Stride Q1 2024 Earnings Call Transcript

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October 24, 2023

There are 9 speakers on the call.

Operator

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 Press.

Operator

Thank you. Tim Casey, Vice President, Investor Relations, you may begin your conference.

Speaker 1

Thank you, and good afternoon. Welcome to Stride's Q1 earnings call for fiscal year 2024. With me on today's call are James Ryu, Chief Executive Officer and Donald 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.

Speaker 1

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. 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 filing. 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 Call. Following our prepared remarks, we'll answer any questions you may have.

Speaker 1

I will now turn the call over to James. James?

Speaker 2

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.

Speaker 2

These are some of the macro themes our country is going through right now, 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.

Speaker 2

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 the outcomes they did not want. And demand for our programs is growing. Enrollments for this fall increased 8% to almost 188,000 enrollments.

Speaker 2

Both our general education and our career learning business group. 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.

Speaker 2

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 Our EPS will be over $3.60 a share, which is 6 times higher than fiscal year 2020. Now as we 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 age children share these same concerns about our public education system, And they are becoming more vocal about their dissatisfaction.

Speaker 2

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 goal choice by a margin of more than 2: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-twelve education in the U. S.

Speaker 2

Conversely, while almost 3 quarters Our 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-twelve school, We're hearing they are 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.

Speaker 2

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.

Speaker 2

Our programs do exactly that, while also helping to alleviate student loan debt pressures and very importantly, fill the skills gap for U. S. Employers. We're 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.

Speaker 2

That's up from just over 20% 4 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.

Speaker 2

Our key objectives and strategies have momentum like never before. As I mentioned, our guidance suggests we are primed for record revenue and profitability performance for this year. I mentioned last year that I felt GenEdge enrollment had bottomed out and it looks like that turned out to be accurate. We think this demonstrates the strength of our K-twelve 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.

Speaker 2

As you know, we're still early in these efforts, I'm excited to share more information at our upcoming Investor Day, which is going to be scheduled for November 14 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 Q1 results and guidance.

Speaker 2

Donna?

Speaker 3

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 am very proud of the work we put in Revenue for the quarter was $480,200,000 an increase of 13% from the Q1 of fiscal year 2023. Adjusted operating income was $14,800,000 compared to an adjusted operating loss of $19,900,000 in the same period last year.

Speaker 3

Earnings per share were 0 point 1 $1 up $0.65 from last year. Capital expenditures were $16,100,000 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 50% ago. We saw growth in both our general education and career learning programs, underscoring the continued demand School alternatives that James outlined in his comments.

Speaker 3

It's clear that the effects of the pandemic have had a lasting impact on the awareness and acceptance Full Time Virtual Offering. Returning to our quarterly results, Career Learning revenue grew 18% to $180,800,000 This performance was driven by continued strong enrollment growth in our career learning program. These programs generated $151,000,000 in revenue on double digit enrollment and 6% revenue per enrollment growth. Turning to the general education programs, revenues increased over 10% to $299,300,000 for the quarter. Enrollment in Gen Ed increased 4.7% from last year.

Speaker 3

Revenue per enrollment grew 7.4%. 1st quarter revenue per enrollment increases for both Gen Ed and Career Learning was somewhat impacted by timing. We think we will finish the year with revenue per enrollment growth at around 4% to 6%. Gross Margins for the quarter was 36%, up 5 50 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 improvement throughout this year.

Speaker 3

We also feel like we manage our teacher hiring well this year and that contributed to the strength and Gross Margins This Quarter. For the year, we expect to see gross margins and Full by 200 to 2 50 basis points. Selling, general and administrative expenses increased 7% to $169,600,000 driven by increases at NetSearch to support its continued growth, Investments in New Products and the Impact of Stock Based Compensation. Stock based compensation for the quarter was $8,400,000 up from the prior year due to the timing of some long term performance plans. We expect to finish the year with stock based compensation in the range of $28,000,000 to $33,000,000 Adjusted operating income for the quarter was $14,800,000 Adjusted EBITDA was $39,800,000 Historically, the Q1 has not been a profitable quarter for us.

Speaker 3

So the strength this year highlights the work that we've done to execute on efficiencies and improved teacher hiring. This coupled with the strength in our enrollment sets us up Returning to our quarterly results. Interest expense for the Q1 totaled $2,100,000 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.

Speaker 3

Capital expenditures in the quarter was $16,100,000 down slightly from last year. Free cash flow defined as cash from operations less CapEx was negative $151,000,000 compared to negative $160,000,000 in the prior year period. This is our normal seasonality of cash flows and relate to school launch and the onboarding of speed. We expect to see positive cash flow for the next three quarters. We ended the quarter with cash and cash equivalents of $254,600,000 Turning to our guidance.

Speaker 3

For the Q2 of fiscal year 2024, we are forecasting revenue in the range of $490,000,000 to $510,000,000 adjusted operating income between $80,000,000 $90,000,000 and Capital Expenditures between $15,000,000 $18,000,000 For the full year, we expect Revenue in the range of $1,960,000,000 to $2,030,000,000 adjusted operating income between 250 $275,000,000 capital expenditures between $65,000,000 $75,000,000 and an effective tax rate between 25% 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 and A. Operator?

Operator

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

Speaker 4

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.

Speaker 4

What's different this year?

Speaker 2

Yes. Hey, Jeff. So, I think there's really 2 basic things that I would highlight. The first is, I said this last year and this is 100% on me, but I think our execution last year was not great. And I think we improved it this year and that's it's a real tribute to I think some of the team that we brought in, But also some of the turnaround that the team executed that they've been through a number of cycles and they were able to identify things that We could do better.

Speaker 2

So one, I think it's clearly execution. And I think that has a lot of legs to it still, because I think while we improved execution this year, I think we keep identifying things that we could do actually a lot better, and I expect our execution to improve through the coming years. And so I think That's still a work in progress that I think we'll see more returns from. The second is, and I think we've been saying this directionally for a while, but We look at our enrollment sort of in aggregate. There's a lot of sort of cross pollination cannibalization that goes on.

Speaker 2

This year, we didn't really have a lot of new career programs. And so, I think a lot of our enrollment strength overall is that a testament to that the fact that the market is still there for our business as a whole. And some of the sort of Nuances between general education and core ed. There's like I said, there's a little bit of cannibalization. There's some puts and takes here and there.

Speaker 2

But I think the overall story is that the market for our types of programs, whether they're career ed or general ed remains very strong, and we think that we've got a lot of room to run.

Speaker 4

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?

Speaker 4

I know you talked about the efficiency, but did we shift some expenses from 1Q to 2Q?

Speaker 3

No, I think it's what James has

Speaker 5

talked about, right? And so it's the strength of our enrollment in the quarter. It's the efficiency efforts that we put in place last year, some of which we didn't put in until later on in the year. I think it's also the timing of I think we did a really good job at our teacher hiring. So, we were careful not to over hire as well as not under hire, so striking the right balance, all the things that contributed to us having a strong financial results in Q1.

Speaker 2

And Jeff, just if I could add, I think our goal As a company, at this kind of scale we're at now needs to be profitable every quarter. There is always going to be some seasonality in our business. So you'll still see level of seasonality. But I think at the scale we're at and at the I think, as Donna mentioned, the efficiencies that we've got, I think our goal has got to be profitable every single quarter going forward.

Speaker 4

All right, great. If I could speak 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?

Speaker 5

So we expect them both to be within that range. Just given sort of where we were in Q1, I would expect Korea Learning to growth for the full year to be on the lower end of that versus GenEdge, again, just based upon what we still need to do on.

Speaker 4

Okay, great. Thanks so much.

Operator

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

Speaker 6

Yes. Thanks very much. Good evening and congrats on the results. It's quite something to I do enrollment break, which is very exciting. A couple of questions, I'd say.

Speaker 6

First one, Can you just talk about whether there's any sort of volume component to go by? How many new schools are open? And are there any new states that are coming on stream Within fiscal or generally, that was the first question. And then the second question is on the sort of guidance. You've set the 2024 guidance At a level which actually just slightly encroaches on the 25 guidance.

Speaker 6

I suppose probably the answer is you're going to say went to the Investor Day on the 4th November, but I'm just interested in whether we should infer anything from the midpoint of 'twenty four to the midpoint of 'twenty five in terms of

Speaker 5

So I'm going to try my best to answer your question that we had a really hard Time hearing you. But I think your first question was around the number of states. And so we are in the same number of states In Q1 that we were in Q4 for both Gen Ed as well as for Career Learning. We've added some new programs, about 5 new programs for Gen Ed and 4 new programs for Korea. With respect To our, I think it's 2022, 2024, we're sort of bumping up against our 2025.

Speaker 5

And so I think when we have our Investor Day and November will be a good time for us to talk about where we think we will be from a long term perspective. We have said last year, every single quarter that we were confident in our 2025 revenue and AOI numbers. And so That should be the path to get there will be different, but that really strongly that would be get there. And I think this is just indicative of the strength of the business. And again, we had a really strong enrollment growth and revenue growth in Q1 and that's impacting obviously our full year numbers.

Speaker 6

That's great. Sorry, you managed to interpret my question. I really appreciate that. One quick follow-up. Adult learning sequentially was down.

Speaker 6

Is there anything to read into that? Is that seasonal or is

Speaker 2

there a little bit of sort of

Speaker 6

softness coming through from sort of end markets and tech?

Speaker 2

Yes. So I think there is something to read into that, meaning that We have I think we have defied the overall market conditions around the tech sector, the Tech Education Sector in that we've had growing profitable businesses in that space, I think, for a lot longer than Most of the market has been able to do so. But and you can you could sort of see I think probably across the landscape, but also you can look at sort of Google searches for this and things like that. But The specific technology focused boot camp business as a whole in this country is down significantly. We believe we are down less, but there is definitely a macro headwind around that piece of our business, which just as a reminder, represents less than was it less than 2% of our overall business.

Speaker 2

It has 0 material impact on our growth prospects. It has almost negligible impact on our profitability profits Our margin prospects and our MedCerts certificate business continues to perform very well and we see sort of very long runway of growth for that business. But yes, On the technology side, specifically, in a very small portion of our revenue, there is a little bit of softness.

Speaker 6

That's very clear. Thank you very much.

Operator

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

Speaker 2

Hey, Jim.

Speaker 7

We have Matt Violett on for Steve and 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 reregistered, And did either of those come in differently than you would have expected?

Speaker 3

Yes.

Speaker 2

So both performed well. Our re reg cohort, if you take away the pandemic year, because obviously that 1 year was very, very anomalous, We basically had on both sides of it near record breaking years. And I think both continue to perform strong. I think it speaks to, 1, the strength of our program Is increasingly sticky with our customers. We have worked really hard to provide programs that really meet the needs of our customers at their point of need.

Speaker 2

And Our outcomes are also improving, meaning you can see our academic outcomes improving, our state scorecard outcomes are improving. And so I think all this sort of translate our net promoter scores are high. So all this is translating into higher year over year retention. We also see new enrollment demand continue to be very strong. I think more importantly than the strength in your enrollment demand is our ability to convert new enrollments Also continues to improve.

Speaker 2

And we learned some things in this past season about both demand gen on the new enrollment side, but also conversion that we think are going to translate into future gains. So it's really across the board. We don't see a lot of soft spots in either re registration, withdrawal rates or new enrollment trends. And in fact, I will say one other thing. Now through 24 days of this month, If you remember last year at this time, we said that While count date enrollments last year were soft, our in year enrollment trends were looking strong.

Speaker 2

That was last year. This year. And again, it's only through 24 days or actually 23 days off today's data yet. But through 23 days, We are outperforming last year. So we just we see a lot of strength in our business.

Speaker 2

We see a lot of demand. I think the one thing the pandemic structurally for our business did change a little bit that is new and a benefit to us Is that families feel like they have just a lot more flexibility in their choices. And part of that translates into families don't feel as rushed To have their kids start school actually on time as much anymore. And we've got a lot of family situations where that's important to them for whatever reason. And we're able to meet their needs there and they're coming to us increasingly through the in year period.

Speaker 2

So that's also really important I think that from an overall structural demand perspective going forward.

Speaker 7

Thank you, James. That's super helpful color and great to hear as well. And then had 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 we're 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.

Speaker 5

We feel comfortable with the range that we actually provided. It's a little softer, as I said in my comments, a little bit softer because Q1, the comparison year over year was an easier comparison because the enrollment grew and we got stronger last year. And so Q1 is an easier comparison. So again, we feel good about sort of where we stand from The 4% to 6%

Speaker 3

range. Got

Speaker 7

it. Thank you. And a great quarter.

Speaker 5

The one thing I believe

Speaker 3

you hear us talk

Speaker 5

about this a lot. Mix obviously plays a part in that, right? And so throughout the course of the year, what happens with our in year enrollment, etcetera, the mix is one factor that could impact that growth number.

Speaker 7

Understood and thank you again and great quarter.

Speaker 2

Thank you.

Operator

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

Speaker 8

Hi, guys. Thanks for taking my question. And I want to add my congratulations on the Very strong Q1 results and the equally strong guidance. Question about execution, you mentioned it several times, James, In your prepared comments, and part of that is, I'm certain, marketing. What are you doing differently now versus last year or the last several years in terms of marketing that has made a difference.

Speaker 8

And 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.

Speaker 2

Yes, sure, Alex. Great question. And yes, I think I'm a huge believer In 2 fundamental pillars for our business. 1 is the macro environment, and I think that the tailwinds, work in our favor for the macro environment and our internal ability to execute. And like I said, last year, we did not execute well.

Speaker 2

We did bring in a new Chief Marketing Officer, Deb Hanna. She's come in feet running, hit the ground running. We also have an existing set of team members, the head of our enrollment center, the head of our operations team, Our IT group, like they all contribute to a better kickoff for our season this year. Specifically to your question on the marketing side, we saw some tactical things over the past several years, by the way, that I think We're always trying to figure out how to improve. One is, obviously, there is a There's a structural shift, a macro shift away from linear TV or regular TV.

Speaker 2

And so We actually moved away from that channel a fair bit. We didn't spend as much in that channel because it's our analytics tells it's less productive. Conversely, our analysts suggested that we had a lot of opportunity in just regular Search Engine Marketing. So it is a Google paid search clicks ad stuff that you do and Refining Our Search Terms. We've got a real rock star that runs that team for us That he just continues to mine opportunities in that channel for us that are really compelling.

Speaker 2

What we're still not yet hitting all cylinders on is some of our social media efforts, Some of our incremental career demand efforts for our career segment. Those things, I think, we can still improve upon. Our enrollment center, which is what we consider marketing and the enrollments are a part of sort of the overall marketing funnel. And our enrollment center really did an incredible job looking at ways that we can improve conversion. The families that come to us and apply, They want to come to us.

Speaker 2

And sometimes we make it harder for them unnecessarily. And so when we find ways to smooth the path for them, they come to us. And so we're doing A bunch of stuff in our enrollment center, which includes, by the way, self serve. Everybody loves to hear the words AI. So we've got some AI initiatives in the enrollment center as well that Automate some things, create more bespoke responses for our families.

Speaker 2

But like I said, we've got a long way to go still. I think The trajectory of improvements that we're going to make, we've got a multi year trajectory of improvements we're going to make and market demand is going to continue to be strong. So hopefully that answers your question.

Speaker 8

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

Speaker 2

Thanks.

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