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spk00: call for fiscal year 2024. With me on today's call are James Rue, Chief Executive Officer, and Don Blackman, Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a presentation that can be found on the Strive Investor Relations website. Please be advised that today's discussion of our financial results may include certain non-GAAP financial measures. 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 views and assumptions regarding future events and business performance at the time we make them, and the company assumes no obligation to update any forward-looking statements made during this call. Following our prepared remarks, we will answer any questions you may have.
spk08: I will now turn the call over to James. James?
spk06: Thanks, Tim, and good afternoon. The state of education in the United States continues to evolve, but more importantly, the way parents and students view that education is evolving. Every survey and research I have seen this year confirms that customers want choice. A recent survey by the National School Choice Awareness Foundation strongly supports this. Of those surveys, almost three-quarters indicated that they'd at least considered a new school for their child over the past year, and that is up from just over half last year. Almost two-thirds looked for a new school for their child, and over half said they were likely to consider a different school over the coming year. And the paradigm on college as a default option for students is beginning to show real cracks. In a recent survey of high school students, more students felt that on-the-job training Courses leading to licensure and courses leading to professional certifications were a better value than two or four year college degrees. That value equation between college and skills training is swinging in favor of skills training. The Wall Street Journal also recently published a number of articles on this trend. They reported that 52% of college graduates are in jobs that don't make use of their skills or credentials. They also reported on the growing trend of Gen Z students entering skilled trades, leaving the traditional college path behind to pursue high-paying skilled jobs. The article cited a survey that showed the growing rise of generative AI has changed the equation when it comes to college, with the majority of the respondents saying they thought blue-collar jobs offered better security than white-collar jobs, given the growth of AI. One of the most compelling findings was that the most critical factors for college graduates in finding success are the things that Stride can offer at the high school level, a choice of major, internships, and getting the right first job. We at Stride are delivering tomorrow's education today. Artificial intelligence also continues to dominate the news cycle in education as well as other industries. We are building a foundation our AI efforts and are developing and testing ways to improve the customer experience for the teachers and students we serve. Initial feedback is very encouraging. We remain committed to incorporating AI and other technologies into our programs, but we will do so by putting the right tools into the hands of teachers and students to supplement their work and empower all parties. Now, we just finished another incredible quarter. we reported record quarterly revenue, and our enrollments hit a new all-time high of 198.4 thousand students, sequentially higher than last quarter and higher than the pandemic levels of fiscal year 21. Our in-year enrollment growth, now for two years running, indicates that the landscape of educational choice is expanding and more fluid, and that the fall is just one indicator of customer sentiment. Many of you are already wondering about the upcoming fall season. Well, we are focused on delivering for our customers this year and ending the year strong. If the trends we are seeing in enrollment during this year continue, we've set ourselves up for a strong fall season. Application volumes as a proxy for demand continue to trend strongly, and conversion rate indicators are positive. As of today, we have the largest cohort of re-registering students in STRIDE's history. There's still a lot of work to be done before next school year, but we feel we are well positioned to continue to grow enrollments. Given the landscape of education today, I believe STRIDE represents one of the many emerging trends on the future of education by delivering on tomorrow's education today that is accessible, technology-driven, flexible, career-focused, and proven.
spk07: With that, I'll pass the call to Donna. Donna?
spk01: Thanks, James, and good evening, everyone. As James talked about, we continue to see strong in-year enrollment trends in the third quarter. Coupled with our strong retention numbers, we feel comfortable increasing both our revenue and profitability guidance for the full year. We now anticipate revenue growth between 10% and 11%, and adjusted operating income growth between 39 and 44%. These growth rates exceed the annual growth rates we outlined in our 2028 targets in November. Turning to our quarterly results, we reported revenue of $520.8 million, an increase of 11% from the third quarter of fiscal year 2023. Adjusted operating income of $96.4 million, up 20% from the same period last year. Earnings per share of $1.60, up 30 cents from last year. And capital expenditures of $16.3 million, an increase of $1.1 million from last year. Career-learning middle and high school revenue grew 11% to $167.9 million. This performance was driven by enrollment growth of 10% year-over-year and revenue for enrollment growth of 2%. We continue to see enrollment growth in the quarter up over 1,000 from the second quarter. This is a continuation of in-year enrollment trends we've seen in the second quarter and third quarters over the last two years. In our general education business, revenue was $328.9 million, up 14% from last year. This strength was also driven by continued enrollment growth in the quarter, with average enrollments finishing the quarter up almost 4,000 from last quarter. Revenue per enrollment in the quarter was up 7.5% from last year. As you think about the fourth quarter, it's important to remember that we anticipate enrollment declines from the third quarter high, as most of our programs no longer accept new enrollments during the quarter. There's always the opportunity for us to convert these leads into enrollments for the upcoming school year, but we still expect a sequential decline in Q4. Per-pupil revenue continues to be impacted by timing, and particularly for career learning, we are going against a strong comp from last year when we finished the year up 16%. We continue to see good funding increases across general and career. However, in any given quarter, these can be impacted by a number of things, including mix, yield, and timing impacts from prior year catch-ups that we've previously discussed. While it's still very early in the process of next year's funding, as of right now, we've seen overall positive funding environment at the state level for fiscal year 2025, but not as strong as we've seen over the past two years. States are also grappling with the loss of ESSA funding in the coming school year, which could impact how they decide to allocate funds across all schools. Our adult learning business continues to see impacts from the slowdown in our coding programs. Revenue for the quarter declined $5.9 million to $24 million. MedCert, our allied health programming, continues to see strong growth, but not enough to fully offset the declines in our boot camps. MedCert should finish the year with revenue growth of more than 20%. Growth margins for the quarter were 38.7%, up 140 basis points from last year. We're still seeing benefits from the efficiency efforts we put in place last year, but not as strong on the year-over-year basis as some of these efficiencies took hold in the back half of last year. Importantly, we're not content with those efforts, and we continue to drive improvements in gross margins while supporting strong academic outcomes. For the full year, we still expect to see gross margins improve by 200 to 250 basis points. Selling general and administrative expenses for the quarter was $113 million, up 10% from last year. Stock-based compensation for the quarter was $5.3 million. We now expect to finish the year with stock-based comp in the range of $28 to $31 million. Adjusted operating income for the quarter was $96.4 million, up 20% from last year, and our strongest quarter ever. Adjusted EBITDA was $120.5 million. As with every year, we expect fourth quarter profitability to be less than the third quarter as we begin to ramp up marketing and other spend in anticipation of the upcoming school year. Entrance expense for the quarter was $2.4 million. Our effective tax rate for the quarter was 26.1%. Diluted earnings per share for the quarter was $1.60. Capital expenditures in the quarter were $16.3 million, $1.1 million above our spend last year. Free cash flow, defined as cash from operations, less capex, was $52.2 million, down from the prior year period, mostly due to timing of cash receipts. We expect fourth quarter free cash flow to be up significantly from last year as a result. We finished the third quarter with cash and cash equivalents of $376.6 million and marketable securities of $194.1 million. Based on the continued in-year enrollment and retention trends, we are raising the low end of our full-year revenue guidance and bringing up our profit guidance. We now expect revenue in the range of $2.025 to $2.04 billion. adjusted operating income between 280 and 290 million, capital expenditures between 60 and 65 million dollars, and an effective tax rate between 24 and 26 percent. Thank you for your time. Now I'll turn it over to our operator for Q&A.
spk08: Operator?
spk09: Thank you. If you would like to ask a question on the phone lines today, please press star 1 on your telephone keypad If you found your question has been asked or you wish to remove yourself from the queue, that is star one again. We'll take our first question from Alex Parrish with Barrington Research.
spk03: Hi, thanks for taking my questions and congrats on the beat and raise. I just have a couple of questions here. First off, while career learning is still growing enrollment faster than general education, general education has accelerated, and now the growth rates are kind of comparable. Is that how we should think about the growth rates regarding the respective segments going forward, comparable growth rates now that you've rolled out career learning so significantly?
spk06: Yeah, I mean, I think directionally that's probably right, Jeff. Sorry, Alex. I think the the the only maybe distinction really is going to be uh sort of really on two levels one is um obviously uh mixed meaning predominantly our career programs are high school oriented right so there's sort of great mix in there that shifts um we we've seen uh we've seen strength in some of our uh lower grade programs uh recently you know so um but obviously that can shift uh and then uh And then schools opening, right? So to the extent that we have new programs opening, you know, we really do try to make sure that they open with career programs. But, you know, there's some dynamics that could maybe make that not as even necessarily as we would want. But, yeah, I think that we see that both of those will continue to grow and they're going to continue to have strong market dynamics for us.
spk03: Speaking of opening schools, what's the plan for fiscal 2025, if you could talk about it, either in terms of new states or new programs and number of new career learning programs versus number of new general ed programs?
spk04: So one of the things we laid out as part of our investor day back in November is, you know, a number of states that we are focused on looking at continuing to try to expand in the states where we're not currently in to continue to grow programs in states we currently are. I don't have anything to announce on today. As you might recall that when we talked about our 2028 guidance, that guidance was not predicated on the fact that we would add new states, but we are certainly having great conversations with states to add new programs. We'll have more to talk about that in Q4 and in Q1. We don't want to get ahead of ourselves before we have any deals signed.
spk06: One thing I'd add is that The new states versus new programs equation for us sometimes is, it's not obvious where the better benefit is, meaning we have some states, for example, where our programs are pretty restricted in terms of the ability to grow in size and things like that. And so in some of those states that have a lot of demand characteristics, it's actually better for us to open a new program in that state, then open up a new state. So it's not necessarily a trade-off one for the other. It's not a zero-sum game here, but just the opportunities that present themselves often for us, we more aggressively pursue where we think that there is strong demand characteristics and things like that, that may not be a new state, but actually has better growth opportunity for us.
spk04: And one last thing I'll add to that, if there are, we have a couple of states where we have some, you know, we have some caps that we're pushing up on our caps. One of the growth opportunities is for us to either have the caps eliminated or have the caps expanded.
spk03: Good. Well, thank you. That color is helpful. One last question and I'll get back into the queue. Seems like that other income line item is increasing significantly. at a pretty rapid rate, both in the quarter and year to date. What is in that line, other income beneath, after operating income, other income?
spk04: I'm glad you asked that question. As you know, we generate a lot of cash in the business, and so we're taking that cash and investing it in marketable securities, and so that's what's driving that increase. That's primarily what's sitting in the other income line item. If you look at our cash number, it may be lower than you would expect because we're actually investing that cash. And so you'll see some of that in our marketable securities and our short-term assets as well as our long-term assets as well.
spk03: Great. Super helpful. Thank you. I'll get back into the queue.
spk09: We'll take our next question from Jeff Silber with BMO Capital Markets.
spk02: Hey, thanks so much. This is Ryan on for Jeff. Just had a question on the funding environment. We saw some data that districts are beginning to cut back on tech spend just to get ahead of the cliff in September. Was wondering if you could give any more color on your confidence on the funding environment for next year. Thanks.
spk06: Yeah, I think there's, you know, there's two separate issues at play here. One is the ESSER-CLF that you referenced, and the other is actually just overall funding environment, right? Because the ESSER-CLF is really a federal government-funded program, whereas the baseline funding is largely the state-based funding. And those, again, are two separate things. I think that for sure districts are feeling a little bit under pressure because of that federal funding. that, you know, is that cliff that you mentioned that's going to go away. That does, I think, you know, I think the intent of the funding was always temporary and was not to be sort of for a lot of structural ongoing costs. You know, I think that every district's made their own sort of decisions, you know, for the best what they thought at the time probably best for their district, but I do think for a lot of them, their structural costs increase, and now they're finding themselves having to sort of figure out ways to scale back. I don't think that we are under the same kind of pressure because we have not had, it's not that we haven't benefited from that funding. We have sort of indirectly benefited from some of it, but we haven't, taking the same sort of approach maybe to it, and I don't think that we have a cost structure that's going to need to be right-sized because of ESSER funding going away. Now, having said that, I think Donna mentioned in her remarks, that still means we continue to pursue cost efficiency. We want to run an efficient business here, but that's a distinct thing altogether. The funding environment at the state level, I think, continues to be in line with our expectation, meaning it's positive, it's continuing to trend positive, and we think that the funding environment going into next year is stable and we'll see positive funding increases. Now, how that actually translates to our business next year, based off of mix and flow through and things like that, we don't know yet. I think we're going to see robust strength in our business going to next year. The mix of funding and how that impacts us, you know, I think remains to be seen. But sort of whatever it's going to be, it'll be, I think, if it impacts us, it'll be somewhat temporary, meaning one-year thing, and then we'll sort of revert to a normalized pattern the year after that. So I'm not too concerned about it, although, you know, there's a potential for, you know, based on mix and things like that, some, you know, one-time impact to us. But I don't think as severe as you might be hearing from districts and things like that.
spk02: Got it. That makes a lot of sense. And then just for the follow-up, I think you mentioned your app volumes and the conversion rates were looking good for the fall cohort. I know it's still kind of early. Can you give any more color on what's driving that success?
spk06: Yeah, so I think my comment is really focused on if the trends this year continue into next year. This year we are, you know, because the fall cohort season is barely underway. I mean, there's Not really a lot of data yet for that, but the in-year season that we've seen has been very strong. Application volumes continue to be strong. Our conversion rates continue to be strong. And so we do think, and we saw this last year, we saw that translate into a good fall season. So we think it is a good early indicator of it translating again into a good fall season. We, you know, a couple years ago, for those of you who remember, we actually had, I would say, an operational, you know, not a great operational fall season. And we've worked really hard over the past couple years to improve that, and we continue to improve it. And I think those operational things give us those improvements in both application funnel volumes as well as conversion rates. I think a lot of it is attributed to, I'd say, our operational improvements that we've made. And also, I think particularly in the in-year side of it, the overall market dynamics, which I talked about a little bit as well, I think are strong.
spk07: Got it. Great quarter. Thank you very much. Thanks.
spk09: We'll take our next question from Greg Parrish with Morgan Stanley.
spk10: Hey, good evening. Thank you. Yeah, I'll just second my congrats on the quarter. Another strong result. So I guess I'll just ask about fall enrollments a slightly different way. Maybe just kind of zooming out higher level, you have sort of long-term financial targets out there, kind of imply mid-single digits to high single-digit enrollment growth, maybe high single-digit at the upper bound of your 2028 targets. So that's kind of the framework you have out there. If you think about next year, are there any sort of headwinds to that framework, or do you expect to kind of grow within the long-term framework sort of knowing what you know now?
spk06: Yeah, I think based on what we see, we don't see a headwind, you know, against that framework. You know, I think it's a really good way to think about it. And the way you're framing the question, I think, is really smart because, you know, we are trying to build a long-term growth business here. I know everybody's concerned about the fall. And so, you know, we're building the long-term engine here for growth. I think that everything we see from a market dynamic perspective and our own operating sort of cadence, if you will, indicates that we're right within that framework, and I think we expect that all things being equal, we're going to continue to execute well against that.
spk10: Great. And we've been talking about M&A pipeline. I mean, is that full at the moment? Could you see things ramping up? I was saying M&A activity kind of ramp up broadly. And then sort of secondly and related, can you kind of update us on, you know, you management and the board's willingness to potentially lever up if the right acquisition target presents itself? Or do you sort of like the sort of very low leverage position that you're in?
spk06: Yeah, so, you know, we've always been very active in terms of our our M&A pipeline, I've been a little bit more bearish on valuation and I continue to be a little bearish on valuation out there. So I don't think there's anything on the near horizon for us. I think if we deploy capital, I want to make sure that we deploy for a good return at a high probability. And I think And I think I just don't see that right now. I think our board is going to be supportive of the right strategic deal if that comes along. And I think structuring that right strategic deal, if it includes leverage, I think they're going to be supportive of. I think they're probably more focused on ensuring that we make good strategic decisions that are in the right long-term interest of our shareholders. And I think they have a belief that the capital structure we put around pursuing that, we'll have options around probably, and usually we do, and we'll try to find that right mix of options to pursue any deal that we need to. I personally will tell you that While I'm not against leverage, and I think that in many instances it's the right mechanism to do a deal, I probably don't like loading ourselves up with debt. I know that the textbook tells you to have a certain amount of turns or whatever, and I'm just probably not as big a believer in having as much leverage as possible on the books. I think where we sit today is pretty good. We have, you know, we're going to end the year with, you know, a few hundred million dollars of net cash on the books. I like that position to be in. We've got a maturity here in the next few years that we're going to have to pay off of, you know, several hundred, 400 plus million dollars. And I want to be really comfortable, you know, if you've lived over the past 20 years through the credit markets, you know that they can seize up literally in a day. I've had to live through a couple of those. and I want to make sure that we're not in a position where we're beholden to capital markets like that.
spk10: Awesome. Yeah, thanks. That's a great comment. And then maybe for my last question, sort of an odd one, but when I talk about your marketing strategy, you're ramping up your campaign for this year. I don't know if you're doing anything differently. You know, I know, and you talked about this on the prior question, excuse me, you sort of saw a lot of improvement last year versus the year prior, so I guess This season, is it kind of running the same game plan that gave you success last year or any material changes?
spk06: Yeah, so I think a little bit of both, meaning the program that we ran last year was an improvement over the prior year and we'll continue to do those things. As it turns out, I think we also have we have sort of a multi-year roadmap of improvements we think are going to move the needle for us. You know, they require time, investment, and good execution. We can't do them all at once. And so I think we continue to see opportunities to improve our execution, improve the way we draw the funnel in, and improve the way we convert the funnel. So, you know, so I actually think there's more headroom to improve. I think the team's laid out a really good roadmap of executing against that roadmap. And so I actually think that we're not done here. I think we've got a ways to go that we can improve across the funnel metrics.
spk08: Great. Thanks, and congrats again. We'll take our next question from Tom Singlehurst with Citi.
spk05: Yeah. Thank you for taking the question. Tom here from Citi. A couple of questions, actually. The first one, probably slightly betraying my ignorance, but Pearson as a competitor has announced a couple of sort of, I suppose I'm going to call them contract wins. They've obviously sort of taken over sort of existing sort of virtual school operations. I'm just wondering whether there are sort of similar opportunities for Stride as well, whether they're the sort of discrete sort of opportunities to take on sort of, you know, you know, additional sort of, you know, sort of schools that are already up and running and whether that can be a source of enrollment growth as well over time, as I forgive the basic question. And then the second one is on the technology boot camps piece. I mean, obviously, you know, I suppose the trends that you're seeing there are representative of what's being seen sort of across the industry. interested what if anything you you're going to do about it i mean is it just one of those things where you just need to stick with it and wait for it to work through or is there some remedial action um to try and um stimulate demand um any thoughts on on on on so when that turns around would be very much appreciated thank you yeah yeah so um let me take the that sort of piercing question first um
spk06: I think the first thing I would say is that maybe I get criticized for saying that. I want Pearson to succeed, actually. I think having a good, healthy, robust, competitive market is really good for everybody. I think education in this country needs that. So I'm personally rooting for Pearson. I hope they continue to have success with their programs. I'm personally not a fan. And again, this is probably maybe not what everybody wants. I'm personally not a fan of sort of taking over other people's clients unless there's a situation where it's necessary. I think we're all better off if we grow the pie than try to split the pie up in more pieces. I think our approach largely focuses on growing the pie. And I think Uh, again, I think our education system is, uh, needs that. So, you know, I think if we're, if we're all trying to fight over the breadcrumbs here, then, um, I think we're not doing what's best for the marketplace and we're not doing what's best for each other. Um, having said that, if, you know, if, uh, if that's the game that everybody's going to play, then of course we're going to play that game and, you know, we're going to play to win. Uh, but my preference is to grow the pie. Um, I, um, I know that Pearson's lost some contracts and of course they've got a business to run and they need to find ways to sort of get that growth back. And so I respect whatever they think they need to do to do that. But I don't see that right now as necessary for a path for us to continue to grow the way we've been growing. I think, as Donna mentioned earlier, our plans are not contingent on new states. They're also not contingent on winning contracts from competitors or others. So I think we feel pretty good about our plan to hit our long-range targets without having to resort to those tactics.
spk07: As far as the tech boot camps go, I think
spk06: yes the the overall market you know what were experiences indicative of what's happening in the overall market um i think it's changing pretty quickly in the sense that you know uh people are learning about how ai is going to impact things pretty quickly here you know i think people are realizing by the way how expensive hey i can be you know building a large language model can be pretty expensive i think we are um trying to take a very foundational approach to investing appropriately, but investing for outcome, investing for return, investing for our customers. It does not mean, I think, having, you know, splashy announcements around AI. I don't think that's the right strategy for us. I think those splashy announcements have hurt the tech bootcamp space a little bit. because of the promise of what AI might be able to do and how it might hurt that industry. I think what we're finding as time goes on is that there will be a place, there is a place for skills training broadly, specifically skills training in the tech space. And I think that the boot camp type of approach has a place long term for that skills training in the technology space. I think we're seeing now the corporate side of the space, the B2B side, some interesting opportunities. I think people are realizing that the technology landscape in terms of development is not going to probably turn on a dime. I think the biggest technology companies have very significant competitive advantage there. I think the rest of the world is, you know, it's going to be a little bit of a slower, slower migration path. Um, the, the war for tech talent, I think continues to be very, very challenging. I think the migration to technology talent to AI, uh, is creating some opportunities. So I guess in short, I would say that, uh, I think that there is a turnaround here. I don't know that I could predict that it's going to happen next year per se, but I think there's a long-term strategy for growth here that we see and that we think we can take advantage of.
spk08: That's very clear. Thank you.
spk09: As a reminder, everyone, that is star 1 on your telephone keypad. We'll take our next question from Stephen Sheldon with William Blair.
spk11: Hey James and Donna, you have Matt Feiler gone for Steven Sheldon. Congrats on the nice quarter and thank you for taking my questions to start. Can you provide an update on tutoring and share some thoughts on one tutoring might become more material to the story?
spk06: Yeah, I think. So our approach to tutoring is sort of twofold. Are I'll say more traditional tutoring solution, which is the. you know, for us is actually, I think, still somewhat distinguished in the marketplace in the sense that, you know, our traditional tutoring solution, it's an online solution that uses state certified teachers. And we see now a number of states putting money behind those types of programs. And I think that we are getting some decent traction there. We've won a number of new clients there. You know, I don't think it's going to, in the next year or so, it's going to become material to our $2 billion plus revenue line. But I think it has the potential to be, you know, a significant contributor over time. And we've seen, we saw some good growth this year. We see some good contracts coming up for next year. And then we're getting really good customer feedback on it. I also think the competitive landscape for it is evolving a little bit in the sense that, you know, you see some new players coming in with AI products. I think we have yet to see an AI product in the tutoring space really hit the mark, if you will. That's the other pillar for us. We are also looking at how we can deploy some of our content in an AI tool using a small language model that's proprietary that we think we can augment our tutoring offering with. I think that, you know, we see what our clients are saying is that some of the quality of the products in the marketplace are forcing some of the districts to go out for bid. There are some concerns, I think, with, you know, some, you know, some companies that have, whether it's foreign ownership or whatever. And I think we're seeing some of that. So I think that, you know, we're seeing opportunity there as well. So I think for us, tutoring is a good long-term opportunity in both the traditional sense and sort of a new technology, innovative way. And we will continue to pursue and invest in it.
spk11: Got it. That's helpful. Great to hear the initial traction has been strong. Just as a quick follow-up to that, though, can you remind us your plans on delivering the tutoring services to non-Stride students? Is that something that students would come directly to Stride for, or could those tutoring services possibly be delivered through integrating with the learning management system or something like that?
spk06: Yeah, it's a great question. So our service is delivered directly right now to consumers and through districts. The integration with learning management type system or some back office type of system is, I think it's definitely something that we would like to pursue. We've got nothing to announce right now, but it's definitely something that we think is a compelling proposition. Um, but, uh, but again, I think it's also, um, you know, the, I think what, what, what's in the news, uh, tends to focus a little bit more around the AI prospects around it. And, um, uh, you know, I, I, I think we just gotta be careful is not the word. I think we've gotta be, um, deliberate, uh, about how those things get rolled out and work. Um, you know, there's, you know, Concerns I think around student privacy. There's just, you know, there's concerns about around hallucinations. There's concerns around the language model that can actually provide the right algorithm to learn from the interactions that are happening. And so I think we just got to proceed cautiously.
spk08: Got it. That's helpful. Thank you, James. And with that, that concludes today's presentation.
spk09: Thank you for your participation today and everyone may now disconnect.
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