Stride, Inc. (NYSE:LRN) Q3 2024 Earnings Call Transcript

Stride, Inc. (NYSE:LRN) Q3 2024 Earnings Call Transcript April 23, 2024

Stride, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to the Stride Third Quarter Fiscal 2024 Earnings Call. Today’s call is being recorded. I would now like to turn the conference over to Timothy Casey, Vice President of Investor Relations. Please go ahead.

Timothy Casey: Thank you, and good afternoon. Welcome to Stride’s third quarter earnings call for fiscal year 2024. With me on today’s call are James Rhyu, 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 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. 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 survey, almost 3/4 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 sell that on-the-job training courses, leading to licensure and courses leading to professional certifications were a better value than 2- or 4-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 they 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 the 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 saw 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 defining 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 new cycle in education as well as other industries. We are building a foundation to support 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 enrollment hit a new all-time high of 198,4000 students, sequentially higher than last quarter and higher than the pandemic levels of fiscal year ’21. Our in-year enrollment growth now for 2 years running indicates that the landscape of education of 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, while 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 reregistering 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 enrollment. 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. With that, I’ll pass the call to Donna. Donna?

Donna Blackman: 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 achieved the annual growth rates we outlined in our 2028 target 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 $0.30 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 per 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 enrollment finishing the quarter up almost 4,000 from last quarter. Revenue per enrollment in the quarter was up 7.5% from last year. As we 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 is always the opportunity for us to convert these leads and to enrollment for the upcoming school year, but we still expect a sequential decline in Q4. Per pupil revenue continued 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-up that we’ve previously discussed. While it’s still very early in the process of next year’s funding, as of right now, we see an overall positive funding environment at the state level for fiscal year 2025, so not as strong as we’ve seen over the past two years.

States are also grappling with the loss of extra 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 impact from the slowdown in our quoting programs. Revenue for the quarter declined $5.9 million to $24 million. Next, our Allied Health programming continues to see strong growth, but not enough to fully offset the declines in our bootcamps. MedCerts should finish the year with revenue growth of more than 20%. Gross margin for the quarter was 38.7%, up 140 basis points from last year. We’re still seeing benefits from the efficiency efforts we’ve put in place last year, but not as strong on a 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 improvement in gross margin 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 were $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 million 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.

Interest 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 billion to $2.04 billion, adjusted operating income between $280 million and $290 million. Capital expenditures between $60 million and $65 million and an effective tax rate between 24% and 26%. Thank you for your time. Now I’ll turn it over to our operator for Q&A. Operator?

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Q&A Session

Operator: [Operator Instructions] We take our first question from Alex Paris with Barrington Research.

Alex Paris: Hi, thanks for taking my questions. And congrats on the beat and raise. I just have a couple of questions here. First off, well, 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?

James Rhyu: Yes. I mean, I think directionally, that’s probably right, Jeff– sorry, Alex, I think the only maybe distinction really is going to be sort of really on two levels. One is, obviously, mix, meaning predominantly our career programs are high school-oriented, right? So there’s sort of great mix in the shifts. We’ve seen strength in some of our lower-grade programs recently, but obviously, that can shift. And then schools opening, right? So to the extent that we have new programs opening, we really do try to make sure that they open with career programs, but there are some dynamics that could maybe make that not as even necessarily as we would want. But yes, 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.

Alex Paris: 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 a number of new core learning programs versus a number of new General Ed programs?

Donna Blackman: So one of the things we laid out as part of our Investor Day back in November is 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. And 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 deal signed.

James Rhyu: I also — one thing I’d add is that the new states versus new programs equation for us sometimes is sort of — it’s not obvious where the better benefit is. And 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 gain here. But just the opportunities that present itself 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 had better growth opportunity for us.

Donna Blackman: And one last thing I’ll add to that. If there are — we have a couple of states where we have some caps that we’re pushing up on our caps, one of the growth opportunities is for us to either have the capsule eliminated or have the caps expanded.

Alex Paris: Good. Well, thank you, that color is helpful. One last question, and I’ll get back into the queue. It seems like that other income line item is increasing 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?

Donna Blackman: 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 with assets as well as our longer-term assets as well.

Alex Paris: Great, super helpful. Thank you. I’ll get back into the queue.

Operator: We’ll take our next question from Jeff Silber with BMO Capital Markets.

Unidentified Analyst : 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. I was wondering if you could give any more color on your confidence on the funding environment for next year. Thanks.

James Rhyu: Yes. I think there’s two separate issues at play here. One is the ESSER cliff that you referenced and the other is actually just overall funding environment, right? Because the ESSER cliff is really a federal government-funded program, whereas the baseline funding is largely the state-based funding and those, again, aren’t two separate things. I think that for sure, districts are feeling a little bit under pressure because of that federal funding that is that cliff that you mentioned that’s going to go away. That does — I think the intent of the funding was always temporary and was not to be sort of for a lot of structural ongoing costs. I think that every district has made their own sort of decisions for the best what they thought at the time probably best for their district.