Stride, Inc.

and I will be your conference operator today. At this time, I would like to welcome everyone to the STRIDE first quarter fiscal year 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. I would now like to turn the call over to Timothy Casey, Vice President, Investor Relations. Sir, please go ahead.

Thank you, and good afternoon. Welcome to Stride's first quarter earnings call for fiscal year 2026. 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 will 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 earnings release and latest SEC filings. including our most recent annual report on Form 10-K and subsequent filings. 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. Following our prepared remarks, we'll answer any questions you may have. Now, I'll turn the call over to James.

James? Thanks, Tim, and good afternoon, everyone. Demand for our products and services remains strong. In fact, we believe industry demand and trends around online education continue to grow. We indicated in August that we believe we would grow enrollment between 10 to 15%. And while we achieved enrollment growth in that range, we still fell short of our internal expectations. While demand is indicated by application volumes remains healthy, overall growth was tempered. But what happened? We made a couple of strategic decisions that we believe will pay dividends over the longer term but limited our growth in the shorter term. First, we invested in upgrading our learning and technology platforms with third-party industry-leading platforms. We continue to believe the investment is the right long-term decision to ensure we are deploying industry-leading technologies and systems. However, the implementations did not go as smoothly as we anticipated. We are actively engaged with our vendors to improve the situation. We heard from our customers that their engagement with these platforms detracted from their overall experience. This poor customer experience has resulted in some higher withdrawal rates and lower conversion rates than we expected. Secondly, we wanted to focus on running high quality programs. And in some instances, the best approach to achieve that is to limit enrollment growth while we improve our execution. We estimate that the combination of these factors resulted in approximately 10 to 15,000 fewer enrollments than we otherwise could have achieved. We also believe that these challenges will likely restrict our in-year enrollment growth. While demand continues to remain strong, we do not anticipate the same in-year enrollment increases that we've seen over the past few years. So our outlook for this year compared to last year is a bit muted. However, our outlook for this business over the longer term remains bullish, and these investments should help us achieve our longer term goals. Our mission and our path are clearer to me than ever. Families want and deserve educational choice. Meeting the demands of families in this country is an increasingly diverse task that is challenging to meet with a one size fits all model. So for many families, we are providing the only real affordable alternative in meeting their needs. And the trends just continue to move in that direction. Whether it be safety issues like bullying or neighborhood violence or health issues or special needs that cannot be met by local schools, we are providing a service that is both increasingly in demand and increasingly necessary. And we are investing in areas that will help enable us to meet the needs of the families we serve. One simple example is the rollout this year offering every second and third grader free ELA tutoring. We know that in order for kids to continue learning, they need to be able to read, write, and communicate. Therefore, we are investing to ensure the youngest students in our programs can do just that. We are tomorrow's education today. We meet the diverse needs of families that want flexible, personalized career forward and tech-enabled education at an affordable cost. This fall has proven challenging for us, and I want to thank our customer-facing employees, the teachers, administrators, and other staff who have worked tirelessly to help us overcome those challenges to serve the students. I also want to thank all our corporate employees who never forget who our customers are and how impactful what we do is in the lives of so many families. Thank you. With that, I'll turn the call over to Donna.

Thanks, James, and good afternoon. As James mentioned, our results this quarter reflect the continued demand for our core offerings. Families are seeking alternative options for their students, to solve ongoing challenges within the existing educational system. However, we also had some internal challenges this quarter as we implemented new platforms for our students. While this caused some disruptions, I believe these changes are important for the long-term goals of the business. As always, I am incredibly grateful to all of the STRIDE employees for their commitment to the families we serve It is an opportunity and a privilege to influence the lives of so many students each and every year. Turn to a few highlights from our quarterly results. Revenue for the quarter was $620.9 million, up 13% from the first quarter of last year. Adjusted operating income was $81.1 million, an increase of almost $23 million, or 39%. Adjusted earnings per share were $1.52, up 43 cents from last year. And capital expenditures were $21.7 million, up $6.9 million. As I mentioned, our quarterly results reflect strong demand for our core offerings. Our total enrollments for the quarter were up 11.3% from last year. Once again, setting a record for the number of students we will serve as families continue to seek out educational alternatives. Career learning middle and high school revenue for the quarter was $241.5 million, up more than 21% from last year. Career learning enrollments grew 20% to 110,000. General education revenue grew over 10% to $363.1 million on enrollment growth of 5.2% to 137.7 thousand students. Total revenue per enrollment across both lines of revenue was $2,388, up 3.7% from last year. As we mentioned in August, we are seeing a positive funding environment But we do expect some impact from state mix and timing. And as such, we now believe we will finish the year flattish in revenue per enrollment compared to FY25. Gross margin for the quarter was 39%, down 20 basis points from last year. I mentioned last quarter that we are continuing to invest in the business, which will have some impact on gross margins. Additionally, given the challenges we have this quarter, we expect to incur some additional expenses related to the platform rollout. As a result, we now expect full-year gross margins will be down from FY25, though still above what we saw in FY24. Selling, general, and administrative expenses totaled $173.1 million, up 3% from last year. We still expect SG&A as a percent of revenue to decrease compared to last year. Stock-based compensation for the quarter was $10.2 million, an increase of $1.8 million compared to last year. We expect to see an increase in stock-based compensation this year, largely due to the impact of a long-term performance grant. And therefore, full-year stock-based compensation will likely be in the range of $41 to $44 million. As I mentioned earlier, adjusted operating income for the quarter was $81.1 million, up 39% compared to FY25. Adjusted EBITDA was $108.4 million, up roughly 29%. Adjusted earnings per share, a new metric we introduced last quarter, was $1.52, up 39.4% from last year. Our profitability strength was driven by the enrollment growth in the quarter and improvements in operating margins. Capital expenditures in the quarter were $21.7 million of $6.9 million from last year. Free cash flow defined as cash from operations less capex was negative $217.5 million compared to negative $156.8 million in the prior year period. Cash flow follow our typical seasonality related to school launch and the onboarding of students in the first quarter. As the years pass, we expect to see positive cash flow for the next three quarters. We finished the quarter with cash, cash equivalents, and marketable securities of $749.6 million. Turning to our guidance. As James mentioned, we do not expect any enrollments to be nearly as strong as they have been for the past three years. However, despite the short-term impacts we are seeing, our guidance this year keeps us firmly on track to achieve our FY28 financial goals. For the second quarter of 2026, we expect to see revenue in the range of $620 to $640 million Adjusted operating income between 135 and 145 million dollars. And capital expenditures between 15 and 18 million dollars. For the full year, we expect revenue in the range of 2.480 to 2.555 billion dollars. Adjusted operating income between 475 and 500 million dollars. Capital expenditures between 70 and 80 million dollars. and an effective tax rate between 24 and 25%. While any new technology can bring challenges, we are committed to delivering a quality experience for all of our families and our partners, and we will make the investments needed this year to ensure we are set up for long-term success. Thank you for your time today. Now I'll turn the call back over to the operator for your questions. Operator?

At this time, if you would like to ask a question, press star, then the number 1 on your telephone keypad. To withdraw your question, simply press star 1 again. We will pause for just a moment to compile the Q&A roster. Your first question comes from Jeff Silber with BMO Capital Markets. Please go ahead.

Thank you so much. I obviously want to focus on the guidance for the year. And forgive me, did you give enrollment guidance for the year? I think you had said 10% to 15% on the prior call. I'm just wondering where you're coming out now.

We did not give guidance for the full year. The guidance that we gave for the count date was 10% to 15% for the count date. We came in at 11.3%. But we do not anticipate that we will see the same level of in-year enrollment growth that we've seen over the past three years. So based upon that assumption, the 11.3% growth that we saw from October to October, we don't expect to see that same year-over-year increase by the end of the year.

Okay. Thank you for clarifying that. And then you did call out about 10,000 to 15,000 weaker enrollments. and he cited two items one was a i guess a bad systems implementation another was limiting uh you know enrollment growth to focus on high quality programs can we parse out um what each one had that impact on that 10 to 15 000 and if you can give a little bit more color on each of those items i think that would be helpful thanks yeah i mean i think um so uh

It's difficult to say exactly. I'll say that first. So anything I say is going to be, you know, based on the data that we can see and estimate. But certainly we believe that the majority was due to the system implementation issues. It impacted the overall customer experience. We had a higher level of withdrawals as a result. And, you know, we attribute the higher level withdrawals directly to the system issues that we're having. So I think that's definitely the predominance of them. It's also the area that we think is most resolvable. We're working very furiously with our partners to fix those issues. And I think that the ability for us to run quality programs is tied intimately with The platform issues that we discussed because we don't want to do is is to really exacerbate a problem by having more students come on to a platform that is not meeting our expectations.

OK, appreciate the caller, thank you.

Your next question comes from the line of Jason Tilchen with Canaccord Genuity. Please go ahead.

Great. Good afternoon. Thanks for taking my question. A little bit of a follow-up on the last question. I'm wondering if you could just share a little bit more about, A, the rationale and the timing for this tech implementation, and then a little bit more about exactly what went wrong.

Yeah. I think so the first thing is the rationale for the implementation is it's actually pretty simple. As we have scaled, I mean, we have, you know, more than doubled in the past five years. And that level of scale requires platforms that are large enough and robust enough to meet the demands of our scale and our anticipated additional growth. And so we operated a number of platforms that were either in-house proprietary platforms or with third parties where we didn't have the confidence that they were going to be at a scale to the extent we needed them to. And so investing in a new set of platforms for the long term, we believe, and we still believe, execution issues aside, is the right for our business long term. And so, you know, the idea of investing in upgrading our platforms continues to be, we think, the right approach. The timing, you know, there's one real window of timing that you have to fall into for most of these types of upgrades. where you have, in theory, the least disruption to your customers. And that is in the summer between the end of one school year and the beginning of the next school year. So, you know, we sort of have to execute in that sort of delicate window. And clearly, what we thought we were going to achieve in terms of an execution in that window. We did not achieve. Demand continues to be very strong. And so we're confident that we're going to overcome this. But the timing for this implementation sort of has to occur really in that summer period. And you really only get that one window of chance. We didn't execute as well as we should have, and our partners didn't execute as well as they should have, and we're going to spend the year making sure that we get it fixed.

Great, and just a follow-up to that. I just want to make sure I understand. Was it essentially that the implementation took longer than expected to complete and sort of bled into the beginning of the school year, or was there something else that went wrong? And then the other sort of question, the dynamic between the two programs, Gen Ed and Career Learning, it seems like learning at the enrollment remained very strong there while we saw the sequential decline for Gen Ed. So wondering if the if this sort of tech upgrade had any sort of impact on one program more than the other.

Yeah, so not a not a material impact on one program versus the other, so I wouldn't sort of read too much into that split. The the implementation. Again, there was a couple of platforms there, but the the main platform took a little bit longer than we expected. Also, we encountered more problems on the rollout than we anticipated. So even when it did roll out for the new semester, the number of problems we experienced during the rollout that impacted directly to customers' abilities to log on, the resiliency of the platform, the performance of the platform, all impacted, you know, the customer trajectory, the customer experience. So I would say it did take longer and it continues into the year, you know, to have issues that we're continuing to fix. So, you know, I think that's sort of the The thing that we're dealing with is that we're now in the year, and we have been now for a couple of months, and we're continuing to ensure that we're improving the platforms in-year as well. Appreciate the call. Thanks, Bob.

Your next question comes from the line of Greg Parrish with Morgan Stanley. Please go ahead.

Hey, good evening. Thanks for taking my question here. So, I'm going to get a little more color on the decision to limit in-year enrollment growth. With the platform implementation issues, is that impacting in-year enrollment growth, or is that not the case? Is this more of a permanent structural decision to improve the quality of your programs?

So, I think it's a little bit of both. You know, we clearly, we want... We want to limit the exposure that the platform issues are having. So, you know, just sort of limiting the intake during a period when we want to make sure that the platform gets stabilized is important. So, you know, and that directly correlates to the quality of the program. You can't have high-quality program if you're having customer experience issues. So I think they sort of go hand in glove.

Okay, so... Would you say that this is just a one-year sort of in-year impact, and then next year it would probably, and there's only been a couple years that this has been happening, or is this, so next year we're going to kind of, it could go back to the way it has been the last few years?

Yeah, I think all things being equal, meaning that Assuming we fix all the issues in this year, which we do anticipate, we have a clear roadmap that this year the issues will, in fact, be fixed. You know, assuming that the demand continues to be strong as we have seen it, yes, we would believe that next year we would be able to return to growth in year. Now, obviously, a lot of variables included there, certainly not guidance of what next year is going to be. But if the demand were to maintain at the high levels that we've been seeing it and all other things being equal to, say, a last year type of performance, then, yeah, I mean, that's what the math would suggest. But we're really focused on making sure we get a fix this year. So That is really the number one priority. And again, I think we have a clear path of getting these resolved in this fiscal year.

Yep. Okay. Thanks. That's helpful, Collin. I know there's a lot of moving parts there. And then maybe just one last question here. I just want to talk about the competitive landscape. And I say that with, you know, you have double-digit enrollment growth here to start the year. So, you know, very healthy. But with your success over the last couple years, there's, you know, other programs are going to try to you know, copy some of your very successful strategies. I think your biggest competitor had a great start to the year, I think, following your playbook in many ways. And I know you're for lifting all boats in the industry, but maybe just help us with what you're seeing out there in a competitive environment, any changes, just anything you're seeing on that front. Thanks.

Yeah, I mean, I have said, I think, pretty consistently that I want all players in the space to be successful. I want to make sure that the industry is healthy. And that the industry has, you know, high quality players. I think a healthy industry promotes higher quality players in the industry. I think that's important. I mean, congratulations to our competitors who are doing well. I think that's great for them. You know, I think if you just looked at the raw numbers, forget percentages for a second. If you looked at raw numbers, I still think our growth year over year outpaced our largest competitors, raw growth numbers by a large margin. You know, when you start at a lower base, the percentage is obviously, you know, that's just math. But I think what we can see is demand remains strong. And we welcome healthy competition. And I think we're going to do everything we can to tee ourselves up for strong next year.

Okay, fantastic. Thank you.

Your next question comes from the line of Steven Sheldon with William Blair. Please go ahead.

Hey, team. You have Matt Feilig on for Steven Sheldon. Wanted to start with a clarification question. Are these platform issues solely related to the classroom and learning experience or are these platforms also used for processing enrollments and other administrative-like functions?

Yeah, it's a it's a really stupid question. It's actually both. So they are the what you would consider to be the more traditional customer facing side of the equation. You know the platform that you know serves up the courses and you know gets the people gets the students. You know, engaged with the program, if you will, as well as. The more back office administrative side that you just referenced.

OK, that's helpful and then. What inning do you feel you are in for rectifying these platform issues? And then can you also tell us when exactly these issues started and then? One more thing as well. Would you kind of call this two separate platform issues or is it you know one thing? How should we think about all that, especially timing of fixing the issues?

Yeah, so. They are distinct platforms, so it is, in this case, specific to your question, two distinct platforms that we're talking about in terms of back office, front office. We did not really have an indication of the impact of these issues until we got well into August. And unfortunately, the timing wasn't great because it happened to be after our last earnings call where, you know, it was more funnel activity of demand that we were seeing that was very strong. And then, you know, subsequent to that, we started seeing the, you know, the withdrawal issues as the platform issues became apparent. So the timing was, you know, unfortunate that it was after after our last earnings call. And, you know, and I think that when we think about sort of the roadmap to getting these issues fixed, we're working every day on them. We believe that over the course of the year, it's not a one-time fix that we're implementing. It's a series of fixes. We think that the, you know, the biggest ones happen here in the next few months, but they will persist throughout the entire year. And in fact, you know, we are engaged with our partners to ensure that there, it doesn't end just when we think that we quote unquote have the issues fixed, but that we signed up with these partners to ensure that there was a robust ongoing set of improvements to the platforms and innovation curve that we would ride with them, that they would invest behind. And so while the immediate issues we expect to get fixed, you know, in the next few months, with the biggest issues and then sort of throughout the year, you know, with the remaining issues, we still expect to be investing in improving this platform and improving the experience for our customers, you know, well into the future. This is not just a one-year deal in terms of the expectation we have on improvement, but the most pressing issues we expect to be fixed in this year.

Okay. Thank you, James. Appreciate the added color there.

Again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from Alex Paris with Burrington Research. Please go ahead.

Thank you. I just have a couple of clarification type of questions. So at the count date, you had 247,700 students, up 11.3% year over year. You said that it could have been 10 to 15,000 higher. if it were not for these issues with the platform rollout. I guess the first question I have is, did those withdrawals occur before the count date or after the count date? Because the Q2 guidance calls for revenue at the midpoint of up 7.3%. So fall term enrollment was up 11.3%, and if it's flat revenue per enrollment, I don't know why revenue would be up only 7% unless these withdrawals continue to occur beyond the count date.

Yeah, so let me try to maybe clarify how you're looking at this first and then sort of circle back maybe on sort of how these withdrawals are manifesting themselves. The comp in each of our subsequent quarters from last year is on a rising set of enrollment and rising set of revenue. And so if what we did was we remained stable, i.e. flat, you still have a deterioration in the year-over-year growth mathematically because you're talking about last year when in the course of the year you were rising, and we do not expect sort of the same dynamic of growth that we saw last year. And so I think that's the first point. Just mathematically, I think you have to look at it from each quarter sequentially last year that was growing. And, you know, and now we're not sort of indicating that same growth. The second piece of circling back, I think, is that, you know, largely speaking, the vast majority of the growth that we think we could have had the indication of the 10 to 15,000 occurred in the first fiscal quarter, meaning everything in that estimate specifically is a calculation estimate through September 30th. Uhm? So set a different way. If we did not have those problems. and our estimates were correct, we actually would have anticipated that our count date, our September 30th only number, would have likely exceeded the upper range of our guidance mathematically. Now, a lot of assumptions built in there around you know, how we're calculating higher withdrawal rates and things like that. But I think to your question, the predominance of it that we're indicating in that number is falling between sort of middle of August through end of September.

Okay. And then when we talk about in-year enrollment, I guess I was sort of thinking about the January enrollment, but implicit in your guidance is rather than rise you know sequential rise in raw enrollment from quarter to quarter to quarter like we saw through q1 q2 and q3 last year it would be a decline in the second you know the second quarter raw number for enrollment will be less than the first quarter raw number enrollment and third quarter will be less than the second quarter presumably the fourth quarter will be less and then next year once all these problems are fixed we can presumably return to growth. Is that the way to think about it?

Yeah, so I think we're not giving exact enrollment guidance per se exactly, but I think we should probably not presume growth beginning of the year to the end of the year in enrollments. We will handle some backfills. You know, we have some attrition during the course of the year. There's likely some backfills that we will that we will do. But yeah, I think beginning of the year to end of the year, we should not anticipate growth. And we do, again, assuming the conditions remain strong as we've seen, the demand conditions remain strong as we've seen, and we can revert back to the prior retention characteristics that we had prior to this issue, we do think that we could resume to in-year growth in subsequent years.

Gotcha. And then the last question in related is revenue per enrollment. You previously said positive funding environment. It probably up a bit. And now you're saying flat. Is that the delta?

As I said in my prepared remark, Alex, we are still seeing a positive funding environment. We will see some impact from the mix and from timing. And as you may recall, one of the things that we did last year was that we had some adjustments throughout the course of the course of the year, given the end year enrollment growth that we had throughout the course of the year. We're not anticipating having that same level of end year enrollment growth. We won't have that catch up that we had last year. And then we also had that higher funding catch up in Q4, funding adjustment, I should say, in Q4. So in the back half of the year, the comp's a little bit tougher. And then again, to the point, we don't expect to have that level of in-year enrollment growth that we saw last year that we adjusted the revenue per enrollment throughout the course of the year.

So has anything really changed on the funding environment outlook? You said, you know, you still view it as a positive funding environment, but Has the mix changed relative to your expectations a few months ago? The expected mix.

I'm sorry. When I talk about mix, the mix is depending upon where we grow, where the withdrawals come from during the course of the year. That's the mix we talk about. So the point James made, we won't have any end-year enrollment growth, right? The reality will happen is we'll have some... Prior to the last three years, we would have in-year enrollment growth. Our withdrawals exceeded that in-year enrollment growth, right? And so we'll still continue to have that mix that will happen. And so it depends on where that mix happens that will drive the variability that we might see in our revenue per enrollment, whether it be a higher general ed or career learning. But in terms of the pure funding environment, the sentiment is the same today as it was in August.

Gotcha. All right. I appreciate the extra color, and I'll ask other questions as we follow up.

Ladies and gentlemen, this concludes the Stride first quarter fiscal year 2026 earnings call. On behalf of Stride, I would like to thank you all for joining. You may now disconnect.