Stride, Inc. (LRN) Q2 2025 Earnings Call Transcript

Good day everyone and welcome to the Stride in Q2 FY 2025 earnings call.

Just a reminder, today's call is being recorded. I would now like to hand things over to Mr. Tim Casey. Please go ahead, sir.

Thank you and good afternoon. Welcome to Stride's second quarter earnings call for fiscal year 2025. With me on today's call are James Rue, 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 file. 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'll answer any questions you may have. Now, I'll turn the call over to James.

Thanks, Jim. We have once again posted record enrollments, copying 230,000 students. We continue to execute against the backdrop of ongoing strong demand. Coming out of the pandemic, we were all uncertain if the increase in demand for our programs was structural or temporary. And for three consecutive years now, we have seen increasing growth in our business. And also for three consecutive years, we see continued in-year strength in demand. The macro environment for our business is as strong as ever. And as long as we can continue to execute effectively, I believe we can benefit from these conditions. While every business has challenges, I believe most of ours are currently within our control. Many of our most significant challenges are to just continue improving and executing well. Not just in how we have traditionally run our core business, but across all of our initiatives. That includes initiatives that I believe can take our core business to a new level while also providing us with new market opportunities. We see some early signs that our investments will pay off, but we need to remain vigilant to ensure we are setting ourselves up for success over the long run. I remain very bullish on our prospects for future growth. We're seeing continued demand for our core offerings, growing support for school choice options, and a student base seeking real career training. As a company, we're in a strong financial position and have an incredible team committed to delivering for our customers. Thank you, and I will now turn the call over to Donna.

Thanks James, and good evening. This quarter confirms we're now in our third year of in-year enrollment growth in our full-time programs. We've talked a lot about market conditions that are pushing families to seek education alternatives, and our results demonstrates that our programs can be an effective solution for many of these students. In light of this continuing strength, we're raising both our revenue and profitability guidance for the full year, which I'll cover in more detail later. Turning to our quarterly results, we reported revenue of $587.2 million, an increase of 16% from the second quarter of fiscal year 24. total average enrollments of 230.6 thousand up 19.4 percent adjusted operating income of 135.6 million dollars up 43 percent from last year earnings per share of two dollars and three cents up 32 percent from last year and capital expenditures of 14.8 million dollars up from 12.7 million last year revenue in our career learning middle and high school programs grew 29 to 213.1 million dollars this strength was driven by enrollment growth of 30.9 percent year over year general education revenue was 354.3 million dollars up 13 percent from last year also driven by continued enrollment growth in the quarter average enrollments were up 12.5 from last year to 135.8 thousand during the quarter we saw accelerating enrollment growth in both of these lines of revenue. As I mentioned earlier, this is now the third year in the role that we've seen strength in in-year enrollments. Total revenue for enrollment across both lines of revenue was $2,395, essentially flat to last year. As we mentioned last quarter, We're seeing some impact from state mix, but we're still seeing a largely positive funding environment. Given these dynamics, we expect to finish the year down 1% to 2% in revenue per enrollment. Softness in our adult learning business continues, and we finished the quarter with revenue down $6.1 million from last year to $19.8 million. dollars gross margins for the quarter were 40.8 percent up 100 basis points from last year we still expect to see gross margins improve 100 to 200 basis points for the full year selling general and administrative expenses decreased marginally to 114.8 million dollars while we've seen declining sgna spend in the first half of the year as i mentioned in the first quarter, I expect to see some increase in the back half of the year. We should finish the year up slightly compared to FY24. Stock-based compensation for the quarter was $7.9 million. We now expect to finish the year with stock-based compensation in the range of $33 to $37 million. dollars adjusted operating income for the quarter was 135.6 million dollars up 43 percent from last year adjusted evita was 160.4 million dollars up 36 percent interest expense for the quarter was 2.7 million dollars our effective tax rate for the quarter was 25.7 percent diluted earnings per share for the quarter were two dollars and three cents our eps calculation includes incremental shares related to our convertible notes on an as-is converted basis for gap reporting purposes. These shares are included in our diluted share count but are not yet issued. However, some of the diluted impacts of these shares will be offset by the cap call transaction we completed at the time of a note issuance, up to an upper strike price of $86.17 per share. We're now including a table in our quarterly investor presentation that shows the potential dilution from our convertible note at various share prices, as well as the offset from the capital. Turning to our balance sheet and cash flow, capital expenditures for the quarter were $14.8 million, up from $12.7 million last year. Free cash flow, defined as cash from operations, less CapEx, was $208.6 million, up $48 million from the prior year period. We finished the quarter with cash and cash equivalents of $515.1 million. Given the continued growth in enrollments and margin improvements, we are raising our full-year revenue and profit guidance and now expect revenue in the range of $2.320 to $2.355 billion, up from $2.225 to $2.3 billion last quarter. Adjusted operating income between $430 and $450 million, up from $395 to $425 million last quarter. Capital extended here is between $60 and $65 million unchanged from last quarter. And an objective tax rate between 24 and 26%, also unchanged from last quarter. For the third quarter, we are forecasting revenue in the range of $585 to $600 million, adjusted operating income between $130 and $140 million, and capital expenditures between $15 and $17 million. Thank you so much for your time this evening, and now I'll turn the call over to the operator for Q&A. Operator?

Thank you. And everyone, if you would like to ask a question today, please press star 1 on your telephone keypad. Once again, that is star 1 for questions. We'll go first to Jason Tilchen, Canaccord Genuity.

Great. Congrats on the strong results, and thanks for taking my questions. I have two, if there's time. The first, I'm just wondering if you could unpack some of that enrollment momentum a little bit, maybe talk about some of the the differences in the funnels you're seeing for career learning and general education and how some of the enrollment numbers on a gross basis are trending versus how retention has been compared to last year.

Yeah. Hey there, Jason, James. I think the basic, I think a little bit. Great.

That's really helpful. And just one follow-up. You recently announced the rollout of K-12 tutoring nationwide. I'm just wondering if you could share any early learnings in that rollout and sort of any additional color on sort of how the go-to-market is going to develop there when you expect sort of more material contribution from that on the overall business.

Yeah, I think the – so for us, it's – you know, if you think about other business –

Really helpful. Thanks a lot.

And we'll take the next question from Jeff Silber, BMO Capital Market.

Thanks so much. Just wanted to drill down a bit on the prior question. There's not a lot of good industry data out there, but from what we've been able to see, you guys have really been dramatically outperforming the industry. Is there anything specific that you're doing that maybe some of your competitors are not to drive that outperformance?

So, yeah, you know, all those rise now, what's happening.

All right, that's helpful. If I could switch gears and talk about the funding environment, we've been seeing a lot of noise out of Washington in terms of freezes or pauses, et cetera. I know you don't get a dramatic amount of revenues directly from the federal government, but is there anything maybe that indirectly comes to you from Washington through the states? I'm just wondering what kind of exposure you might have. Thanks.

Yeah, so are, you know, I think well less than five. You know, listen, I think the downstream impact that people maybe aren't yet seeing.

I really appreciate the call, James. Thanks.

We'll take the next question from Alex Parris, Barrington Research.

Hi, guys. First off, I'd like to ask you a couple of clarifying questions. In the first question, James, you responded about strength across the board in enrollment. I'm presuming you're talking about new student enrollment. The question would be, how has retention been faring?

Yeah. Retention, I think, generally speaking, that's right. Year over year, we're seeing retention numbers that are sort of plus or minus that they can go in and major plus things like when I provide some longer-term benefits.

Great. That's helpful. And then on that same question, the final comment you made was you said something about incremental career funnel has not materialized as strongly as we expected or hoped. But then I look at the career learning enrollment up 31% year over year. Did I misunderstand your response? Or perhaps you could all respond to color.

No, I think you got, you got, you got, you understood the response.

Good to hear. Last question, and I hate to pick it, the only negative thing in this report. Adult revenues were soft, 19.8 million, even a little bit below where they were in the first quarter. I guess the first question on that is, what's the makeup of that segment now? I realize there's two boot camps and med certs, maybe a proportion. Med certs, I'm assuming it's the largest, but whatever color you could give there would be helpful. I know it's very small as a percentage of the total, I think 4% on a last 12-month basis, but I was just curious.

Yeah, I think the behind them.

Great. And then just one more clarification question came into my mind. In answering the question about federal funding, you've said before it's well less than 5% of revenue. Is this ESSER we're talking about or are there other things in there like Title I and so on? That's great. Thank you so much for answering my questions and congratulations on the strong quarter.

And everyone, just a reminder that it is Star 1 if you have a question today. We'll go next to Stephen Sheldon William Blair.

Hey, Jason and Donna, you have Matt Filick on for Stephen. Great results this quarter, and thank you for taking my questions. Has your optimism about being able to open new schools in new states changed at all, especially with the president pushing for universal school choice? Just curious how you're thinking about that.

Either way, you run the business either way, given changes. I honestly do think that I don't know that it will.

That's a helpful explanation. james thank you for that and then wanted to ask one on career learning i think you have talked about your desire to build out pilot programs for skilled trades like plumbers hvac repair so can you talk a little bit more about that and what that opportunity could look like yeah so um we have run a couple tests already actually okay sounds good and then lastly just wanted to quickly confirm are there any schools that are currently getting close to hitting enrollment caps, especially in light of the strong enrollment growth in the recent quarters. Great. Thank you, team. Appreciate the time.

And that does conclude our question and answer session. That also concludes our conference for today. We would like to thank you all for your participation. You may now disconnect.