Stride, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the K-12 First Quarter Fiscal 2021 Renews Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mike Lawson, VC Investor Relations. Thank you. Please go ahead.

Thank you, Chantel, and good afternoon. Welcome to K-12's first quarter earnings call for fiscal year 2021. Before I 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 Privacy Reform Act of 1995. They should be considered in conjunction with the cautionary statements contained in our earnings release and the company's periodic filings with the SEC. Overlooking 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 advise any forward-looking statements. For further information concerning risks and uncertainties that could material effect 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 2020 annual report on Form 10-K. These findings 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 would include an earnings release and is also posted on our website. This call is open to the public and is being webcast. 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, and Tim Medina, Chief Financial Officer. Also on the call today is Mike Kraft, our former Head of Investor Relations, who remains with the company as Senior Vice President of Corporate Communications. Following our prepared remarks, we will answer any questions that you may have. I'd now like to turn the call over to Nate. Thank you, Mike. You did that very well.

First time, huh? Good afternoon, everyone. Thanks for joining us on the call today. There's so much uncertainty in our lives right now. I feel fortunate. Our business is stable, it's growing, and it's well positioned for the future. As you know, the pandemic is helping to drive a shift to more online learning. But our great results are not just because of the COVID-19 crisis. Independent of the pandemic, as we've said in the past, there is an evolving view of online learning as a quality option for many families. This trend started before the pandemic and will continue after the pandemic. A new study commissioned in partnership with a third-party researcher called Qualtrics shows that more than 60% of parents believe the quality of education students receive from an online school is equal to what they receive in a traditional brick and mortar school. In fact, independent research recently published by Dr. Ian Kingsbury corroborates these findings. Dr. Kingsbury's studies concluded that the virtual schools often outperform brick and mortar schools when it comes to key learning experiences, which includes promoting active learning, communicating effectively, managing the classroom, and providing high-quality instruction. Key takeaway is this. While the pandemic may have accelerated this trend, the awareness and the acceptance of online and blended learning has been increasing every year. Again, we believe this shift has been a key contributor to our growth this year. So how does this growth impact our financial results? Specifically, first quarter fiscal year 2021 revenues were $371 million, up 44.3% from revenues of the same period in FY20. Adjusted operating income was $39.2 million, up 275% from the loss in the same period of fiscal 20. adjusted even dollars up even more on a percentage basis, as was cash on the balance sheet. By all measures, we're stronger, we're going faster than any time in the recent history. I won't steal all Tim's thunder, because I'm going to let him address the full set of financials. Our financial results reflect the multi-year strategy I communicated to investors several years ago, and since then have implemented. As some of you may remember, we had two goals. First, to support the growth of our core general education business, and second, to more efficiently use our strong balance sheet to expand into this career learning industry. As you can see in the results we announced today, both segments are growing. Gross and operating income margins are starting to improve, which leads to improved return on invested capital. And we believe these improvements are just the beginning of the benefits from the strategy I first described in mid-2018. Excuse me. To align with this strategy and to help investors better understand our progress and our performance, we're providing new disclosures in our reporting starting this quarter. Student enrollment and revenue data will now be reported separately for our general education and our career learning lines of revenue. This will allow investors to more easily see our progress in building career learning while maintaining focus on the core general education market. We'll be providing detail on adult learning so the investors can track our expansion into that market for consumers, enterprises, and the military. Lastly, for your reference, we provide a historical result in the new reporting format. Tim will provide additional details on the definition of each line of revenue in his remarks. But that is the backdrop. I want to turn to the general education market. For the first quarter, we posted enrollments of near to 165,000 ENROLLMENTS ARE A 49% INCREASE YEAR OVER YEAR. THIS IS THE LARGEST ENROLLMENT INCREASE WE'VE DELIVERED IN OVER A DECADE. WE SAW ENROLLMENTS RISE IN THE VAST MAJORITY OF STATES AND SCHOOLS WHERE WE SUPPORT FULL-TIME PUBLIC PROGRAMS AS WELL AS IN ALL OF OUR PRIVATE SCHOOLS. I'D LIKE TO ALSO POINT OUT THAT ENROLLMENTS ROSE THE MOST IN GRADES K-5. THE SKU TO YOUNGER GRADES MAKES SENSE IN OUR COVID ENVIRONMENT ERA BECAUSE STUDENTS at that age aren't able to adhere to social distancing guidelines as effectively as older students. Therefore, many parents of younger students are choosing an online option. Importantly, even with the huge surge in enrollment and the logistics associated with onboarding tens of thousands of students, our outreach data indicates that over 75% of parents were satisfied with the enrollment process. In fact, parent satisfaction actually rose year to year even though we onboarded more than twice as many new students. To handle the volume, we honed and automated our document submission process, improved communications and engagement with learnings and parents. We increased the functionality of the K-12 app and made a host of other improvements. That's not to say the enrollment process went without challenge. For example, the availability of computers and materials during the shortage was amazing. If you tried to buy a medium to low-priced computer during this period, you know it wasn't easy. Another example, the availability of documents that parents needed to enroll in our schools when schools and doctor's offices were often closed. Difficult for them to get those documents. Another example, some boards raised their caps or what we would limit on enrollment, but they did so at the last minute or late in the enrollment season. But through it all, we persevered and we now support nearly 80 full-time general education programs, which include our private schools, that are up, running, and providing an engaging learning environment. These results are a testament to the depth of experience in our organization, the strong relationships we have with our schools and school district customers, and also strong relationships with our supply chain partners. This demonstrates our ability to quickly scale our business, rolling out online learning isn't easy when you do it at scale. But I can't say enough about how the K-12 team rose to meet these unprecedented challenges. I'm often asked about our operational competency. Our ability to enroll this many students and turn up this many new programs and hire teachers demonstrates our operational excellence. Our core competency and operational excellence comes from the ability to take this complicated process of enrolling students and operating a school and transform it into a well-run, legally compliant, solid educational program so that the behind-the-scenes work is where we excel. In addition to our school solutions, we also saw growth in revenues by selling a la carte products and services to school districts and schools across the country. Our learning solution team, which you may have heard us say is the institutional business, added over 150 new school and district partners this year. bringing our total to over 1,000 school districts nationwide. These programs will support over 25,000 learners, including students from David Douglas College in Oregon, the Tumwater School District in Washington, the Rescue Union School District in California, and the State College Area School District in Pennsylvania. I just wanted to name a few to show you the geographic diversity of our district customers. We're also in the early phase of implementing a new program in partnership with the Rhode Island Department of Education. This program will support medically vulnerable students, those with English language learning requirements, and other families seeking alternatives to in-person instruction during the pandemic. Importantly, we didn't just win new customers, we retained the vast majority of the existing base. On a year-over-year basis, over 85% of our largest learning solutions customers renewed their services for this school year. This is the result of strengthening and reimagining our institutional business in the past few years while it was shrinking, rather than abandoning that line of revenue. However, I want to be clear on something. Even these great results, unfortunately, not all of the new implementations went as smoothly as we'd like. A few custom implementations that we looked to launch on very short timeframes did not go as planned. One such visibility, high visible, implementation was the Miami-Dade implementation, where we faced a very large custom implementation with numerous systems interfaces and involving requirements. Because we believe in the vision of Superintendent Carvalho, we committed to delivering that solution in six weeks, something that should have taken us six months to implement in regular circumstances. Unfortunately, there just wasn't enough time to iron out all the kinks in the interfaces and systems in a short timeframe. To this day, we still maintain great respect for Superintendent Carvalho and his staff and their vision. Now I'd like to turn to career learning, for which we posted another year of very strong growth. Enrollments were near 31,000, an increase of 127% year over year. We saw growth in 90% of the programs we administer, while adding four new programs this school year. The ongoing interest in career learning programs clearly aligns with what many families are looking for in their students' education. In the same Qualtrics survey I mentioned previously, more than 83% of the parents surveyed believe that career programs are a good way to prepare their students for in-demand jobs and for attending trade schools and certification programs without needing to take on college debt or go to college. Most of these parents say that they would rather prefer their students take career-oriented courses as opposed to general electives in school. And remember, many students taking career learning programs will still attend college, but with a better knowledge of their interests and skills. These results underscore how K-12's career learning programs are in place with the right direction at the right time. During fiscal 21, we will continue to invest in building out our career rep programs for middle and high school students. We plan on adding between two and five new programs or schools this year. And as we noted in previous calls on communications, over the next two to three years, we plan on expanding our career learning programs across all 31 states in which we operate full-time programs. In fact, we'll also look to add a second or third program in several states due to the high demand for these programs. So this year, we're also planning on adding new industry pathways in digital media, and legal and law enforcement. The California Virtual Academies will be leveraging a new relationship with the California Broadcasters Association, nicknamed CBA, to expose more California high school students to digital journalism and media sales pathways. This collaboration will give K-12 pilot students access to CBA's network of industry experts. The program also includes an industry-endorsed curriculum that integrates project-based learning with technical and production experiences, hands-on experiences. To complement our career learning offerings, we established a student participation agreement with two important organizations, the Business Professionals of America and the Family, Career, and Community Leaders of America. Through these arrangements, students will have an opportunity to represent their schools at virtual and in-person events, competitions at the local, state, regional, and national levels. They'll also be able to gain access to each organization's programming, resources, and national networks of career-focused peers and industry professionals, which is what motivates a young student to stay focused in their career pathway. These partnerships are just a few examples of how K-12-powered learning programs is much more than just a curriculum. It's a comprehensive, interactive, experiential learning environment. Look for more partnerships in the near future. Our career connection partner, Tallow, is also experiencing incredible growth. This quarter, their community of users grew to over 1.1 million, an increase of 10% since just last quarter, and nearly doubling from a year ago. Tallow also added new industry partners like Abbott Labs, CVS, Exelon, and Publix for leveraging the platform to fill current job offers and to connect to future workforces. And through the end of the summer, Tallow made more than 15,000 direct engagement matches between talent users and a college of community, I'm sorry, a college of company or other organization partners. As important as making these career connections are, Tallow also finds the right fit for the users even more importantly. That's why Tallow has also forged strategic partnerships with Jobsology, which houses an award-winning career assessment algorithm, and Yellow, who you may have heard of, the nation's leader in management recruiting software. Last year, this past quarter, Tallow successfully launched Ping, the new web-based app that offers an innovative solution to in-person college fairs. This launch included three successful virtual fairs that connected students with colleges and companies across the country. Future events will build on this success and will also provide connections for a diverse community of students and job seekers, including a historically black college and university virtual college fair. Proud of them. Now I'd like to turn to the adult market. The adult market for career learning and our galvanized business is very strong, starting to accelerate after months of pandemic-related impacts. In fact, this month's consumer education class is the largest that we've ever had. Enrollment has grown more than 30% quarter-over-quarter and 45% year-over-year. In-person classes have been minimal due to the pandemic as we monitor safety precautions. However, we've seen remote learning not only become a short-term substitute for in-person classes, but actually expand the student population. In addition, we're seeing increased interest from our nation's veterans. I'll talk more about that in a minute. This quarter, we also launched software engineering classes in San Jose to capture Bay Area interest. As the pandemic increases, we're considering adding one to three additional markets to support continued growth in Galvanize's consumer business. On the enterprise side of Galvanize's business, the effects of COVID continue to slow decision-making by corporations who are strapped for cash. However, this quarter, we did secure new business with IDT, a communications company, and Citadel, an investment firm. provide data science training. We also saw further expansion in our military business, as I mentioned a minute ago. This quarter, we became a subcontractor on a military training program for which we are onboarding software engineers to the Air Force Platform One. We do this through weekly workshops. In addition, we launched one of the very first 12-week software engineering immersive classes for selective active duty members. Due to this success, we received requests to deliver three more immersive classes in the coming quarter. While still in the early stages of development, the military segment of Galvanize's business has grown more than fourfold in the past year. As I mentioned last quarter, the community business segment of Galvanize continued to be slowed by COVID-19. However, we believe that a combination of Galvanize's immersive boot camp business, what we call the consumer business, and the enterprise business will deliver revenue growth in fiscal 21. As expected, Galvanize posted a $7.6 million loss in EBITDA for the recent quarter, first quarter. But we continue to believe this organization will contribute a positive EBITDA by the fourth quarter of this year. This assumes the economy and our community business rebound a bit in the second half of the year. If that rebound is delayed, then we could see breakeven get delayed into FY22. Taking all of this into account, our revenue guidance for the year is $1.445 billion to $1.470 billion. This is an increase of up to 41% year over year. Guidance for operating income, we expect adjusted operating income in the range of 120 to $130 million. That's an increase of up to 110% year over year. This income improvement, comes from both revenue growth, the inherent leverage in our business, and proactive management of our cost structure. This year, we'll continue to reallocate funds to fuel our career learning activities, while also investing in programs that enhance the customer experience, increase the teacher efficiency, improve student outcomes, and improve student retention. Regarding capital expenditures, we're increasing our investment in the range of 50 to 60 million. This reflects one of our stated use of funds from a recent financing, reinvesting in the core business and core business opportunities. As a part of this, we're stepping up our spending specifically to grow our career learning business and strengthen our systems and infrastructure. We're continuing to modernize our curriculum and increase the use of gamification, video, and artificial intelligence to improve student engagement. And in building enhancing tools that support teachers in introducing new products and services or school districts that want to expand their capabilities, especially in career learning. Additionally, our investment in career learning will include expanding the number of project-based learning courses, deepening the content of existing pathways, and expanding into new career pathways. In summary, we've posted an extraordinary strong quarter, provided guidance for a record year, total full-time program enrollments exceeding 195,000 of 57%, revenues approaching $1.5 billion, profitability more than double on a year-over-year basis. It's important to note that current trends and public opinion support our enthusiasm and our investment in our career learning business. This includes improving trends at Galvanize, which we continue to believe will be accretive to EBITDA as we exit the year. Let me close on the five key focus areas for the year. These are the things we'll focus on. We remain committed to constantly reimagining the online and blended learning experience, investing in teachers and school leaders. Second, through our customer experience organization I initiated nearly two years ago, we will work to retain as many students as possible, showing them the K-12 Power Program stand head and shoulders above the rest. Internally, we say we've got to delight the customer. Our improvement and retention over the last few years demonstrates the effectiveness of our focus on the customer experience. Third, we'll continue to invest in and grow our general education business. This includes ensuring that we have products, quality, and infrastructure to scale the business. We're targeting consistent single-digit revenue growth in this business for the next couple of years. Now, we all know nobody knows what's going to go on with the pandemic, so the impact of that is still unknown. If there's an effective vaccine, if there's treatment, if it's rolled out fast, we could see more than we thought. Students go back to brick and mortar. We might see flat to declining enrollment. But right now, our belief is we can see single-digit revenue growth in this business for the next couple of years. Fourth, we continue to expand our career learning business. That includes expanding our footprint, programs, partners, and capabilities. We're targeting high double-digit revenue growth over the next couple of years. And we might, just might, see another year of triple-digit percentage growth next year. And fifth, we work with school districts to grow our sales of a la carte products through the learning solutions business. We believe that our continued focus on these five areas, our unwavering dedication to academic service and innovation, and increased awareness and acceptance in the marketplace for online and blended learning, will enable us to produce consistent revenue growth for our shareholders over the long term. Thank you very much for your time today. I'll turn the call over to Tim Medina. Tim?