Stride, Inc.

the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Tim Casey, Vice President, Investor Relations. You may begin your conference.

Thank you, and good afternoon. Welcome to Stride's first quarter earnings call for fiscal year 2024. With me on today's call are James Rue, Chief Executive Officer, and Donna Blackman, Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a presentation that can be found on the Stride Investor Relations website. Please be advised that today's discussion of our financial results may include certain non-GAAP financial measures. A reconciliation of these measures is provided in the earnings release issued this afternoon and can also be found on our investor relations website. In addition to historical information, this call may also involve forward-looking statements. The company's actual results could differ materially from any forward-looking statements due to several important factors as described in the company's latest SEC filing. These statements are made on the basis of our during this call. Following our prepared remarks, we'll answer any questions you may have. I'll now turn the call over to James. James?

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. These are some of the macro themes our country is going through right now, and 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. 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 outcome they did not want. And demand for our programs is growing. Enrollments for this fall increased 8% to almost 188,000 enrollments. 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. adjusted operating income at the midpoint of our range is up over 400% from fiscal year 20 and up well over 50% from fiscal year 21 when we had the pandemic benefit. Our net income will be up something like 600% from fiscal year 20. Our EPS will be over $3.60 a share, which is six times higher than fiscal year 20. Now, as we return 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-aged children share these same concerns about our public education system, and they are becoming more vocal about their dissatisfaction. 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 school choice by a margin of more than two to 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 through 12 education in the US. Conversely, while almost three quarters of 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've selected a K-12 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. 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's 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 a career. And they want to develop those skills earlier. Our programs do exactly that. While also helping to alleviate student loan debt pressures and very importantly, fill the skills gap for us 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 requirements. That's up from just over 20% four 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 current programs, but the underlying drivers of demand demonstrate that we made the right decision to move into this fast-growing space. Our key objectives and strategies have momentum like never before. As I've mentioned, our guidance suggests we are primed for record revenue and profitability performance for this year. I mentioned last year that I felt genetic enrollment had bottomed out, and it looks like that turned out to be accurate. We think this demonstrates the strength of our K-12 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. As you know, we're still early in these efforts, and I'm excited to share more information at our upcoming investor day, which is going to be scheduled for November 14th 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 first quarter results and guidance.

Donna?

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 to make every student successful in our program. Turning to our reported results for the quarter. Revenue for the quarter was $480.2 million. an increase of 13% from the first quarter of fiscal year 23. Adjusted operating income was $14.8 million compared to an adjusted operating loss of $19.9 million in the same period last year. Earnings per share were 11 cents, up 65 cents from last year. Capital expenditures were $16.1 million 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 years ago. We saw growth in both our general education and career learning programs, underscoring the continued demand for school alternatives that James outlined in his comments. It's clear that the effects of the pandemic have had a lasting impact on the awareness and acceptance of full-time virtual offerings. Returning to our quarterly results, career learning revenue grew 18% to $180.8 million. This performance was driven by continued strong enrollment growth in our career learning programs. These programs generated $151 million in revenue on double-digit enrollment and 6% revenue per enrollment growth. Our adult learning business grew 7% to $29.9 million. Turning to the general education programs, revenues increased over 10% to $299.3 million for the quarter. Enrollment through Gen Ed increased 4.7% from last year. Revenue per enrollment grew 7.4%. First quarter revenue per enrollment increases for both gen ed and career learning were somewhat impacted by timing. We think we will finish the year with revenue per enrollment growth of around 4% to 6%. Gross margins for the quarter was 36%, up 550 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 improvements throughout this year. We also feel like we managed 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 improve by 200 to 250 basis points. Selling general and administrative expenses increased 7% to $169.6 million. driven by increases at net thirds to support its continued growth, investment in new products, and the impact of stock-based compensation. Stock-based compensation for the quarter was $8.4 million, up from the prior year due to the timing of some long-term performance growth. We expect to finish the year with stock-based compensation in the range of $28 to $33 million. Adjusted operating income for the quarter was $14.8 million. Adjusted EBITDA was $39.8 million. Historically, the first quarter has not been a profitable quarter for us. So the strength this year highlights the work that we've done to execute on efficiencies and improve teacher hiring. This, coupled with the strength in our enrollment, sets us up to be profitable every quarter this year. and demonstrates the underlying financial strength of STRIDE. Returning to our quarterly results, interest expense for the first quarter totaled $2.1 million. 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. Capital expenditures in the quarter was $16.1 million, down slightly from last year. Free cash flow, defined as cash from operations, less capex, was negative $151 million compared to negative $160 million in the prior year period. This is our normal seasonality of cash flows and relates to school launch and the onboarding of students. We expect to see positive cash flow for the next three quarters. The end of the quarter with cash and cash equivalents of $254.6 million. Turning to our guidance. For the second quarter of fiscal year 2024, we are forecasting revenue in the range of $490 to $510 million. Adjusted operating income between $80 and $90 million. and capital expenditures between $15 and $18 million. For the full year, we expect revenue in the range of $1.96 to $2.03 billion, adjusted operating income between $250 and $275 million, capital expenditures between $65 and $75 million, and an effective tax rate between 25 and 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&A.

Operator? Thank you. At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from the line of Jeff Silver with BMO Capital Markets. Your line is now open.

Thank you so much. I 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. What's different this year?

Yeah. Hey, Jeff. So I think there's really two 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 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, you know, they've been through a number of cycles and they were able to identify things that we could do better. So one I think is 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. This year, we didn't really have a lot of new career programs. And so, you know, I think a lot of our enrollment strength overall is that a testament to the fact that the market's still there for our business as a whole. And some of the sort of nuances between general education and career ed, you know, there's, like I said, there's a little bit of cannibalization. There's some puts and takes here and there. 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.

Okay, that's really helpful. And I know typically in the first quarter, I think, Donna, you had mentioned that, you know, you typically lose money, and I think the bottom line strength was also, you know, really surprising. Were there any timing differences this year? I know you talked about the efficiency, but did we shift some expenses from 1Q to 2Q?

No, I think it's I think it's what James had talked about, right? And so it's the strength of our enrollment in the quarter. It's those 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 teacher hiring. So we were careful not to overhire as well as not underhire. So striking the right balance, all the things that contributed to us having a strong financial results in Q1.

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 to be profitable every quarter. There is always going to be some seasonality in our business. So you'll still see a level of seasonality. But I think at the scale we're at and at the, I think, as Donna mentioned, the efficiencies we've got, I think our goal has got to be to be profitable every single quarter going forward.

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?

So we expect the most to be within that range. Just given sort of where we were in Q1, I would expect career learning to grow for the full year to be on the lower end of that versus gen ed. Again, just based upon what we still need to learn.

Okay, great. Thanks so much.

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

Yes, thanks very much. Good evening and congrats on the results. It's quite something seeing a real enrollment growth, which is very exciting. A couple of questions. First one, can you just talk about whether there's any sort of volume component to go by and how many new schools have opened and whether any new states are coming on screen within uh in particular general ed um that was the first question um and then the second question is on the sort of guidance um you set the 24 guidance um at a level which actually just slightly encroaches on the 25 guidance i suppose Probably the answer is you're going to say wait until reinvest today on the 14th of November, but I'm just interested in whether we should infer anything from the midpoint of 24 to the midpoint of 25 in terms of the growth and margin progression. Thank you.

So, I'm going to try my best to answer your question. 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 in Q4 for both gen ed as well as for career learning. We've added some new programs, about five new programs for gen ed and four new programs for career. with respect to our i think it says 2024 we're sort of bumping up against our 2025. um and so i think uh when we have our investor day um in november will be a good time for us to talk about where we think we will be from a long-term long-term perspective you know we have said you know last year every single quarter that we were uh confident in our you know 2025 revenue in aoi numbers and so that we say the path to get there would be different, but felt really strongly that we would 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.

That's great. Sorry, you managed to interpret my question, so I really appreciate that. One quick follow-up. Adult learning, sequentially, Is there anything to read into that? Is that seasonal, or is there a little bit of sort of softness coming through from sort of end markets and tech?

Yeah, so I think there is something to read into that, meaning that, you know, 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, you know, for a lot longer than most of the market has been able to do so. And you can sort of see, I think, probably across the landscape, but also you can, you know, 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 2% of our overall business. It has zero material impact on our growth prospects. It has almost a negligible impact on our profitability prospects or 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.

That's very clear. Thank you very much.

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

Hey, Jim. You have Matt 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 students that re-registered? And did either of those come in differently than you would have expected?

Yeah, so both performed well. Our re-reg cohort, you know, if you take away the pandemic year, because obviously that one year was very, very anomalous, you know, we basically had on both sides of it, you know, near record-breaking years. And so, you know, I think both continue to perform strong. I think it speaks to, one, 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. 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. And I think more importantly than the strength in your enrollment demand is our ability to convert new enrollments. also continues to improve. 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, um if you remember last year at this time um we said that uh well while count date enrollments last year were soft our in-year enrollment trends were looking strong 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 uh we're outperforming last year So we see a lot of strength in our business. We see a lot of demand. I think that 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. So that's also really important, I think, from an overall structural demand perspective going forward.

Thank you, James. That's a super helpful color and great to hear as well. And then I had one on revenue per enrollment as well. Sounds like you're expecting revenue per enrollment. growth in the range of four 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.

No, 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% range.

Got it. Thank you, and great quarter.

And the one thing I would... Go ahead. You hear us talk about this a lot. Mix obviously plays a part in that, right? And so throughout the course of the year, what happens with in-year enrollment, et cetera, the mix is one factor that can impact that growth number.

Understood, and thank you again, and great quarter. Thank you.

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

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

Yeah, sure, Alex. Great question. And, yeah, you know, I think I'm a huge believer in two fundamental pillars for our business. One 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. 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, you know, 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's a structural shift, a macro shift away from linear TV or regular TV. And so we actually moved away from that channel a fair bit. We didn't spend as much in that channel because our analytics tell us it's less productive. Conversely, our analytics suggested that we had a lot of opportunity in just regular search engine marketing, sort of the Google paid search clicks ad stuff that you do. and refining our search terms we've got a real rock star uh that runs that team for us that um you know he just he just continues to mine opportunities uh in that channel for us that are really compelling 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 uh for a career segment Those things I think we can still improve upon. Our enrollment center, which is, you know, we consider marketing and the enrollment center 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. 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. You know, 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. 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.

Yeah, no, James, this is very helpful, and we'll look forward to the investor day in November. Thanks very much. Thanks.

As a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad. We'll pause for just any last moment questions. There are no further questions at this time, and this concludes today's conference call. Thank you for attending. You may now disconnect.