Earnings Call Transcript - LRN Q4 2025

Operator, Operator

Thank you for standing by. My name is JL, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stride Fourth Quarter Fiscal Year 2025 Earnings Call. I would now like to turn this over to Tim Casey, VP of Investor Relations. You may begin.

Timothy Casey, VP of Investor Relations

Thank you, and good afternoon. Welcome to Stride's fourth quarter and year-end earnings call for fiscal year 2025. 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 will 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 earnings release and latest SEC filings, including our most recent annual report on Form 10-K and subsequent 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. Following our prepared remarks, we will answer any questions you may have. Now I'll turn the call over to James.

James J. Rhyu, CEO

Thanks, Tim, and good afternoon, everyone. We recently celebrated our 25th year anniversary and continue to see record demand for the products and services we pioneered a quarter century ago. In a rapidly evolving world, our focus is on how we can best serve customers and the market over the next 25 years. First, some highlights from this year that reinforce our market leadership. We were named one of America's best midsize companies by TIME. We were named 2024 Company of the Year by BIG Awards for Business posted by the Business Intelligence Group and Best EdTech Company by the Global EdTech Awards. We received 2 Gold Stevie awards, one for our game-based curriculum and one for our virtual learning solution. We were awarded digital education awards, digital game-based learning product of the year and named the digital education institution of the year. We are one of the largest employers of teachers and education staff in the country offering choice for teachers as well as families. And in a country where more teachers are leaving the profession than entering and where there is a persistent national teacher shortage, we have managed to grow and provide an outlet to teachers who are looking for something different than what the traditional system can provide them. But all of this pales in comparison to the record numbers of families and students we're able to serve. So how can we build on this momentum and also prepare for the next 25 years? The good news is that macro trends around our core business continue to be positive. Demand for school choice is growing, and our customers and potential customers continue to choose us in record numbers. Given where we are, less than 50% through our anticipated enrollment season, we can already see if current trends continue that we will once again achieve double-digit enrollment growth this fall. And we are continuing to invest in new products and services. This will both benefit our core business but also give us new market opportunities to pursue. For example, over the past year, our tutoring business hosted over 100,000 sessions. In this upcoming school year, we are going to offer dedicated tutoring for all second and third graders focused on the core skill of reading. We also continue to invest in our career platform and programs with an emphasis on building a community of resources that offer practical trajectories. And of course, everybody is talking about AI. We are proceeding with our cautious but ambitious approach to enable the use of AI in our programs in a responsible and impactful manner. I said a couple of years ago that we are not going to play into the hype around AI but rather focus on foundational areas and technologies that we can leverage for better customer outcomes and experiences. And we are continuing down that path both in partnership with other providers as well as through proprietary investments that we can leverage our core strengths. We're excited about what the next 25 years hold for us and how we can deliver on tomorrow's education today. Thank you. Now over to Donna.

Donna M. Blackman, CFO

Thanks, James, and good afternoon. As James discussed, we had another strong year, driven by strong demand and the continued momentum in the school choice market. Full year revenue of $2.4 billion was up 18% from last year. We continue to see the benefits of our scale coupled with improvements in marketing, which drove adjusted operating income of $466.2 million, up nearly 60% from last year. Our team served more than 240,000 students and families this year, and I am incredibly proud of what we have accomplished. And as I look at the trends we're seeing for the upcoming school year, I see more opportunities ahead. I'll talk a little bit more about next year momentarily, but I want to first provide more detail on our results for FY 2025. Career Learning and middle and high school revenues were $876.3 million, up 35%. Full year enrollments totaled 96,300, up 33%. General Education revenue was $1.45 billion, up 12%. Enrollment in General Education for the year totaled 137,700, up 13%. Total revenue per enrollment was $9,677, up just slightly from last year. Throughout the year, state mix had an impact on our overall revenue per enrollment, but the strong fourth quarter results meant we finished the year relatively flat. For FY '26, we see some states holding funding flat, while others are increasing funding. So overall, we see a fairly positive funding environment. Additionally, we do not anticipate any material impact on our revenue per enrollment from changes at the federal level. As with any year, revenue per enrollment may also be impacted by state mix and yield. While it's still early in the year, given the current environment, we expect full year FY '26 revenue per enrollment to be relatively flat to up slightly from FY '25. Gross margin for the year was 39.2%, up 180 basis points. As we mentioned last quarter, there is a balance between continuing to invest in the business and improving gross margin. For FY '26, we anticipate making investments in our products and services as we seek to continuously improve the experiences for our students. Therefore, we expect gross margins to continue to grow but at a slower pace than we've seen in the past 2 years. Selling, general and administrative expenses were $524.3 million, up 2% from last year. We will continue to keep our SG&A spending in check, and we expect to see strong operating leverage out of the business going forward. Stock-based compensation for the year was $36.8 million, up $5.3 million from last year. As you saw in our press release, we booked a one-time non-cash impairment charge of $59.5 million related to our Galvanize business. This charge is associated with 2 aspects of the business. First, $27.3 million is a pull-forward of lease expenses associated with our co-working business, which has never recovered from the COVID pandemic. And $32.2 million is a trade name write-down due to the continued IT software business decline, which we've previously discussed. Given the one-time nature of this charge, we have excluded this from our adjusted profit metrics. For the year, adjusted operating income was $466.2 million, up nearly 60% from last year, and adjusted EBITDA was $571 million, up 46% from the prior year. Diluted net income per share totaled $5.95, up 27% from last year. As I mentioned last quarter, we're introducing a new metric this quarter, adjusted earnings per share, in order to give investors a better sense of the ongoing operational performance of the business. Similar to our other adjusted metrics, adjusted earnings per share excludes stock-based compensation, amortization of intangible assets and any one-time adjustments. Additionally, the metric nets out the tax impact of these adjustments and includes the impact of the shares we expect to receive from the capped call transaction associated with our convertible notes. We believe this new metric will also help investors better understand the net impact of the convertible notes on our earnings per share. For the full year, our adjusted earnings per share was $8.10, up 48%, compared to $5.49 in FY '24. A reconciliation of adjusted EPS is provided in the earnings release and the presentation accompanying our webcast. Our effective tax rate for FY '25 was 24.4%. Capital expenditures were $60 million for the year. Free cash flow, which we define as cash from operations less CapEx, was $372.8 million, up $155.6 million from last year. We finished the year with cash, cash equivalents and marketable securities of just over $1 billion. This year was another record year for Stride with continued strong revenue and profitability growth. And while it's still early in the enrollment season, given that historically August and September are our busiest months, we are on track for another year of strong growth in FY '26. And as we've done in the past, we'll wait until the first quarter earnings to provide formal enrollment guidance. However, I'd like to add a little color to the comments James made about our anticipated enrollment growth for the first quarter. Based on our latest data, we expect year-over-year enrollment growth to be in the range of 10% to 15% in the first quarter. It's still early in August, and we will need to continue to execute against what we believe is a strong market trend. A few additional notes for FY '26. Seasonality for next year should be in line with FY '25. SG&A as a percent of revenue should continue to decrease marginally, while CapEx as a percent of revenue is anticipated to be relatively flat. Stock-based compensation will increase slightly from this year, and interest expense and the tax rate should be in line with FY '25. Thanks so much for your time today, and I'll turn the call back over to the operator for your questions.

Operator, Operator

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

Jeffrey Marc Silber, Analyst

Congratulations on the quarter and the strong year. I was wondering if we can just talk about fiscal '26. I really appreciate you giving us at least some framework of what you're expecting. You talked about the 10% to 15% potential enrollment growth in the first quarter. And I think you've caveated that with saying if current trends continue. So can we just talk about what current trends you're talking about and where you are seeing that strength? What's driving that 10% to 15% expectations?

James J. Rhyu, CEO

Yes. I mean I think we've been pretty consistent that we sort of view demand as application volumes as a proxy for demand. And so when we see early funnel activity, i.e., demand is strong, we're really talking about applications. And I think applications have been a much more proven indicator of demand for us. It's much more reliable. It does require some level of increased effort than just clicking a button. So families tend to convert higher. We're not yet, I think, 50% through what we anticipate the season to be. So it is a little bit early, but I think those demand indicators, they look strong year-over-year. They look strong. And so we're pretty bullish that these trends should hold up and we'll have a strong fall.

Jeffrey Marc Silber, Analyst

All right. That's really helpful. My follow-up was just regarding either new contracts or lost contracts. I know there was some noise out of New Mexico, but you issued a press release last night. So maybe we can get some specific color in terms of what's going on there. And are there any other major changes that we should be aware of for the upcoming fiscal year, both positive and negative?

James J. Rhyu, CEO

Yes, there are no significant changes for the fiscal year. As I've mentioned before, client turnover is a common occurrence in business, and ours is no exception. However, the strength of our franchise remains evident. We had an unfortunate situation in New Mexico with a partner who didn’t meet our expectations, but we quickly established a pipeline of new potential partners and successfully signed up a couple of new districts. This highlights the strength of our franchise rather than any disappointment on our part. It’s unrealistic to expect 100% client retention in any business, and we will encounter client turnover from time to time. Nevertheless, our franchise's strength will allow us to overcome these challenges and continue to grow. New Mexico has a unique population, and our programs are particularly beneficial to them. Notably, families who participated in our program last year have transitioned to our new offerings instead of remaining with the legacy program. This indicates a clear preference for our program and approach, emphasizing the strength of what we provide.

Operator, Operator

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

Gregory Scott Parrish, Analyst

Congrats on the results. And thanks for all the color heading into next year. I guess maybe I want to start with your long-term framework, especially on operating income. You've outperformed your targets and essentially hit them already. But thinking about the 10%, 20% framework, now that you've exceeded your plan and you've rebased the margin higher, I guess, the question is, does that get harder from here to grow operating income at twice the rate of revenue? And then thinking about next year, more specifically, is EBIT growth 2x revenue growth? Is that still the right target when thinking about next year?

James J. Rhyu, CEO

Yes. In any business, it becomes increasingly challenging to achieve growth as you scale. Mathematically, it becomes harder to double your revenue growth. We have set ambitious targets in previous years and have consistently surpassed them, but we need to reevaluate our approach. As Donna mentioned, our gross margin expansion is expected to level off this year and into the future. I don't believe we'll see the same level of gross margin growth, which has a significant impact on our 10% and 20% growth model. Therefore, it will likely become more difficult. However, if we can maintain our growth and the market demand remains strong, our investors should be satisfied with outcomes between 10% and 18%. This year, we will reassess our planning and provide updates either later this fiscal year or soon after.

Gregory Scott Parrish, Analyst

Great. That's helpful. And then maybe I come back to funding. One question on the fourth quarter number. I think the Career Learning, the 4Q number was pretty strong. I think that's sort of a true-up for the year. Maybe you could help us understand where that came in better than expected. I don't know if there's anything to call out. And then maybe bigger picture heading into '26, I mean, a lot of noise out there, all the federal funding and sort of districts facing uncertainty and state budgets, et cetera. Maybe kind of just flesh out what you're seeing. I know you called out your expectation for flat, but maybe just kind of anything to call out from your conversations with states.

Donna M. Blackman, CFO

Yes. Regarding Q4, I focus on overall revenue per enrollment rather than distinguishing between General Education and Career Learning, as it often depends on the mix of both. I want to reiterate what I mentioned in my prepared remarks: we've seen continued strength throughout the year. Initially, we anticipated some softness due to the mix, but as the year went on, those numbers improved, and we ended the year on a higher note. Additionally, we experienced favorable funding related to growth and completion funding in Q4. Overall, both General Education and Career Learning performed strongly. Concerning the funding environment, as I noted, it appears favorable. Some states plan to increase funding while others remain flat. We believe this will create a positive funding environment for 2026. At the federal level, we do not expect any significant impact on our funding for 2026.

James J. Rhyu, CEO

The positive news regarding funding is that, in addition to what Donna mentioned, our partners are benefiting from a strong funding environment, and their financial situations continue to improve. This environment provides residual benefits because our partners have solid balance sheets, which ultimately helps the customers they serve. It's a very healthy situation for our sector. As Donna indicated, we have not observed any negative consequences from the federal government's actions so far, and we support their focus on school choice for families in this country, which we believe is a positive direction.

Operator, Operator

Your next question comes from the line of Jason Tilchen of Canaccord Genuity.

Jason Ross Tilchen, Analyst

I would like to follow up on the earlier comment about the slower pace of gross margin expansion next year. Can you share where some of the investments in products and services will be directed and how they could enhance the experiences of students or teachers? Additionally, what are some notable opportunities for cost savings in the near term?

James J. Rhyu, CEO

I may not have the exact figures, but when I started this role about four or five years ago, our gross margins were around 33 percent, and now we are nearing 40 percent. This represents a significant improvement. Throughout this time, we have also focused on making ongoing investments in our programs. This year, we are doing something a bit different by offering high-dosage tutoring services to all second and third graders, specifically addressing the crucial need for children to learn to read by the third grade. It’s a major investment, and we will evaluate its effectiveness. However, as Donna mentioned, this does not imply that we expect any reduction in margin. We are finding alternative ways to finance this, although it may mean that the pace of margin expansion will slow down. In terms of opportunities, I believe there is considerable potential for efficiency gains by adopting technologies like AI, among others, which we will continue to explore.

Donna M. Blackman, CFO

We saw a growth of 180 basis points in gross margin this year and 220 basis points last year. We will be making additional investments aimed not only at improving student outcomes through tutoring but also in enhancing our engagement initiatives. You’ve heard us discuss our K-12 zone and our focus on investing and operating within that space.

Jason Ross Tilchen, Analyst

Very helpful. One quick follow-up, if I may. The Adult Learning business showed a little bit of stabilization in Q4. The decline there was much lower than in the first 3 quarters of the year. Just wondering if you could share anything about the transition that's ongoing there. And anything else you're seeing from the demand environment for those platforms?

James J. Rhyu, CEO

Yes, this has definitely been a miss on our part and a disappointment. There’s really no way to sugarcoat it. The markets have turned against us somewhat, especially in the technology sector. However, we have made some changes in the past couple of months. The demand side, particularly in health care, remains an opportunity for us. We need to execute better than we have. I believe there's potential for us to improve our execution and still derive value from these areas. Unfortunately, we haven't performed well on the tech side, and the demand has shifted against us. It’s not a great situation for us, and we must improve in that area.

Operator, Operator

Your next question comes from the line of Alex Paris of Barrington Research.