Stride, Inc.

Good day and thank you for standing by. Welcome to the Stride, Inc. Fourth Quarter Fiscal 2021 Earnings 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 zero. I would now like to hand the conference over to your speaker today, Mr. Timothy Casey. Please go ahead.

Thank you, and good afternoon. Welcome to Stride's fourth quarter earnings call for fiscal year 2021. With me on today's call are James Rue, Chief Executive Officer, and Tim Medina, Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a slide presentation that can be found on the Investor Relations website. Please be advised that this call may include certain non-GAAP financial measures during the discussion of our financial results. A reconciliation of these measures is provided in the earnings release issued this afternoon, which is also posted in the investors section of our website. In addition to historical information, today's 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 described in the company's latest SEC filings. 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?

Thank you, and good afternoon. We all appreciate what a difficult year this has been. Even in the face of this incredible adversity, Stride has been able to thrive. And we've only been able to do so because of the commitment of our thousands of team members. These folks have been dedicated to our customers, and the families that need an alternative approach to education now more than ever before. So I want to start by saying thank you to all of our dedicated staff. This was also a year in which the country and the world took notice of online and distance learning in a mainstream way. But the experience was not always positive. Across the country, many schools struggled with uncertainty and inconsistency for students and families as they vacillated between online and in-person instruction. Thankfully, our 20 years of experience was able to deliver a seamless experience for our customers. Our teachers, platforms, content, and curricula were all developed to meet this need. Everybody now knows what online learning is. Many have not embraced it. Others realize its potential if done the right way. We stand alone. having served millions of students in our online bond and while many schools struggled with learning loss and deteriorating test scores our results outpaced them in the face of onboarding a record number of families for our programs i'll get to how we are training for this fall in a minute first i want to review some of our fiscal 2021 accomplishments by almost any measure we had a record year by a long We helped over a quarter of a million full-time learners, and millions of other users became interested in our programs. Learning loss became the norm, except in the schools we managed. No wonder when national data showed an overall enrollment decline of 1.5 million students. We published our first-ever ESG report, backed by a number of key initiatives. A new partnership with the National Association of Black Male Educators designed to increase the diversity of teachers across the country. A program with Teach for America to share practical online experience to student teachers. Our We Stand Together College Scholarship, a $10 million multi-year commitment to support underrepresented students. But we are not relying on the tailwinds of the pandemic to set our long-term path forward. We rebranded our company from K-12 to STRIVE to ensure that our name better reflects the commitment to providing educational opportunities for learners of all levels. We acquired two high-growth, higher-margin companies to expand our adult career learning offerings. We held an investor day to outline our strategy and growth trajectory through fiscal year 2025, a trajectory that I believe we are well on track to hit. And we raised almost $360 million through a convertible note offering to facilitate further investment in both organic and inorganic growth. In our general education business, we saw student enrollment increase by almost 50%. With all the uncertainty this past year, we saw dramatic improvements in retention in both our general education as well as our career education business. And we did not see the mass withdrawal of students in the second half of the school year as many states began to reopen their brick and mortar schools. This is a testament to the stickiness and value propositions of our programs. As we've mentioned previously, students enrolled in our career learning programs tend to retain at a higher level than our general education students. And we believe this trend will continue. We also had a record number of re-registration families indicating that they will be returning for the fall. Our career learning business finished the year with over $250 million in revenue. This is an increase from less than 10 million just four years ago. A 150% compounded annual growth. This year we saw growth of over 125% to almost 30,000 students. These programs offer a career path without the need for an expensive college degree. And we are increasing the programs from our MedCerts acquisition that we will offer to high school students for certificates in the healthcare industry. Both our MedCerts and tech elevator acquisitions continue to grow and contribute to the bottom line and are exceeding our expectations from when we purchased them. They are high growth, high margin market opportunity platforms for us that we will continue to leverage into other areas of our business, particularly our high school programs. We will continue our focus on IT and healthcare training because these industries are projected to add more than two and a half million new positions in the US by 2029. On the other hand, our galvanized acquisition has not performed according to our plan. We've restructured this business and believe we now have a glide path to both renewed growth and profitability heading into next year. We will also look for ways to invest behind and expand our adult learning offerings with a lens toward making career learning a $1 billion plus business. In June, we released our inaugural ESG Initiatives Report. As an education and career learning company, we have a significant opportunity to help achieve global education, workforce, and diversity and inclusion goals. All of our ESG initiatives are based on the four cornerstones outlined in the report. Expanding lifelong learning for today's competitive workforce, supporting racial and socioeconomic equity and inclusion, fostering transparent leadership, governance, and professional development, and contributing to a more sustainable world. For me, our focus on learner outcomes is the most important aspect of all our ESG efforts. Stride is in a unique position to influence the lives of millions of students of all ages. Not many other companies have that kind of impact or carry that responsibility, and we don't take that responsibility lightly. By now, everyone is aware of the significant shortages impacting the workforce. Stride is well positioned to help alleviate that shortage. To that end, we have set 10-year goals that are driven by learner outcomes. So by 2030, our goals are to graduate over 100,000 students from our STRI career high school program, to graduate hundreds of thousands of students from our adult programs, and to achieve leading graduation and learning growth rates for over a million students. Our report contains a lot more specific information on our ESG efforts. I encourage everyone to read it. It can be found on our investor relations website, and there's a direct link in today's earnings presentation. Now I want to turn to fiscal year 22. The long-term trends, prospects for our general education and career learning businesses both remain tremendous. The COVID-19 pandemic has raised consumer awareness around the need for and the benefits of online education in grades K through 12 and in adulthood. While it doesn't work for everyone, many students and families have realized that online learning and the flexibility it provides is a preferred alternative. Increased awareness and openness to different options to meet educational needs fundamentally provides for a long-term tailwind for all aspects of our business. As we do every year, we will provide formal fiscal 2022 guidance during our first quarter earnings call in October. So while we're not providing guidance right now, I do want to provide some insight into how the current enrollment season is trending. Even now in August, we're still less than halfway through the volume of our typical enrollment season. And this means that these trends could shift in the coming weeks. Additionally, the pandemic has increased uncertainty around all these metrics, so please do not extrapolate what I'm about to say. We have not seen the mass return to remote schools that many have predicted for students. We're currently exceeding the number of re-registrations that we saw during fiscal 21 and in previous years. Right now, we're well ahead of where we would be normally in enrollments versus pre-pandemic. Awareness for our offerings is at an all-time high. pandemic helped to drive awareness, and we no longer need to explain what distance or virtual learning is to families. They get it, and now they just need to choose it. Conversion rates from our new league are at an all-time high, so when families seek us out, they are more likely to enroll. We believe that health and safety continue to be top priorities for families, and we're seeing that and we're seeing even stronger demand in states where the Delta variant has surged. Our goal is clear, it's to grow every year. Importantly, we remain on track to achieving the long-term revenue and profitability targets that we outlined during the investor day last fall. We still anticipate achieving revenue of $1.9 to $2.2 billion adjusted operating income of $250 to $350 million by the year 2025. Thank you for your time today. Now I'll hand the call over to Tim to discuss our full year 2021 results. Tim?

Thank you, James, and good afternoon, everyone. First, let me recap our reported results. Revenue for the full fiscal year 2021 was $1.54 billion, an increase of 48% over the prior fiscal year. Adjusted operating income was $161.4 million, up 160% compared to the prior year. Capital expenditures were $52.3 million, an increase of $7.3 million over last year. In each case, these results met or beat the expectations we provided in our guidance last quarter. The outperformance was primarily driven by favorable revenue per enrollment and retention. Looking ahead to fiscal 2022, it is still too early to confidently forecast our count date enrollments for the reasons James just outlined. Given where we are in the process, there remains variability around two key factors. Firstly, ongoing re-registration and new enrollments, and secondly, the retention of these enrollments once school starts and through the month of September. Now here's what I can say today about fiscal year 2022. We expect to grow adjusted operating income and adjusted EBITDA year over year compared to our strong fiscal year 2021 results. And that is thanks to an expectation of continued strong revenue growth and career learning, margin improvements, and higher operating leverage. Furthermore, We believe that the increased awareness and acceptance of online and hybrid education accelerated by the COVID-19 pandemic has sustainably reset the baseline for the general education business. Therefore, we are confident that general education revenue in fiscal year 2022 will be significantly larger than it was in fiscal year 2020. As we have done in the past, we will refrain from providing guidance until we report our first quarter fiscal 2022 results in October. By that time, we will have much greater visibility into enrollments for the new school year. Returning to our results for fiscal year 2021, revenue from our general education business increased $346 million or 37% to $1.28 billion. This was due primarily to higher enrollments partially offset by lower revenue per enrollment. General ed enrollments rose 45% year-over-year to more than $156,000, while revenue per enrollment declined 5%. The decline in revenue per enrollment was due primarily to state budgetary pressures resulting from COVID-19 and a higher mix of lower-funded states. As we stated last quarter, we expect revenue per enrollment to improve next year given what we know today about state budgets and policy. Career learning revenue rose to $256.6 million in FY21, an increase of 140%. This growth was driven by significantly higher volumes in our stride career prep programs, as well as organic growth and new acquisitions in our adult learning businesses. We expect to continue growing our stride career prep programs in FY22 with plans to open four new programs and expand eight existing programs in FY22. Gross margins were 34.8%. up 140 basis points compared to fiscal 2020 driven by an increased contribution from the higher margin adult learning businesses and lower costs from efficiencies and automation initiatives we expect margin improvement to continue into fiscal 2022 we are confident that we will achieve our 36 to 39 percent gross margin targets much sooner than fiscal 2025, which was our original target communicated during our November 2020 investor day. Selling, general, and administrative expenses were $424.4 million, up 35% from fiscal 2020. The increase in SG&A was driven primarily by higher costs associated with our enrollment growth, an increase in stock-based compensation expense, and the annualization of expenses for our adult learning businesses. Adjusted EBITDA of $239.9 million reflects an increase of 87% over FY20. Adjusted EBITDA margin improved 400 basis points from 12% of revenue in FY20 to 16% in FY21. The margin improvement and growth in adjusted EBITDA are driven by higher revenue and improved operating leverage. Stock-based compensation expense came in at $39.3 million, up 67% year over year, driven by the timing of certain stock-based grants tied to our career learning business. We currently expect stock-based compensation expense to decline to a range of $30 to $34 million in FY22. Interest expense totaled $18 million for fiscal 2021, in line with the expectations we provided last quarter. This consisted of approximately $5 million in cash interest and $13 million in non-cash amortization of the discount and fees on our convertible senior notes. In the first quarter of fiscal 2022, we early adopted new accounting guidance related to our convertible notes. This will result in the elimination of the non-cash debt discount expense, among other impacts. As such, we expect our interest expense in FY22 to be materially lower and more in line with the cash interest we recognize in FY21. Our full year tax rate for FY21 was 26%, below the guidance range we provided last quarter. We had some positive tax benefits related to stock-based compensation that had the effect of lowering our tax rate for the year. In FY22, we anticipate an increase in non-deductible compensation that will cause our tax rate to be closer to the 28 to 30% range. Capital expenditures for the year totaled $52.3 million, up 16% from the prior year, due mainly to higher capitalized software development costs associated with adult learning, automation, and improvements to our platforms. CapEx as a percent of revenue was 3.4%, and that is lower than our historical average of approximately 4% to 5% over the past few years. Free cash flow, defined as cash from operations less CapEx, totaled $81.9 million for FY 2021. This was approximately $45 million below the expectations provided at Investor Day last November due entirely to the timing of receipts, which drove lower than expected cash from operations. Some of the timing issues were associated with our growth in states that regularly pay in the following year, and some were related to delayed payments due to COVID. In fiscal 2022, we expect to have significantly higher free cash flow reflecting these timing issues from fiscal 2021. Finally, we ended the year with cash and cash equivalents of $386.1 million, an increase of 173.8 million compared to the same period a year ago. We believe that our strong free cash flow generation and liquidity will continue to provide the financial flexibility to fund our existing operations and pursue strategic acquisitions. To summarize, fiscal 2021 was a landmark year for Stride. We saw record enrollments in both our general ed and career learning businesses, which drove double-digit growth in revenue, adjusted operating income, and adjusted EBITDA. Our career learning assets, which accounted for less than $7 million of revenue four years ago, generated over a quarter billion dollars in revenue during the year, a sign of the tremendous demand for career education offerings and strides innovation and leading position within this market. In addition, we continue to improve our margin profile and bolster our cash and liquidity position while maintaining a low level of indebtedness. As James mentioned, we could not be more excited about the prospects for our business and will continue to execute on our high growth career learning strategy and margin expansion initiatives. And with that, I'll turn it over to the operator for Q&A. Operator?

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. First question comes from the line of Jeff Goldstein of Morgan Stanley.

Hey guys, good evening. So I know in your prepared remarks, you mentioned re-registrations are performing very well. So I have to ask, are you able to put some numbers either around that or other figures that could help us better understand the trajectory of enrollments to this point or If not, I guess broadly speaking, are enrollments coming in above your expectations at this point? And then when you mentioned enrollments are doing well where Delta has surged, would you characterize that as making up a majority of your enrollment base? Just trying to think overall like additional color that you have around either enrollment trends and how Delta is affecting that really.

Hey, it's James. As we said, we're not providing any guidance right now. really can't give you a lot more color than what we've given you. The enrollment trends, re-registration trends are very strong. We're seeing more than we've ever seen. We're not disclosing sort of new percentages. The Delta variant, you know, you can see a lot of the states that have spikes in the Delta variant, places like Texas, we just see sort of unprecedented demand, very similar to what we actually saw last year. So we see that spike happening now. We think that a lot of people are going to have ongoing concerns about safety, and we think it bodes well for the long-term prospects for our business, but we're not going to provide more color right now.

Okay, no problem. I thought I would ask. I know a bigger focus for you recently is trying to sell more digital services on an ad hoc basis for districts that may not need a fully managed program. So I'm just curious for any update on progress there and what type of demand you're hearing from districts for those services as we enter another year that likely has some virtual options.

Yeah, it was really good. Last year, that sort of district business, if you will, almost doubled. And so we saw a lot of good business there. We continue to see a lot of interest. Our pipelines, I think at this stage in the year, our pipeline for that business is actually stronger than it's ever been. We also have states like California that are sort of mandating districts sort of get ready. There's some legislation there that sort of helps us and helps providers like us. And frankly, I think that that trend, meaning that the sort of district demand trend, that's one, irrespective of the pandemics, just unlikely to go away because who knows what the future holds. And I think districts can't be caught flat footed going forward. And most districts just don't have the resources or skill to stand up and down programs like ours easily. And frankly, I think that they need to concentrate on the programs that they've got going. And so I think in many cases, it just makes more sense to outsource to somebody like us.

All right. Thanks a lot. I appreciate the call.

Next question comes from the line of Jeff Silber of BMO Capital Markets.

Thanks so much. Again, I appreciate that you're not providing guidance for the current year, but you did give us some indication in terms of where you expect both adjusted operating income and adjusted EBITDA to go. Can we get a little bit more color of what's driving that? Are there specific segments, specific leverage? Anything you can help us out on would be great.

I think the biggest thing is what we sort of laid out in our investor day presentation, which is we think gross margins are going to improve. We think that drives great leverage in our business. And obviously we'll keep a line on the SG&A expenses. You know, we're pretty confident that we can continue to grow our bottom line irrespective of what happens here for the rest of the season.

Okay, fair enough. You had also talked about expectations for revenue per student in your general education business to grow in the current fiscal year based on, I think you said, you know, budgets that you've been tracking so far. I know a lot of the federal stimulus money is not directly allocated to you, but are you seeing benefits or do you expect benefits from that? And if so, will that continue beyond fiscal 2022?

Yeah, the good news and the bad news is that we really were not seeing much of a benefit for us. I think those dollars are, as you said, they're not really directed towards us either directly or indirectly. We could provide some limited services, I think in some instances, where districts may choose to allocate some of those dollars for some things that we can help them with. But we're not really seeing a big bump in that. We don't expect to see it. But, you know, the other side of that is that it's also nothing that's going to go away in future years. So, you know, having that one-time bump for us, I don't think it would have been that meaningful anyway. And we're really just focused on helping the districts that we can in any way we can. And we're not just focused on those dollars. Okay, that's great to hear.

Thanks so much. Thank you.

Next question comes from the line of Alex Paris of Barrington Research.

Thanks for taking my questions. I don't want to ask you any more regarding the fall, but I'm glad to see that early leading indicators are positive. I wanted to dive a little deeper into per pupil funding. It was down this year. I noticed, though, at least from the press release, it looked like it was down more on the career learning side than the general education side. What's going on there?

Tim can probably expand a little bit more. I think it's predominantly a function of mix. a lot of our career learning programs and where we have a lot of larger programs, they just happen to be in states that have slightly below average funding levels. I wouldn't read too much into it, frankly, and I think over the next several years it'll normalize back, probably more in line with the overall average. I wouldn't add anything to that, James.

Okay, fair enough. And then specifically, during fiscal 21, California's approach to funding impacted revenue per enrollment for the full year. For example, as I recall, they did not fund incremental students, yet you served them anyway. Has California finished their budget, and what are their plans for the coming year, and how do you expect your California schools to be funded?

Yeah, we do expect our enrollments to be fully funded from California in fiscal 2022, Alex.

Okay, great. And that will contribute to an increase in revenue for enrollment in 22 versus 21. That's correct. Just a follow-up on a prior question and comment. Federal stimulus, it's not aimed at you, but the school district's benefits. So would you expect a benefit to LRN in your learning solutions business as a result?

Yeah, I don't think we're seeing a material benefit. Of course, there could be some. But just in the overall context of our business, they're not dollars that we'll specifically chase, if you will. What we're doing is we're trying to provide a virtual learning program for as many districts' needs that stood up either for the fall or even in an emergency situation. And we sort of leave it to the districts to decide how They fund it, whether it's from ESSER dollars, federal dollars, or any other pools of money that they have. That's really up to them, and we really leave it up to them. So we sort of don't want to get too much into how they allocate their dollars. That's the job of the districts.

Okay, fair enough. And I guess the last one I'll ask you is, and I think I know the answer to this, I don't think you have any new states planned for the coming year. I appreciate the fact that you're going to open up four new stride career preps and you're going to expand eight. But what about new states in general?

No new states anticipated for fiscal year 2022 at this point.

Okay, that's what I thought. Thank you very much.

Thanks, John. Again, to ask a question, you may press star, then the number one on your telephone keypad. Next question comes from the line of Stephen Sheldon of William Blair.

Hi, thanks for the question. So it seems like the gross margin improvement is trending a bit ahead of schedule here. I just wanted to ask if you have any update on the efficiency, some of the efficiency improvements that you had in progress, you know, such as the automation of the enrollment process that you all had spoken about previously?

Sure. Well, this is the first enrollment season where a parent can, in a fully automated manner without interaction with a human on our side, enroll their students. So that's a big plus for us from an efficiency standpoint. It's also outstanding customer satisfaction. Now, many, most parents still want some interaction. They have some questions, et cetera. But that capability has been turned up entirely, Stephen, as a big example.

Okay. Thank you. And then another quick one. So it seems like for the most part trends were positive in career learning with the obvious exception of galvanize it. Just curious if you could expand a little bit on what's going on there, what kind of headwinds you're seeing.

Yeah, I mean, if you may remember, the galvanized business is really sort of three pieces. There was a direct-to-consumer piece, there's an enterprise piece, and there was a non-workforce piece around what they call a community business, like a WeWork type of real estate business. and um and i think obviously in the past uh year since the pandemic hit that third leg of the stool uh just crumbled underneath underneath us and so we closed the acquisition early in the first calendar quarter of last year and then the pandemic hit sort of late in that calendar quarter and so um virtually this entire year we were hit entire fiscal 21 we had a very weak community business. In addition, the pipeline in the enterprise business did not materialize in the way that we thought it would, and so the enterprise business also underperformed. They have a great consumer product, and I think that consumer product is going to continue to thrive. They place their students in a lot of the preeminent technology companies across the country, And so I think that trend is going to continue, and we're going to double down on the consumer business and cut out the costs from those other businesses and turn this thing around this year. And so while it may be smaller overall than what we had originally expected, I still think we can put it onto a path to create a lot of value for us.

Okay. Makes sense. Thank you for the questions.

There are no further questions at this time. Presenters, you may continue.

Great. Thanks for the call today, everybody, and we'll see you in October with guidance.

This concludes today's conference call. Thank you for participating. You may now disconnect.