Tim Casey, Vice President of Investor Relations, you may begin your conference.

Thank you, and good afternoon. Welcome to Stride's first quarter earnings call for fiscal year 2024. 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. At Stride, I believe we can change the future of education. We can provide opportunities for our customers that are desperately needed in today's evolving landscape. The macro outlook today portrays an increasingly cloudy picture, economic volatility and uncertainty, chaos and divisiveness in our political system that is often extremist, unsustainable debt levels, geopolitical threats, just to name a few. These are some of the macro themes our country is going through right now, and it doesn't appear they will abate anytime soon. Many of these same themes also impact our education systems and institutions. Most Americans agree and understand that our education system is in need of repair and that our students are falling behind. I don't think there's any question that we need to rethink how we approach education and ensure we are setting up the next generation for a future we are proud to hand down to them, but I do think that will require fundamental change, and I believe Stride is positioned to change the future for our kids, for our teachers and schools, our communities, and our country. I believe this change includes offering families choice in education, and in our case, that choice is a virtual education. That choice has saved countless thousands of families from an outcome they did not want. And demand for our programs is growing. Enrollments for this fall increased 8% to almost 188,000 enrollments. Both our General Education and our Career Learning business grew. I think our numbers for this quarter speak for themselves, record revenue, record career enrollments, record career revenue, and except for the pandemic year, our highest profitability also except for the pandemic year, our highest growth rate in the past decade. Total revenue growth for the past few years, including at the midpoint of our range for this year, has been right around 9% a year. Adjusted operating income at the midpoint of our range is up over 400% from fiscal year 2020 and up well over 50% from fiscal year 2021 when we had the pandemic benefit. Our net income will be up something like 600% from fiscal year 2020. Our EPS will be over $3.60 a share, which is six times higher than fiscal year 2020. Now, as we've returned to a sense of normalcy following the worst of the pandemic, while our programs have continued to flourish, unfortunately many public school systems have largely reverted back to doing exactly what they were doing pre-pandemic. I had hoped the significant learning loss and access to new educational tools would challenge schools to embrace change, and some have, but far too many have not. Parents of school aged children share these same concerns about our public education system and they're becoming more vocal about their dissatisfaction. As a result, we're beginning to see more bipartisan efforts to expand school choice. A recent survey showed that both Democratic and Republican voters support school choice by a margin of more than two to one. A poll conducted in August by Gallup demonstrates just how frustrated Americans are. Over 60% of Americans said they are dissatisfied with the quality of K through 12 education in the US. Conversely, while almost three quarters of parents rated their own children's teachers positively, this tells me that the dissatisfaction lies in the educational system and not with the incredible teachers within the system. We are starting to see this widespread dissatisfaction lead to change at the legislative level, and I think we're just at the beginning stages of changing the future of education. When we ask parents why they selected a K-12 school, we're hearing they're coming to us to solve those same issues that are leading to dissatisfaction with our public school system. Stride has always been a leading advocate for parent choice, and I think we're starting to see more and more parents opting for a school that fits the specific needs of their child, and that's a powerful position for parents to be in. We also see continued strength in our career programs, crossing 70,000 enrollments this year. While we continue to see most of these enrollments coming from our general full-time virtual program funnel, we still believe there is a compelling case for parents and students to choose a career program and more and more Americans agree with us. Parents and students want skills that will help them be successful in their career, and they want to develop those skills earlier. Our programs do exactly that, while also helping to alleviate student loan debt pressures, and very importantly, fill the skills gap for US employers, while continuing to see employers being more open to hiring based on skill rather than degree. In fact, in 2022, almost 30% of paid job postings on LinkedIn omitted any degree requirement. That's up from just over 20% four years ago. We're also seeing support for skills-based hiring from state policymakers and governors across the country. So far, the governors of 10 states have announced initiatives to remove degree requirements from state jobs. Now, there's still work to be done. We still need to drive awareness of our career programs, but the underlying drivers of demand demonstrate that we made the right decision to move into this fast-growing space. Our key objectives and strategies have momentum like never before. As I've mentioned, our guidance suggests we are primed for record revenue and profitability performance for this year. I mentioned last year that I felt Gen Ed enrollments had bottomed out and it looks like that turned out to be accurate. We think this demonstrates the strength of our K through 12 full-time virtual school business, and all the indicators suggest we will continue to see strong demand for these offerings for the foreseeable future. This also allows us to invest in other growth areas and new products. As you know, we're still early in these efforts and I'm excited to share more information at our upcoming Investor Day, which is going to be scheduled for November 14th here in our offices in Reston, Virginia. One of our core advantages is in our ability to move and change and innovate with the needs of the marketplace. If we are able to create a better educational future, I believe Stride can be part of the solution and together we can change the future. Now, I'll turn the call over to Donna to discuss our first quarter result and guidance.

Thank you, James, and good evening, everyone. Our strong enrollment growth for this year is a testament to the incredible work that our teams put in day-in and day-out. Making sure parents and students feel supported at the beginning of the year sets them up for a strong year. I'm very proud of the work we've put in to make every student successful in our program. Turning to our reported results for the quarter. Revenue for the quarter was $480.2 million, an increase of 13% from the first quarter of fiscal year 2023. Adjusted operating income was $14.8 million compared to an adjusted operating loss of $19.9 million in the same period last year. Earnings per share were $0.11, up $0.65 from last year. Capital expenditures were $16.1 million, down $700,000 from last year. These results reflect the return to enrollment growth following our pandemic high. We're starting this year with enrollments more than 50% higher than before. We saw growth in both our General Education and Career Learning program, underscoring the continued demand for school alternatives that James outlined in his comments. It's clear that the effects of the pandemic have had a lasting impact on the awareness and acceptance of full-time virtual offerings. Returning to our quarterly results. Career Learning revenue grew 18% to $180.8 million. This performance was driven by continued strong enrollment growth in our Career Learning program. These programs generated $151 million in revenues on double-digit enrollment and 6% revenue per enrollment growth. Our adult learning business grew 7% to $29.9 million. Turning to the General Education programs, revenues increased over 10% to $299.3 million for the quarter. Enrollment in Gen Ed increased 4.7% from last year. Revenue per enrollment grew 7.4%. First quarter revenue per enrollment increases for both Gen Ed and Career Learning were somewhat impacted by timing. We think we'll finish the year with revenue per enrollment growth of around 4% to 6%. Gross margins for the quarter was 36%, up 550 basis points from last year. We're continuing to see the positive effects from last year's efficiency efforts and expect to see gross margin improvements throughout this year. We also feel like we manage our teacher hiring well this year, and that contributed to the strength in gross margins this quarter. For the year, we expect to see gross margins improve by 200 to 250 basis points. Selling, general and administrative expenses increased 7% to $169.6 million, driven by increases at MedCerts to support its continued growth, investment in new products and the impact of stock-based compensation. Stock-based compensation for the quarter was $8.4 million, up from the prior year due to the timing of some long-term performance grants. We expect to finish the year with stock-based compensation in the range of $28 million to $33 million. Adjusted operating income for the quarter was $14.8 million. Adjusted EBITDA was $39.8 million. Historically, the first quarter has not been a profitable quarter for us, so the strength this year highlights the work that we've done to execute on efficiencies and improve teacher hiring. This, coupled with the strengths in our enrollment, sets us up to be profitable every quarter this year and demonstrates the underlying financial strength of Stride. Returning to our quarterly results. Interest expense for the first quarter totaled $2.1 million. We expect full year interest expense to be similar to last year. Our effective tax rate for the quarter was 23.9%. For the full year, we believe we will finish with a tax rate in the 25% to 27% range, similar to prior year. Capital expenditures in the quarter were $16.1 million, down slightly from last year. Free cash flow, defined as cash from operations less CapEx, was negative $151 million compared to negative $160 million in the prior year period. This is our normal seasonality of cash flows and relates to school launch and the onboarding of students. We expect to see positive cash flow for the next three quarters. We ended the quarter with cash and cash equivalents of $254.6 million. Turning to our guidance. For the second quarter of fiscal year 2024, we are forecasting revenue in the range of $490 million to $510 million. Adjusted operating income between $80 million and $90 million, and capital expenditures between $15 million and $18 million. For the full year, we expect revenue in the range of $1.96 billion to $2.03 billion. Adjusted operating income between $250 million and $275 million. Capital expenditures between $65 million and $75 million, and an effective tax rate between 25% and 27%. Thank you for your time. I look forward to seeing you in November when I will give more detail on the longer-term financial plan. Now I'll turn it over to the operator for Q&A.

Thank you. Your first question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open.

Thank you so much. Wanted to start with the General Education business. The numbers were really strong, I think a lot stronger than most people had thought. What was behind that? I know the past couple of years we've kind of seen that business move or decline a bit and you saw a nice rebound. What's different this year?

I want to highlight two main points. First, I acknowledge that our execution last year was not up to par, and I take full responsibility for that. However, I believe we've made improvements this year, thanks to the team we brought in and the valuable insights they provided from their experience. They identified areas for enhancement, and while we've made progress in execution, there are still many ways we can improve further. I anticipate that we will continue to enhance our execution in the coming years, and I expect to see positive outcomes from these efforts. Second, we've been discussing our enrollments for a while now. This year, we didn't introduce many new career programs, but our overall enrollment strength indicates that there is still a strong market for our business. While there is some overlap between General Education and Career Education, the key takeaway is that there is a robust demand for our programs in both areas, and we believe there's significant potential for growth ahead.

Okay. That's really helpful. And I know typically in the first quarter, I think, Donna, you had mentioned that you typically lose money, and I think the bottom line strength was also really surprising. Were there any timing differences this year? I know you talked about the efficiency, but did we shift some expenses from 1Q to 2Q?

I think it's consistent with what James mentioned earlier. The strength of our enrollment this quarter is largely due to the efficiency measures we implemented last year, some of which were initiated later in the year. Additionally, we did a great job with our teacher hiring, ensuring we maintained the right balance without overhiring or underhiring. All these factors contributed to our strong financial performance in Q1.

And Jeff, I would like to add that our goal as a company, given our current scale, should be to achieve profitability each quarter. There will always be some seasonality in our business, so some fluctuations are expected. However, considering our scale and the efficiencies we've established, our objective must be to maintain profitability every single quarter moving forward.

All right. Great. If I could ask just one more in. I think you said that you expect revenue per enrollment to be up 4% to 6% this year. Is there a difference between Gen Ed and Career Learning?

So we expect most to be within that range, just given sort of where we were in Q1. I would expect Career Learning to grow for the full year to be on the lower end of that compared to Gen Ed. Just again, just based upon probably what we still do in Q1.

Your next question comes from the line of Tom Singlehurst with Citi. Your line is now open.

Thank you very much. Good evening and congratulations on the results. It's exciting to see a significant enrollment increase. I have a couple of questions. First, can you discuss any volume trends related to the number of new schools opening and whether any new states are being added, particularly in General Education? My second question is regarding the guidance; you've set the 2024 guidance at a level that slightly overlaps with 2025. I assume the response will be to wait for further information on November 14th, but I'm curious if we should take anything from the midpoint of 2024 to the midpoint of 2025 regarding growth and margin progression. Thank you.

I'm going to do my best to answer your question, but we had a hard time hearing you. I believe your first question was about the number of states. We are in the same number of states in Q1 as we were in Q4 for both General Education and Career Learning. We've added about five new programs for General Education and four new programs for Career Learning. Regarding our projections for 2024, we're approaching our targets for 2025. Our Investor Day in November will provide a good opportunity to discuss our long-term outlook. Last year, we consistently expressed confidence in our 2025 revenue and AOI numbers. While the path to achieving these may differ, we strongly believe we will reach them, which reflects the strength of our business. Additionally, we experienced significant enrollment and revenue growth in Q1, which will influence our overall numbers for the year.

That's great. Sorry, you managed to interpret my question, so I really appreciate that. One quick follow up, adult learning sequentially was down. Is there anything to read into that? Is that seasonal, or is there a little bit of softness coming through from sort of end markets and tech?

I believe there is something significant to note here. We have managed to thrive despite the overall market conditions affecting the tech sector, particularly in tech education. Our profitable business has been growing for a longer period than most of our competitors. However, it's evident that the technology-focused bootcamp sector as a whole in this country has seen a notable decline. While we think our decline is less severe, we are still facing some macro challenges in this area, which, as a reminder, makes up less than 2% of our total business. This has no substantial impact on our growth outlook and minimal effect on our profitability or margins. Our MedCerts certificate business, on the other hand, continues to perform exceptionally well, and we anticipate significant growth potential there. Nevertheless, we are experiencing some softness on the technology side, but it represents a very small part of our overall revenue.

That's very clear. Thank you very much.

Your next question comes from the line of Steven Sheldon with William Blair. Your line is open.

You have Matt Filek on for Steven Sheldon. Thank you for taking my questions. Wanted to start with one on enrollment trends. Can you provide a little more color on the enrollment trends, particularly when it comes to new student enrollments versus that students that re-registered? And did either of those come in differently than you would've expected?

Both cohorts performed well. If we exclude the anomalous pandemic year, we saw nearly record-breaking performance on both sides. This reflects the growing strength of our program and its increasing appeal to our customers. We have put significant effort into offering programs that cater to our customers' needs at their moment of necessity. Our academic outcomes are showing improvement, as are our state scorecard results. This leads to high net promoter scores, which in turn contributes to an increase in year-over-year retention. Demand for new enrollments remains robust, and more importantly, our ability to convert these new enrollments is also continuing to improve. We learned valuable lessons this past season regarding both demand generation for new enrollments and conversion strategies, which we believe will lead to future successes. Overall, we don’t see notable weaknesses in re-registration, withdrawal rates, or new enrollment trends. Additionally, through the first 24 days of this month, we are outperforming last year, which was notable for its soft enrollment counts. This year, we are seeing significant strength in our business and sustained demand. One structural change brought about by the pandemic that benefits us is that families now enjoy more flexibility in their educational choices. Many families no longer feel pressured to start school on time, allowing them to approach us during the in-year period, which is crucial and beneficial from a demand perspective going forward.

Thank you, James. That's super helpful color and great to hear as well. And then had a one on revenue per enrollment as well. Sounds like you're expecting revenue per enrollment growth in the range of 4% to 6% for the full year. And was just wondering if you could talk about some of the factors that could push the revenue per enrollment growth to either end of that range, and if you would consider that range to be on the more conservative end of the spectrum.

Now, we feel comfortable with the range we provided. It's slightly softer than I mentioned earlier because the year-over-year comparison for Q1 was easier due to enrollment growth last year, making Q1 a simpler comparison. Overall, we are confident about our expectations for revenue per enrollment growth in the 4% to 6% range.

Got it. Thank you and great quarter.

Thank you.

Your next question comes from the line of Alex Paris with Barrington. Your line is now open.

Hi, guys. Thanks for taking my question. And I want to add my congratulations on the very strong first quarter results and the equally strong guidance. A question about execution. You mentioned it several times, James, in your prepared comments. And part of that is uncertain marketing, what are you doing differently now versus last year or the last several years in terms of marketing that has made a difference? And as I recall, I think you brought on a new Chief Marketing Officer. You have a new k12.com website. Just maybe a little review on what you're doing on the marketing front.

Absolutely, Alex, that's a great question. I strongly believe in two fundamental pillars for our business. First is the macro environment, which currently has favorable conditions for us, and second is our ability to execute internally. Last year, our execution was lacking, but we have since hired a new Chief Marketing Officer, Deb Hannah, who has hit the ground running. We also have a dedicated team, including the heads of our enrollment center, operations, and IT, all contributing to a stronger start this year. In terms of marketing, we've recognized some tactical changes over the years that we are continuously looking to enhance. One significant shift is the move away from traditional linear TV, where we've reduced our spending, as our analytics show it's becoming less effective. Instead, we've identified opportunities in search engine marketing, particularly with Google paid search ads, and we have a talented individual leading that team who is effectively exploring opportunities in that area. However, we still have room for improvement in our social media efforts and our additional demand strategies for our Career segment. Our enrollment center is integral to our marketing funnel, and they have made great strides in enhancing conversion rates. We understand that families interested in our services can face unnecessary barriers, so we're working to simplify their experience. This includes the implementation of self-service options and AI initiatives that automate processes and provide tailored responses for our families. We recognize that we have a long journey ahead, but we are committed to a multi-year path of improvements, and we anticipate continued strong market demand moving forward. I hope that answers your question.

Yeah. No, James, this is very helpful and we'll look forward to the Investor Day in November. Thanks very much.

Thank you.

There are no further questions at this time. And this concludes today's conference call. Thank you for attending. You may now disconnect.