Stride, Inc. (NYSE:LRN) Q2 2023 Earnings Call Transcript

Stride, Inc. (NYSE:LRN) Q2 2023 Earnings Call Transcript January 24, 2023

Operator: Good afternoon, ladies and gentlemen. And welcome to the Stride Second Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. After the speakers’ prepared remarks, there will be a question-and-answer. At this time, I’ll turn things over to Mr. Tim Casey, Vice President of Investor Relations. Please go ahead.

Tim Casey: Thank you. Good afternoon. Welcome to Stride’s second quarter earnings call for fiscal year 2023. 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 Investors 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’ll answer any questions you may have. I will now turn the call over to James. James?

James Rhyu: Thank you. Good afternoon, everyone. I’ve said this now for the past couple of years that part of our ability to succeed longer term is dependent on the macro environment providing a tailwind for our products and services. A survey that was released just last week found that more than half of all parents have considered a new or different school for their child over the past year. As families continue to see a need for option, more and more are aware that our programs offer that alternative. And certainly, awareness for virtual programs like ours increased dramatically since the pandemic, and we don’t see that reversed. In addition, families are increasingly engaged in their child’s education in a ways just a few years ago we didn’t see.

Parent activism on the child behalf, whether it be philosophical, safety, religious, medical or any other host of reasons on the rise. Now our total enrollment numbers were disappointing to us. We also said that we saw increasing in-year demand in the early days of October. Well, that continued with us through December and we ended the quarter with over 180,000 enrollments up from 174,000 enrollments at the end of September. And in the first few weeks of January, we are continuing to see strong demand . That Q2 enrollment growth is the largest enrollment gain that this company has ever experienced. So we went from being down 8% year-over-year at the end of September and now being down to 4% percent. A number of factors are contributing to the strong results.

In-year demand remains strong during the quarter and we’re seeing record levels of retention of existing fees. Once families come to us, they are staying in our program longer. We’re seeing many future families continuing to explore their options throughout the year. Not at the beginning of the year. Same survey I mentioned before was conducted at the beginning of January found that 26% of all parents are currently considering a new school for their children. And this benefit is reflected across our . Lead and application volumes remain strong, referrals and return customers are also trending favorably. We get a number of customer referrals from existing or prior customers, so other customers has always been a pretty significant part of our business and continues to trend very strongly.

And many customers who have either been in a program before or looked at a program within enrolled are reconsidering at very healthy rates. So clearly the market is not getting an alternative they are searching for. This is at a time when our position has an option for students . The schools we manage and the partners in our network had worked hard to ensure we provide availability and access. Our programs has much flexibility as possible. As a result, we’re seeing more students choosing Stride as . So I believe long term, our core full time education offering, both general education and career education are on solid footing and on a growth trajectory for years to come. We’re also beginning to make some progress into expanding our product service offerings.

This year, we successfully launched a number of new product pilot products. We have a number of districts, both large and small signed up for our updated career platform pilot study our next version of the platform is ready to use this sprint. We also have secured contracts with districts for our upgraded teacher professionals development platform and we successfully rolled out our tutoring platforms to a couple of test districts. Our new professional development product offers on-demand training for teachers based on educational test prep. The platform delivers course in leadership, practices, counseling and special programs. It’s proven because we would need training modules to the thousands of teachers we already trained this year for our manage progress and much of it is available now for free.

We’ve received positive feedback on our products so far and now we’re starting to see school take us. We secured an opportunity to deliver our platforms in one of the largest school district . I said last quarter that our goal for the year was to expand on our top line growth and aim to achieve a basically flat year-over-year adjusted operating income. Our revised guidance based on these improving enrollment trends continue to show that these are achievable goals. A big driver behind this strength is the sustained success in our career learning programs. I continue to believe that these programs can have an outsized impact on a continued field gap and labor challenges in the country today. A recent study demonstrated that 75% percent of high school graduates do not feel prepared to make college or career decisions after graduation.

72% reported that they will only sometimes are rarely exposed to a variety of career options. Meaning that for many students, it’s not just about the ability to do a job, but rather exposure to the career assessment and Stride can be a part fixing that. Career programs offers students opportunities with over 400 career courses, including career exploration and more in-depth experience. Students also recognized that schools need to be providing an important aspect of education. More than 60% of students in the same study feel that it is the responsibility of the school to expose them to these opportunities responsibility of family and friends which can disadvantage many students. Our offerings will close these gaps and provide an alternative to schools for shifting their focus away from the parent’s students for their careers.

We also continue to see more companies willing to hire non-traditional candidates. Recent Gartner article on the top workplace predictions, except that the trend towards relaxing formal education and experience required in job posting will continue in 2023. This includes employers reaching out directly to external candidates with nontraditional background, something our new career platform address . I think we have a unique opportunity in front of us to lead innovation around a number of educational products and services. That isn’t limited to . I previously mentioned that we rolled out and approved K-12 we saw significant improvement in customer satisfaction. Recently, that same product was awarded children’s home learning product at the year award.

This award is best digital learning products for children aged four to 18 curriculum design that allows students to work more . On top of that, Tech Elevator was awarded the adult home large product of the year award, which recognizes the best digital learning products over the age of 18. These awards confirm our best in class product suite and encourage ne continue to prudently invest in our future. I’m also proud of the work environment we are creating in these transitional times. We recently ranked number 18 in the top 100 companies for higher jobs by FlexJobs. The great quarter for Stride business are showing strong demand and improving trend with a favorable macro climate at our back. I believe we are on the cusp of having more meaningful success in some of our newer products and services.

Now I’ll pass the call over to Donna for a recap of our second quarter results and our updated guidance. Donna?

Donna Blackman: Thank you, James, and good afternoon, everyone. First, let me quickly recap our reported results. Revenue for the quarter was $458.4 million, an increase of 12% from the same period last year. Adjusted operating income was $76.3 million, up $15.6 million or 26%, and capital expenditures were $16.9 million, an increase of $2.7 million. We are very pleased with the strength in both revenue and adjusted operating income in the quarter. As James discussed, we continue to see strong demand across all of our offerings. This is the first time we have seen enrollment growth from the first quarter to the second quarter. Average enrollments for the second quarter were 177.5000. And we finished the quarter in excess of 180,000.

This growth supports our belief that students and families are more aware of the school options available to them. It also gives us the confidence to raise our full year revenue and profitability guidance, which I will discuss later. Now let me provide more detail on our second quarter results. Career learning revenue was $183.7 million, up 91%. This strong growth was driven by increasing Stride career prep enrollment and continued strength in our adult learning business. Middle and high school career learning revenue was $153.8 million, up over 100%. This was driven by a 58% increase in enrollments and a 29% increase in revenue per enrollments. The quarterly increase was driven by increased funding, some timing impacts and the better than expected retention that James discussed.

We continue to see a favorable funding environment and for the full year we believe revenue per enrollment will increase just over 10% from last year. This increase is a combination of higher funding, better capture and mixing into higher funded states. Adult learning revenue in the quarter was $29.9 million, up over 42%. We remain on pace to finish the year with greater than 30% growth in this business. Quarterly revenue for our general education business was $274.8 million. The decrease from last year is due primarily to the decline in enrollments we previously outlined. Somewhat offset by an increase in revenue per enrollment. Gen Ed enrollments were 111.2000, down from 145.6000. However, in both career learning and Gen Ed, we actually finished the quarter with enrollment that exceeded our first quarter numbers, a phenomenon that company has not experienced previously.

Revenue per enrollment for Gen Ed increased 17% from the second quarter last year. Similar to career learning, we anticipate finishing just over at 10%. Gross margin for the quarter was 37.1%, an increase of more than 100 basis points compared to last year. As we said last quarter, we’re seeing a more normal seasonal pattern of our expenses this year in line with pre-COVID years. Additionally, I am pleased to say that we are starting to see some of the efficiencies we discussed last quarter had a positive impact on expenses. However, inflationary pressures still exist. Given these factors, we now believe we will finish the full year with gross margins that are flat to last year, a significant improvement on what we thought last quarter. Selling, general and administrative expenses were $102 million, up $11.4 million from last year.

Most of the increase is due to scaling our adult learning business and our continued investment in new products. Stock based compensation was $4.9 million for the quarter. Adjusted operating income for the quarter was $76.3 million and adjusted EBITDA was $100.5 million. Interest expense for the quarter came in at $2.1 million and our effective tax rate for the quarter was 27.1%. And finally, diluted earnings per share totaled $1.19. Turning to our balance sheet and cash flow items. Capital expenditures totaled $16.9 million, up $2.7 million from last year. Free cash flow was $147.4 million, up $41.7 million from last year. This increase is tied to revenue growth and the timing of receipts from states that regularly pay us on a lag. We expect to continue to see positive cash flow for the rest of the fiscal year.

We finished the quarter with cash and cash equivalents of $318.3 million. Turning to our guidance. For the third quarter of fiscal year 2023, we are forecasting revenue in the range of $445 million to $465 million Adjusted operating income between $70 million and $80 million and capital expenditures between $16 million and $19 million. For the full year, we are raising our revenue and profitability guidance and narrowing our CapEx guidance. We now expect revenue in the range of $1.775 billion to $1.815 billion, up from $1.71 billion to $1.79 billion previously. Adjusted operating income between $180 million and $200 million, up from $160 million to $190 million previously. Capital expenditures between $70 million and $75 million and an effective tax rate between 27% and 29%.

Thank you for your time today. Now I’ll turn the call back to the operator for Q&A. Operator?

Operator: Thank you, Ms. Blackman. We’ll go first this afternoon to Jeff Silber of BMO Capital Markets.

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Q&A Session

Jeff Silber: Congratulations on the strong results. A few items that you had talked about with in improved funding environment. I know it’s too early to give guidance for next year, but can we talk about what you think might happen next year? I know a lot of the states and districts are talking about funding right now in terms of what they expect for next year. So any color would be great.

James Rhyu: Generally speaking, the funding environment remains strong. I think as you know and as you referenced, a lot of states are sort of in session now and over the next several months to finalize what it will actually look like for next year. So anything right now is still pretty premature. In fact, a lot of the states don’t even yet know. And there’s a lot of back and forth that will go in the state negotiations around funding. But I think as you also know, some of it will actually depend on how local state economies are projected to be for the next year or so. So they’ll take that into consideration as they go through their deliberations. But the early signs are, it continues to look pretty favorable.

Jeff Silber: Okay. That’s great to hear. You also a couple of times mentioned timing. I’m just wondering if we can get a little bit of color were there issues in terms of timing from both an expense and revenue perspective in terms of things may be deferred into the third quarter?

Donna Blackman: So there was some impact of timing for both the — primarily related to our revenue. And so some funding adjustments that we would normally expect to see later on the year. We saw some of that a little bit earlier this year. The other thing more importantly is that with respect to our rates, as you know, like last year our attention ended up being higher than we had forecasted. We’re a little bit conservative in our forecasts earlier in the year. And so we had a catch up sort of later in — catch up sort of later in the year. And so when you look at sort of our year over year comparison, Q1 and Q2 was an easier comparison versus last year, because we had that sort of catch up last year in late third quarter and fourth quarter.

Jeff Silber: Donna, I’m sorry. You mentioned the funding adjustment. Can you just explain that again? Is that a benefit in the second quarter? Does that hurt you in the second quarter? Roughly how much was it?

Donna Blackman: It’s a benefit. For the full year —

James Rhyu: Sorry. So Jeff, I think — I want to be sort of maybe clear that these happen sort of every year. We always have some level of fluctuation. I think what we’re seeing for the full year net-net, it’ll probably be very consistent with last year. And so I think we’re probably in the range last year and this year, timing is a little bit different. But I think as you see, our guidance suggests that we think we’re going to end strong even though we did get the benefit in this quarter, in the back half of the year, we do expect to be very strong.