Earnings Call Transcript - LRN Q1 2023

Operator, Operator

Ladies and gentlemen, thank you for being here and welcome to Stride, Inc.'s First Quarter Fiscal 2023 Earnings Call. All lines are currently muted to ensure a clear audio experience. After the speakers finish, we will open the floor for questions. Tim Casey, Vice President of Investor Relations, you may start the conference.

Tim Casey, Vice President of Investor Relations

Thank you and good afternoon. Welcome to Stride's first 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 Investors 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'll answer any questions you may have. I will now turn the call over to James. James?

James Rhyu, Chief Executive Officer

Thank you, Tim, and good afternoon everyone. The world has been volatile to say the least these past few years with many companies reeling from the impact of that volatility. When the COVID pandemic first hit, we were coming off a decade of strong economic growth, a long bull market, and historically low inflation, interest rates and unemployment in a relatively peaceful global environment. Fast forward a couple of years and we've experienced not one, but two stock market corrections, almost double-digit inflation, interest rates that have tripled and heightened global tensions. Amid all this turmoil, there is one constant that gives me optimism, the resilience, ingenuity, and resolve of America and in particular, its younger generations. In this environment, for us to continue to provide opportunities for this country to prosper, we need to ensure we are adapting to an increasingly diverse and evolving world. I believe part of that evolution is changing how we think about education. We need to focus our younger generations on skills and tools that will help them succeed in the digital world, and this requires rethinking some of the norms that we've held here for generations. The model Stride has built in Online and Career Learning has taught us a lot about some of the vulnerabilities in our education system. First and foremost, we need to begin treating our customers like customers. We should be listening to them and innovating to meet them at their point of need. And those customers extend beyond the students to include the families, teachers, and employers, who will empower the next generation and build on America's legacy. And as we have listened to our customers, a few key themes emerge. Students and parents need more options, not just online and brick-and-mortar programs, but options around what our children learn, how they learn, and even when they learn. Teachers continue to be the backbone of each child's education, even as the role of the teacher is evolving. And then many teachers are reeling from the stresses of the pandemic and questioning their role in education. So, we need to find ways to further support and enable them. Students are also telling us that they learn in different ways than their parents did. They want more say in what they learn, and they want their education to be practical and digital. They want technology infused throughout the experience and they want that technology to be on par with the technology they use in their everyday lives. Over the past several years, the rollout of our Career Learning programs has tried to address some of the feedback. Our programs deliver in-demand career certifications for students in middle and high school. We saw that employers were struggling to hire talent with the right hard and soft skills and we knew we could help. In 2018, we enrolled less than 2,000 students in these nascent programs. This year, we have over 60,000 students in these programs and we're just now starting to get enough scale to really have an impact on the talent gap. While it is still only a small fraction of our 2030 goal to have more than 100,000 graduates from our Career Learning programs, we are making good progress. Additionally, the pandemic has exacerbated both the need we see in the marketplace and our resolve to deliver on our programs. Employers still struggling to identify, recruit, and hire skilled workers; numerous studies have confirmed these challenges and demonstrate the importance of our Career Learning programs. We offer programs to teach real skills that are in high demand in the current environment and will be in high demand for years to come. Computer and IT-related jobs will continue to drive a digital economy. Healthcare physicians are expected to add 26 million jobs by 2030. We will be part of training these future employees. Investment in our Career programs achieved significant step forward this fall. We launched the positive of our new career platform that provides what our customers have been asking for: an all-inclusive solution for career education. The platform leads students through personalized career exploration to help them decide which career paths may be right for them. They are directed to self-paced training to develop the skills they need to be successful and they are able to obtain industry-recognized certifications and use these skills and certifications to access internship and job opportunities. That seamless customer journey from exploration to job provides a new paradigm for students to succeed. And the best part is that we intend to make this free to all students. No more college debt. The platform also helps schools and districts solve their own set of challenges. Schools believe that preparation for the workforce is the number one measure of success for their programs. 90% of school districts say that Career Learning is their top priority. 75% of school districts are considering outsourcing their Career Learning options. With our platform, schools don't have to increase spending as we are offering this to school districts at no cost. Given the current staffing challenges and desire to recruit skilled staff, we can monetize the platform through replacement and recruiting fees that employers are already conditioned to pay. This means that schools can address their challenges without budget impact, students can get the training and certifications they need at no cost to them, and employers can access highly skilled and certified employees without increasing HR budgets. It's a win for everyone involved. We've already received some extremely positive feedback from our pilots we spread across major metro areas to rural school districts. In addition to our fast-growing middle and high school business, our adult learning business is growing at over 25% a year. We are now on a run rate of over $100 million and on pace to hit $200 million over the next several years, and each of our product lines will grow this year for the first time. We are also investing in both our professional development and tutoring platforms. That tutoring platform will match students with certified U.S.-based teachers, not tutors on the other side of the world. We want to enable the teachers right here in the U.S. to earn more. And speaking of teachers, we realize that we can also help with the teacher shortage problem plaguing many school districts in our country. Over the summer, we rolled out a teacher shortage hybrid solution that can supplement districts' local teachers. We continue to provide more and more tools for teachers to help them be more efficient and effective. We just completed our first gaming series using the Minecraft game to provide lessons in history, geography, and science. This and other co-curricular offerings are growing at an exponential pace. Our art and photography contest are drawing interest from tens of thousands of entrants, compared to just a few thousand last year. Our Esports leagues and programs just completed a summer school program that was oversubscribed many times over and now counts tens of thousands of users. By listening to our customers, we have delivered these programs and shown the ability to dramatically improve retention compared to pre-pandemic levels. Our new enrollment withdrawals are at all-time lows and we welcomed our largest cohort of registrations thus far. It's all about focusing on our customers and their outcomes. That includes more job placements than ever and stronger academic outcomes as well. We all know about the learning loss that most schools experienced during the pandemic; that has been written about extensively this week. Well, over the past two years, the programs we manage have seen improving graduation rates; improved course pass rates; increasing retention rates; and positive increases in ELA reading, math, science, and social studies. So our model has proven itself in the face of the pandemic. And parents and students continue to demand more choice in their education. 70% of parents want schools to offer multiple learning modes, including in-person, online, and hybrid options. Our school districts are starting to move away from offering the more choice that they offered during the pandemic. In January 2022, 40% of public schools offered full-time remote instruction, but by June of this year, that number had dropped to 33%. Meanwhile, only 10% of public schools offered a hybrid option. Stride will continue to offer parents and students multiple options for their education and the landscape appears to be supporting us. Over just the past two years, 20 states have started to expand voucher-type programs. This is a great start, but we believe more can be done to allow families to attend their preferred school. While our general education enrollments have fallen more than we hoped, much of that is because families aren't embracing our career programs. But we can still do a better job in attracting a broader range of new families to our programs in both career education and general education. And while our enrollments are up around 40% from pre-pandemic levels, our revenue is up over 70% and operating income is up over 500%. So we have demonstrated an ability to scale extremely profitably while also investing in innovation at the same time. Now for this fiscal year, just like last year, we set our intent to grow, and our first quarter results and full-year guidance indicates we will. While enrollments overall are lower, we are finding ways to make up for that shortfall with other products and growth vectors. We think general education enrollments have probably bottomed out at these levels and the other growth areas will continue, which sets us up for a longer-term trajectory of growth. In addition, in spite of the tremendous pressures we're feeling from inflation, we are finding ways to be more efficient and find more leverage in our business. On both the top and bottom lines, our guidance range this year is a little larger than most because we see opportunity in-year to find ways to improve our results. So we believe you will see that improvement as the year progresses and we will narrow in our guidance range accordingly. One early example is that our enrollment numbers since September 30, pre-pandemic have shown October to be a month that sees a deterioration in enrollments. That trend returned last fall, but so far this October, we have seen a net increase in enrollments. As you may remember, last year we saw in-year demand as measured by application volumes be 20% to 30% higher than the previous year. But so far this year, we are seeing application volumes several percentage points higher than even last year. In-year new enrollment volumes for the first few weeks of October are more than 20% higher than last year and well over 50% higher than pre-pandemic levels. Ultimately, our goal for the year will be to continue to expand on the top line growth and aim to achieve a basically flat year-over-year adjusted operating income plus or minus a few percent. Longer term, we remain committed to the 2025 targets we previously communicated. Given the range of products and services we're putting in the market that we were not aware of when we set our original 2025 targets, I see the opportunity to create even greater value for our customers and stakeholders than when we issued them. It's the incredible people in the Stride community that make all of this possible. From educators to administrators, there isn't a more passionate and dedicated team in the industry, and we are still at just the beginning of our journey to disrupt the education system. More to come, thank you so much for your time today. And now I'll pass the call over to our CFO, Donna Blackman. Donna?

Donna Blackman, Chief Financial Officer

Thank you, James, and good afternoon, everyone. I want to start by thanking all of Stride’s employees for another successful school launch and enrollment season. It always impresses me that we can enroll and onboard hundreds of thousands of students onto our platform. We know how important it is for students and families to have a smooth start to the school year, so I thank all of the Stride teachers, administrators, and support staff for their hard work. Now turning to our reported results, revenue for the quarter was $425.2 million, an increase of 6% over the same period last year. Adjusted operating loss of $19.9 million was down compared to last year. Capital expenditures were $16.8 million, an increase of $1.4 million over last year. Career Learning demonstrated strong enrollment growth coupled with increases in revenue per enrollment, delivering another quarter of revenue growth for Stride. General education enrollment and revenue have declined but remain above pre-pandemic levels. These results demonstrate what we have been saying for the past two years: Stride will emerge from the pandemic as a stronger company with a fast-growing career and adult learning business and a solid core general education business. Overall, Career Learning revenue for the first quarter increased 63% to $153.5 million, driven by strength in middle and high school career enrollments and adult learning growth. Career Learning middle and high school revenues were $125.5 million. Enrollments for middle and high school reached 61.6, a 47% increase from last year. We are incredibly impressed with the continued enrollment growth in this business and believe it will be a growth driver for many years to come. Revenue per enrollment for the quarter was $200,029, up 20.2%. Some of the strength is timing-related, and we anticipate finishing the year up 7% to 10%. Adult learning also continued to show strong gains with $28 million in revenues, up 24% from last year. This business is on track to achieve over 30% growth year-over-year for the full year. General education revenue decreased to $271.7 million or 11%, due to a decline in enrollments from our pandemic high. General education enrollments decreased to 112.3, still up almost 2,000 from pre-pandemic levels. It's important to note that even with the general education decline, our overall enrollment, including Career Learning, is up significantly from before the pandemic. We believe that as we've expanded our Career Learning options, some other students and families who would otherwise have chosen general education have opted for Career Learning offerings. The decline in general education enrollment is somewhat offset by an increase in revenue per enrollment of 2,216, up 18% from last year. Similar to Career Learning, the strength in revenue per enrollment was partially timing-related, and we would expect to finish the year up 7% to 10%. Gross margins for the quarter were 30.5%, down 110 basis points compared to the first quarter of 2022. This year, we expect a normal seasonal pattern in our spending and profitability. However, as we mentioned last quarter, we do think there will be some tightening of our gross margins for the full year due to inflationary pressures, which I'll discuss more shortly. We believe we could see a reduction of up to 200 basis points for our full-year gross margin. Selling, general and administrative expenses for the quarter were $158.4 million, up $25 million from last year. The increase in SG&A is primarily driven by higher costs associated with marketing and enrollment, as well as increases in our adult businesses as they continue to scale. Stock-based compensation expense for the quarter was $5.5 million, down from last year due to the timing of stock-based grants tied to our Career Learning business. We expect fiscal year 2023 stock-based compensation expense to increase marginally from last year in the range of $20 million to $25 million. Adjusted operating loss for the quarter was $19.9 million. Adjusted EBITDA was $3 million. Profitability for the quarter was impacted by increased marketing expenses, as well as earlier teacher hiring. As we anticipated, inflation has driven up our costs faster than revenue per enrollment funding increases. Inflation has impacted all companies, and we are not immune. As we said last quarter, we are fully funding teacher and staff salary increases because it is important for students to have instructional consistency. We made these decisions even in the face of increasing materials and marketing expenses because we believe it is the right thing for the company and the long-term. We are continuing to drive efficiencies throughout the company by finding scale, leveraging our nationwide footprint, and increasing material-free courses. Moreover, we are still in a strong financial position, and we remain committed to investing in our new products. These initial investments will ensure market fit for pilot programs and drive earlier revenues, and we believe the investment will deliver long-term growth opportunities. While we expect to see a decline in both growth and operating margins this year, we believe we can offset these declines through ongoing efficiency efforts. However, there is still work to be done, and we will need to execute on these efforts to continue driving margin improvements in the year. I want to emphasize that we still believe we can achieve our 2025 target. Inflationary pressures and a looming potential recession will present challenges, but we strongly believe we can meet these. An improving funding environment, strength in career and adult learning, new products, and a return to moderate growth in general education enrollment position us for success in the years ahead. While we may achieve our target in a slightly different way than we originally anticipated, we believe there are ample opportunities for us to meet and exceed our original target. Interest expense for the first quarter totaled $2 million, and we expect full-year expense to be between $7 million and $9 million. Our effective tax rate for the quarter was 25%. For the full year, we believe we will finish with a tax rate in the 27% to 29% range, similar to the prior year. Diluted loss per share was $0.54. Capital expenditures in the quarter totaled $16.8 million, up $1.4 million from last year. As you can see from our guidance, we will continue to invest behind our new mainstream products this year. We believe these products will expand our addressable market and expect them to impact growth in the coming year. Free cash flow in the first quarter, defined as cash from operations less capital expenditures, was negative $160 million, compared to negative $146.9 million in the prior year period. This reflects our normal seasonality of cash flows related to school launch enrollment and onboarding of new students. As is typical, we expect to see positive cash flow for the next three quarters. We ended the quarter with cash and cash equivalents of $194.5 million. Our strong cash position allows us to continue investing in organic growth opportunities. Turning to our guidance for the second quarter of fiscal year 2023, we are forecasting revenue in the range of $435 million to $465 million, adjusted operating income between $70 million and $80 million, and capital expenditures between $17 million and $20 million. For the full year, we forecast revenue in the range of $1.71 billion to $1.79 billion, adjusted operating income between $160 million and $190 million, capital expenditures between $70 million and $80 million, and an effective tax rate between 27% and 29%. To summarize, we anticipate another year of growth for Stride driven by strong Career Learning and adult learning results. While short-term margins have been pressured by inflation and investments in new products, we are still in a strong financial position with an excellent balance sheet. We believe our shift towards Career Learning six years ago has set us up for long-term success. We are also excited about the next few years as we begin to see how our new products succeed in the market. Thank you for your time. Now I'll turn it over to the operator for Q&A.

Operator, Operator

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

Jeff Silber, Analyst

Thank you so much. I know the focus of the call was mostly on Career Learning, I completely understand it, but I'm going to start with General Education. Obviously, the enrollment decline was pretty surprising at least to us. Should we get into a little bit more color there, I mean, did you lose any contracts? Is it more of a competitive issue? Any color on that would be great.

James Rhyu, Chief Executive Officer

Yes, I think, so first of all, I think that the Gen Ed enrollment sort of bottomed out, and if you look pre-pandemic, our General Education business is sort of around those pre-pandemic numbers, so we feel pretty good that it's bottomed out at this level. We certainly see the return to school post-pandemic having an impact. I think we see some fatigue in the marketplace around online learning and we see some increased competition from local brick-and-mortar schools. Having said all that, I also think that our execution this summer could have been better. And so I think it's a combination of factors. But overall, I think we see overall demand in the market for online education continuing to increase post-pandemic, and I think that we probably did lose a little bit of market share, and I think that's on us to improve. But I think the overall market for us continues to improve. And I think the overall market opportunity in both General Education and Career Learning is going to continue to improve. So, I think that we've got some work to do to improve our execution, but I think the markets are there for us, and I think that we got to execute better.

Jeff Silber, Analyst

So let me just dig into those comments just a little bit. Maybe we can talk about some of the execution. Can you give us some examples of things that you might need to improve?

James Rhyu, Chief Executive Officer

Yes. And I think, for example, we went into this year, I think less clear about the messaging we were putting into the market post-pandemic. I think we also had a number of situations throughout the country that either a teacher-strike or uncertainty around school situations; we could have been more localized in how we communicate with a certain market. So, I think part of it is really just adapting better to being a national footprint player, but having more localized messaging, because the reality is we're particularly with the pandemic. The sensitivities around school options and school choice have become very localized. And I think that a lot of what our messaging needs to do is to actually drive into local residents as opposed to sort of the national cookie-cutter, if you will, approach.

Jeff Silber, Analyst

In your comments like that, some of the reasons why you think enrollments may have bottomed out, you think there could be room for some improvement if you do improve the execution next year?

James Rhyu, Chief Executive Officer

Yes. I can provide a couple of recent examples that I mentioned earlier. Over the past 24 days since the end of the quarter, we have observed improvements in our numbers, particularly when excluding the pandemic impact. October is typically a period when we see a significant influx of fall enrollments, followed by some attrition into November. However, this October, we actually gained enrollments. This indicates that our execution is gradually improving. Additionally, the ongoing circumstances in education seem to be working in our favor, as parents and customers are actively seeking alternatives and may be disappointed with the offerings in some traditional school districts. We continue to be a strong option for them. Therefore, I believe there is evidence suggesting potential for growth both this year and into the next.

Operator, Operator

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

Greg Parrish, Analyst

Hey, thanks for taking my question. I mean, sort of double-down on this, but why is this the new baseline in Gen Ed because I mean you mentioned a couple of things that there is competition from brick-and-mortar. And brick-and-mortar knows how to do this now. There's also, and you mentioned this in your remarks, as well as some cannibalization to middle and high school. So I mean, I guess, what gives you such confidence that like this is the new baseline going forward?

James Rhyu, Chief Executive Officer

I believe the general public and most customers would disagree that brick-and-mortar schools have figured out how to succeed. Based on the information, research, and studies we have access to, it's clear that most brick-and-mortar schools have not found an effective approach. Customer satisfaction with their programs is lacking. This is one crucial observation. Additionally, it appears that brick-and-mortar schools are becoming less focused on promoting their virtual programs. While some still offer these programs, there's a noticeable shift away from emphasizing them. I also anticipate that we'll see a growing trend in outsourcing these programs, as many institutions may recognize their limitations in delivering them effectively. Regarding cannibalization, although we are experiencing some overlap, the strength of our current fall pipeline suggests we may be reaching a stabilization point. Continued uncertainty in the market tends to benefit us, especially with the emergence of new virus variants causing spikes. This ongoing uncertainty, which we've been indicating for two years, doesn't seem to be dissipating. We believe we have established a solid foundation moving forward, but it's a valid question, and we will continue to monitor the situation.

Greg Parrish, Analyst

Okay, that's very helpful. Thanks. And I want to talk about the operating income margin guidance because I mean, it sounds like you need a couple of things to happen to get that, and maybe that's wrong. Correct me. But talk about a couple of things, just talk about in-year revenue acceleration, you talked about gaining efficiencies on the expense line throughout the year. I guess, I mean do those have to happen to meet your guidance or is that just upside?

James Rhyu, Chief Executive Officer

Yes, I believe we have work to do, and it’s not guaranteed. However, historically speaking, in my ten years with the company, we have not missed our guidance. We set guidance that we feel confident in, and while we still have work ahead, we are comfortable with our ability to achieve it. We feel optimistic. I mentioned our goal, which is within our guidance range, is to maintain adjusted operating income flat, with slight variation. This goal is actually above the midpoint of our guidance. Therefore, we are aiming for above the midpoint and are diligently working every day to optimize our cost structure to reach that target.

Greg Parrish, Analyst

Okay, great. And then help me, maybe this is a sort of an ignorant question, but I mean, you have a pretty big step down in kind of overall enrollments. But you have a pretty big step-up in some of your teacher costs, and you had a pretty big teacher base last year. So I mean, I guess, was there no kind of mark-to-market in teachers, I mean how do you kind of assess that internally, are you sort of over-staffed in Gen Ed, are they allocated somewhere else? And I know you have some sort of other areas where you want to sort of monetize those teachers with school districts, maybe that's the answer. But maybe kind of help me, kind of, fill the gaps there?

James Rhyu, Chief Executive Officer

Yes. I think it's a little bit of a mix. We certainly are investing in certain places. But also, which is a little bit of a nuance that maybe not everybody is aware of but, oftentimes when we get funding increases, those funding increases come with prescribed costs associated with them, often at zero margin to us. And so, there are some of that does that play here that we're sort of forced to along the way, but say, the way that the funding works is that we have to spend against it. And so, there is a mix of that in there as well as I think just we are investing in certain things. I do think that we were fully staffed in most years. We're actually, we go into the year a little bit understaffed. This year, we wanted to make sure we were fully staffed. So I think there is a number of things at play there.

Operator, Operator

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

Tom Singlehurst, Analyst

Good evening. It's Tom from Citi. Thank you for taking my question. I apologize for not bringing this up earlier, so I appreciate your patience. I wanted to discuss the trend in General Eds enrollment. Previously, you mentioned that survey results indicated that enrollment would remain strong. Did those surveys not accurately reflect the situation, or do you believe that the execution on your part was not fully effective? I'm curious whether the enrollment decline is due to your execution or a general decrease in industry demand. Additionally, I noticed that Pearson mentioned there was a revenue mix shift in their school business, indicating weak enrollments but favorable average revenue per student. Can you provide any insights into what may be driving this overall trend? Those are my two questions for now. Thank you.

James Rhyu, Chief Executive Officer

Yes, I believe our business is somewhat similar to Pearson's, with a mix of revenue per enrollment that reflects both the funding environment and our specific mix of offerings. Last year, we experienced strong in-year demand compared to the previous year. However, during the summer season, that strength did not carry over as much. I think this could be attributed to various factors including execution challenges and a general fatigue that families feel toward enrolling in certain programs. Nonetheless, the overall market continues to grow. A few thousand fewer enrollments can lead to us being down a few percent, possibly even 8%. This isn't a massive fluctuation but does highlight the mix of influences at play. We are observing shifts in consumer behavior where families tend to revert back to their local brick-and-mortar schools, only to find that those options may not meet their needs as expected. This leads them to seek alternative options by September and October. Early indicators suggest that this season, we might see demand levels higher than last year and exceeding pre-pandemic levels. The patterns we're witnessing indicate a significant increase in demand compared to the pre-pandemic environment.

Tom Singlehurst, Analyst

Perfect. One follow-up, if that's okay. Regarding the cyclicality of the Career Learning business, particularly the adult learning segment and its institutional offerings, should we be concerned about organizations and enterprises being more cautious in acquiring enterprise learning resources and tools in this environment? Or do you believe we remain on solid ground?

James Rhyu, Chief Executive Officer

I apologize for interrupting. Please continue.

Tom Singlehurst, Analyst

Do you think it will remain robust despite the macro challenges?

James Rhyu, Chief Executive Officer

Yes, I think the good news, bad news for us is that within the context of our adult businesses, we didn't have a material amount of that enterprise-side business. When we did some of these acquisitions, we were actually pretty bullish that would materialize; they didn't. And so, therefore, I think the risk of the macro trends working against us there is just mitigated by the fact that we just didn't have a material amount of business there. As it turns out, what we are seeing is still some healthy opportunity on the enterprise side for those businesses. I think as companies try to figure out what their staffing hiring needs are, particularly in the technology space, technology tends to be prioritized. And there's still I think is, a lot of demand that employers don't know how to fill appropriately. And so, I think there is still a lot of opportunity there for us, but it's just not material enough one way or the other to impact us too much at this stage.

Operator, Operator

Your next question comes from Stephen Sheldon with William Blair. Your line is open.

Unidentified Analyst, Analyst

Hi, team. This is actually Matt Fielek on for Stephen Sheldon. To start, I was wondering if you can talk about what drove the increase in SG&A expense relative to the prior year. It sounds like higher marketing cost is driving some of that, but any additional detail would be helpful. And as a second part, how should we think about SG&A looking ahead over the next several quarters?

James Rhyu, Chief Executive Officer

Yes, I believe the increase in SG&A is primarily due to two factors. One is that our marketing expenses have risen slightly. However, the more significant factor is inflation, which has affected nearly every cost item we encounter. I’m not sure if you have anything to add, Donna, but those are the main drivers.

Donna Blackman, Chief Financial Officer

I think I would sort of add that the timing of hiring had some impact on our numbers. But with respect to SG&A, I think the inflation on not only the marketing, but also on the salary and wages; and I sort of think about the rest of the year. I would think about the increase being more in line with inflation.

Unidentified Analyst, Analyst

Got it. That's helpful. Thank you. And then switching gears here, how have application to enrollment conversion rates been trending relative to your expectations? And if you could, what are some of the underlying forces driving those trends?

James Rhyu, Chief Executive Officer

Yes, what we observe is that at the top of the funnel, traffic leads to leads, which then leads to applications and ultimately enrollment. We're currently seeing strong and improving conversion rates. Families better understand the programs we offer, which is leading to higher conversion rates. This trend started during the pandemic and has continued, as families have maintained their appreciation for our programs and their fit for their needs. Overall, we're experiencing higher conversion rates throughout the entire funnel, from applications to enrollment, at a sustained level.

Unidentified Analyst, Analyst

Great, thank you.

Operator, Operator

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