Stride, Inc. (NYSE:LRN) Q1 2024 Earnings Call Transcript

Stride, Inc. (NYSE:LRN) Q1 2024 Earnings Call Transcript October 24, 2023

Stride, Inc. beats earnings expectations. Reported EPS is $0.11, expectations were $-0.39.

Operator: Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Stride First Quarter Fiscal 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Tim Casey, Vice President of Investor Relations, you may begin your conference.

Timothy Casey: 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 Rhyu, 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 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 made during this call. Following our prepared remarks, we will answer any questions you may have. I will now turn the call over to James. James?

James Rhyu: 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 an 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 grew.

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 2020 and up well over 50% from fiscal year 2021 when we had the pandemic benefit. Our net income will be up something like 600% from fiscal year 2020. Our EPS will be over $3.60 a share, which is six times higher than fiscal year 2020. Now, as we’ve returned 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’re 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 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 selected a K-12 school, we’re hearing they’re 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 is 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 their 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, while 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 requirement. That’s up from just over 20% four years ago. We’re also seeing support for skills-based hiring from state policy makers 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.

A teacher giving a lecture in a classroom illuminated by a bright light of knowledge.

We still need to drive awareness of our career 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 Gen Ed enrollments had bottomed out and it looks like that turned out to be accurate. We think this demonstrates the strength of our K through 12 full-time virtual school business, and all the indicators suggests 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 result and guidance. Donna?

Donna Blackman: 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 strong year. I’m very proud of the work we’ve 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 2023. 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 year were $0.11, up $0.65 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 [technical difficulty]. We saw growth in both our General Education and Career Learning program, 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 program. These programs generated $151 million in revenues 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 in 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’ll 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 manage our teacher hiring well this year, and that contributed to the strength in 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 MedCerts 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 grants. We expect to finish the year with stock-based compensation in the range of $28 million 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 strengths 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 relate to school launch and the onboarding of students.

We expect to see positive cash flow for the next three quarters. We ended 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 million to $510 million. Adjusted operating income between $80 million and $90 million, and capital expenditures between $15 million and $18 million. For the full year, we expect revenue in the range of $1.96 billion to $2.03 billion. Adjusted operating income between $250 million and $275 million. Capital expenditures between $65 million 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?

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open.

Jeff Silber: Thank you so much. 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 years we’ve kind of seen that business move or decline a bit and you saw a nice rebound. What’s different this year?

James Rhyu: Yeah. Hey, Jeff. So I think there’s really two basic things that I would highlight. The first is, and I said this last year, and this is a hundred percent on me, but I think our execution last year was not great. And I think we improved it this year, and that’s — 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 — 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 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 enrollments 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 I think a lot of our enrollment strength overall is that a testament to that 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, 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.

Jeff Silber: Okay. That’s really helpful. And I know typically in the first quarter, I think, Donna, you had mentioned that you typically lose money, and I think the bottom line strength was also 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?

Donna Blackman: No, 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 our teacher hiring. So we were careful not to overhire as well as not underhire. So striking the right balance, are all the things that contributed to us having a strong financial results in Q1.

James Rhyu: 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.