Stride, Inc.

Greetings, and welcome to the K-12 Third Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Kraft, Head of Investor Relations. Thank you, Mr. Kraft. You may begin.

Thank you and good afternoon. Welcome to K-12's third quarter earnings call for fiscal year 2020. Before we begin, I would like to remind you that in addition to historical information, certain comments made during this conference call may be considered forward-looking statements. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. They should be considered in conjunction with cautionary statements contained in our earnings release and the company's periodic filings with the SEC. Forward-looking statements involve risks and uncertainties that may cause actual performance or results to differ materially from those expressed or implied by such statements. In addition, this conference call contains time-sensitive information that reflects management's best analysis only as of the day of this live call. K-12 does not undertake any obligation to publicly update or revise any forward-looking statements. For further information concerning risks and uncertainties that could materially affect financial and operational performance and results, please refer to our reports filed with the SEC. These reports include, without limitation, cautionary statements made in K-12's 2019 Annual Report on Form 10-K. These filings can be found on the Investor Relations section of our website at www.k12.com. In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. or GAAP, we will discuss certain information that is considered non-GAAP financial information. A reconciliation of this non-GAAP financial information to the most closely comparable GAAP information was included in our earnings release and is also posted on our website. This call is open to the public and is being webcast. The call will be available for replay for 30 days. With me on today's call is Nate Davis, Chief Executive Officer and Chairman of the Board, Tim Medina, Chief Financial Officer, and James Rue, President, Corporate Strategy, Marketing, and Technology. I'd like to now turn over the call to Nate.

Thank you, Mike. Good afternoon, everyone. Thanks for joining us on our quarterly call. Such a challenging time for our country. I'm sure everybody's busy, but hopefully you're safe and sound in your own studies as you listen to this call. I'm sure I join everyone in a call in saying that we continue to extend our thoughts and prayers to those impacted by this virus, both in the U.S. and around the world. The good news is times like this that bring us together. Everywhere I look, I see goodwill and good intentions, people concerned about each other's health, both physical and emotional, and everybody coming together. It's wonderful to see a country coming together. I'd like to get started with a brief summary of this quarter's financial results. Our new CFO, Tim Medina, will follow up with a more detailed comment. As you saw in today's press release, revenue is $257.2 million. In the third quarter of fiscal 20, an increase of 1.5% year-over-year. Our adjusted operating income for the quarter was $20.6 million, and capital expenditures for the quarter were $9.5 million. Now, looking at results in comparison to the guidance we provided last quarter, we beat our estimates across the board. Revenue, adjusted operating income, and capital expenditures. With limited impact from COVID-19 in these numbers, our results underscore the ongoing strength of our core business, and that's very important. The underlying fundamentals of our core business remain strong. Now, this is due in part to three factors. First, we saw student retention improve by 200 basis points versus last quarter. While some of this improvement relates to the impact of the pandemic, we saw improving retention trends even earlier in the quarter. Last quarter, I mentioned that we had implemented steps to help students determine if our program was right for them early on. And the effect of that would be to drive withdrawals up and retention down in second quarter fiscal 20, but would allow for lower withdrawal, better retention in third quarter and fourth quarter. It's also noting that we saw retention improvement in all grade levels and in most of the schools we serve. Second, when getting guidance, when setting guidance in January, we anticipated strong growth in new enrollment, and that happened as we internally planned. And third, customer satisfaction with K-12-powered programs is increasing. Based on a recent parent survey, all satisfaction and loyalty metrics have increased from fall of 2018. Parent satisfaction with K-12-powered schools and the curriculum rose to 82%, and the likelihood of those parents re-enrolling their students topped 89%. both were all-time highs. More importantly, ratings on nearly all key drivers of net promoter score have improved year-over-year to 61, and this score puts us in line with other popular major national brands. Importantly, in our press release today, we have reaffirmed the full-year guidance we provided last quarter. We often receive questions about COVID-19's impact on our business, both short and long-term. I'd like to make some comments to answer that question. The pandemic has disrupted academic plans and goals for so many students across the US and across the globe. All brick and mortar schools closed in the US, and there was a scramble by many to figure out just how does this virtual schooling thing work. However, the academic experience for most K-12 powered programs is essentially school as usual. School as usual includes students with special needs and those in rural and underserved communities, just as the U.S. Department of Education has clarified in its guidelines. Also, for the current school year, we do not anticipate changes in funding for public schools as a result of COVID-19. We've had communications with state authorities. We've monitored public statements by a number of policymakers. All indications are that schools we support will be funded, and as such, K-12's revenue The fiscal 20 should not be negatively impacted for the services we provide. However, with certain school functions being curtailed this year, the number of services we'll provide will be reduced. An example would be that we provide end-of-year testing in all schools that we support, leasing computers, assembling testing sites, and things like that. Well, states have suspended end-of-year state assessments, so we cannot provide those services, and therefore we cannot realize that revenue. You may have heard us talk about terms like this, such as revenue capture in previous years. As such, revenues from these services will be somewhat lower than anticipated, and we therefore expect to achieve revenues for the full year at the lower end of our guidance range. At the same time, the pandemic is also driving cost savings across our business. When coupled with our ongoing focus on cost reductions and efficiencies prior to the pandemic, we're realizing some cost reductions in a number of areas. Therefore, we anticipate achieving adjusted operating income at the high end or even possibly exceeding our guidance range for the full year. Now, again, this is not a change in guidance, but just giving you more specific direction within the guidance we've already issued. Excuse me. Let's talk about the upsides of the pandemic in our business. As I've already said, it's horribly unfortunate for so many people all around the world. But we're in the business that helps schools and students in situations exactly like this. When the pandemic first started to impact brick-and-mortar schools, our phones began to ring off the hook. And we saw a sharp increase in traffic on our website. We reached nearly 1 million unique visitors to the K12.com website in February and March, which is a 49% increase year over year. Many of those visitors filled out lead submission forms. In fact, more than 100,000 lead submission forms were completed by parents in the last two months, a 57% increase over the same time last year. The majority of the inquiries we received related to families looking for options for students to complete the current school year. Most schools we support were unable to accept enrollment this late in the school year due to authorizer or local school board policy. However, For the schools that were open for enrollment during this period, we've received more than 6,000 applications, more than we had last year. Now the impact of these students who were eventually enrolled, but it's not gonna have a great impact on our revenue because they were enrolled very late in the school year. Some of the inbound inquiries, however, concerned options for the next school year. And while the enrollment season is just now starting, applications have already topped 14,000, which is a 16% increase compared to this time last year. Now at this point, no one knows how many of these applications will result in student enrollment in 2021 school year. However, we believe that some of these students will choose to stay with the program, even if traditional schools open in the fall. And also we hope some who expressed interest and investigated this choice for the spring will now choose online learning for the fall. Our company has also stepped up in support of communities that were impacted by the nationwide school closures. This includes offering free online curriculum, platforms, training, and technical assistance to students, their families, and to school districts. We're also offering free webinars on best practices for teachers and families who have been thrust into an online environment for the very first time. To date, nearly 70,000 students, teachers, and families have signed up for these programs and webinars. These efforts continue to raise interest in and awareness of the blended and online classroom and of K-12's expertise in this area. Lastly, we're also working closely with dozens of school districts on solutions that will help them educate students remotely. Some school districts are already using our curriculum under the 30-day free offer I mentioned. Others are using our supplemental content, such as Stride and Big Universe. Many are using a mixture of both. So far, more than 30,000 students are being supported by these promotional programs in the current school year. We believe a larger, longer-term opportunity exists as districts figure out just how they will incorporate online learning into their regular curriculum and into their school continuity plan. Now I'd like to turn to Galvanize. As many of you may remember, we acquired Galvanize back in January. In their core immersive boot camp and enterprise businesses, Galvanize moved all programs fully online in mid-March. The good news here is that the majority of the students stayed with the program. While some have decided to defer until in-person sessions resume, students are committed to staying with Galvanize. We saw very few cancellations of new admissions or students dropping from existing classes. And in their community business, which manages co-working space in eight locations, Galvanize strongly encouraged all team members to work from home and to follow CDC local health guidance. As you would expect, there are fewer new leases in the Galvanize community business, given all the states have implemented work from home requirements. This caused the community business to stay flat in Q3 and will likely shrink a bit in the next quarter. None of us can predict when things will come back to normal. if ever, or when we'll see small businesses entering into more leases in the galvanized community business. But while the pandemic will be a headwind to galvanize the community business in the short term, we do not feel it dampens the prospects of this total business over the long haul. In fact, the immersive boot camp business can be counter-significant during recessionary-like periods when people are looking to upscale or position themselves for new jobs when they've been laid off or out of work. The bottom line is we predict that Galvanize's boot camp in enterprise business can continue to deliver strong growth into fiscal 21. In fact, while the community business will not deliver against expectations, the consumer business is slightly exceeding our expectations at this time. Before I leave my discussion of Galvanize, I also want to provide more detail on the impact of the acquisition on fiscal year 20 and fiscal year 21 financial results. As we mentioned last quarter, the adjustment to our operating income guidance for fiscal 20 was largely a result of purchase accounting related to the acquisition. Eight to nine million of the reduction in our adjusted operating income guidance related to galvanized negative operating income and to short-term operational investments we plan to make. But the remaining 11 to 12 million was related to purchase accounting adjustments. Specifically, All assets and liabilities on Galvanized's balance sheet, including deferred revenue, were required by accounting standards to be reported at fair value. When deferred revenue is recorded at fair value, it has the effect of lowering revenue and profitability for the acquired business until the liability comes off the balance sheet. And I promise that is the last accounting lesson I'll give today. Overall, the gross prospects for Galvanized remain solid. And I'm confirming what I said last quarter. I expect Galvanize to deliver positive EBITDA in FY21 and therefore be accretive to K-12 EBITDA in FY21. As I think about the impact that the pandemic is having on our country and our communities, and I believe it to be horrific, it's a similar moment for online education. This moment will permanently change how the general public, school districts, and regulators think about our business and how online education and blended education should be incorporated into ongoing learning process. This is not just my personal opinion. This view is informed by recent studies we commissioned with parents of students in the kindergarten through 12th grade. We asked them a series of questions regarding their views on online education in the post-pandemic environment. This is what's it going to be after the pandemic is over. The results were eye-opening. 88% of parents agreed that online learning should be an option for families. In addition, more than 68% of the parents are either somewhat or very reluctant to send their students back to school with other students even after the pandemic subsides. Prospective parents believe career readiness education is an important way for their children to learn real-world skills and be prepared for the future. More than 30% of high school parents want school options with online career readiness education offered. And while the short-term positive impact of the pandemic may be modest to K-12's current financials, the long haul, the long-term effect we see providing a great tailwind to our business model. The pandemic has crystallized four things for us. It's increased the awareness and acceptance of online options. It's helped break down the preconceived notions about online learning and highlighted the difference between a simple digital video session and a comprehensive online learning program with teaching and instruction and measurement. Third, it's made school districts examine their preparedness for disasters and highlighted how online learning can be and should be a part of their ongoing plan. And fourth, it's increased brand recognition for K-12. We believe that over the long haul, these are all good trends for our business. So in summary, our core business is strong, the underlying trends are improving, and it shows through our results this quarter as we exceeded the guidance we provided. I'll wrap up my longer-than-normal comment by talking about an important organizational change at K-12. As you may have seen in our leadership organization release a few weeks ago, James Rue has now assumed a new role at K-12 as President, Corporate Strategy, Marketing, and Technology. For the past seven years as CFO, James has helped implement my vision of our company. And more importantly, he's shouldered added responsibility as president of products and technology while holding down the CFO job. That's a lot to ask of any one person. Now, I personally hired James because in a previous life, I knew all about his work ethic, his intelligence, his skills beyond finance, and his ability to help strategically drive innovation in any business he was involved with. By every measure, he's been an instrumental part of our company's trajectory and a tremendous help to me personally. During his tenure, we've grown into a world-class education services company and we've launched the company's interest into career learning and adult education markets. I've asked James to help drive even more strategies, new strategies, marketing and technology expansions in a brand new world. James will be partnering with me and leaders across the company to expand the market for K-12, to reach new students, students who traditionally didn't or wouldn't consider online education, from kindergartners to adult learners. They'll also lead the teams that drive the product innovation and improvements in the customer experience, all with the goal of attracting and retaining more students. They'll also develop the marketing and the messaging to support these new expansions, and they'll execute on mergers and acquisitions and partnering opportunities that support the growth strategy. I'm lucky to have someone with his depth of experience ready to step in and help me increase shareholder value and provide great services to our students of all ages. James, thank you for your incredible contribution. I know you're leaving the finance organization and the financial health of K-12 in great shape. As I already mentioned, we're joined today by our new Chief Financial Officer, Tim Medina. Tim joined K-12 with more than three decades of financial and capital markets experience both domestically and internationally. He has an extensive background in accounting and operations, management and strategy, and a deep understanding of high-growth technology sector companies, including important experience in acquisitions. He most recently served as Executive Vice President and Chief Financial Officer of TPX Communications. And prior to his role at TPX Communications, Tim served as CFO and in leadership positions at ECI Conference Call Services. Independent Wireless One Holdings, Verizon Communications, GTE Corporation, and TTI Holdings. I'm excited for someone with Tim's experience and background to join the K-12 team. So thanks, everyone, for your time today. And I'm going to turn the call over to Tim. He'll elaborate on the third quarter financial results. Tim?