Stride, Inc. (LRN) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the Stride, Inc. conference call. [Operator Instructions] Thank you. I will now hand the call over to Mr. Tim Casey, Vice President of Corporate Development and Investor Relations. You may begin your conference.

Thank you, and good afternoon. Welcome to Stride's second 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'll answer any questions you may have. I'll now turn the call over to James. James?

Thanks, Tim. Good afternoon. In November, during our Investor Day, we discussed the opportunities for our business and laid out our strategy to deliver what we believe will be market-leading returns. I discussed how increasing uncertainty, volatility and chaos in our country has and will continue to increase demand for our offerings. Our second quarter results speak for themselves and demonstrate the macro trends are behind us. Our strategy is beginning to play out, and we are executing better. The year began with some uncertainty regarding the trends we might see in year given the volatility over the past few years. We have been convinced that the market has moved in our direction, and then we were not going to fall back to pre-pandemic levels, but there still remains a question of whether we could surpass those pandemic highs. Well, we ended the second quarter with 196,500 enrollments for an all-time record, surpassing our pandemic level highs. We saw enrollment growth in both our Career Learning and General Education programs and strength in both new enrollment and retention. We have the largest cohort of new in-year enrollments that we've ever seen. And Americans continue to believe that school choice is good for the education system. A recent poll by YouGov released this fall showed 84% support, giving every child in the U.S. the ability to attend the public school in their state that best meets their needs regardless of where they live. The results are clear, and it's what we've been hearing for years. Parents want choice. They want to be able to choose a school that will meet the unique needs of their child. They want to be able to change their child's future. I also continue to see reports that support our move into the career learning space. This fall, freshmen enrollment in 4-year institutions for 18 to 20 year olds declined by 5.2%. And the reason for this decline was that this age group is increasingly choosing to enroll in community college or certificate programs. Students are explicitly looking for short-term programs that have a direct connection to the workforce. While we're still working on driving incremental demand to our current programs, data like this supports our decision to focus on certificates and career pathways in fast-growing in-demand careers. Students in our programs can graduate high school knowing they've got the skills to go directly into the workforce or to choose to attend a post-secondary institution. There's also continuing support for our new products. In November, I outlined our K-12 tutoring product along with some of the demand drivers that support our entrance into the market. A study out of Texas showed that K-2 students who received individual virtual tutoring during last school year demonstrated higher reading test scores by year-end. And Virginia launched a statewide high dosage tutoring effort, part of a $400 million investment in education to recover from academic declines. We know that our tutoring offering using state-certified teachers can be part of the solution to the nation's learning loss and help drive student success. Taken together, I remain as excited about Stride's ability to change the future for students as I ever have been. The market conditions are right for an innovator like Stride to continue to drive student success across multiple markets. This call marks the end of my third year as CEO. And as we continue to achieve new enrollment and financial records, I still see a long runway in front of us. A couple of highlights I'd like to point out since I was appointed CEO. Gross margins are on pace to expand 300 basis points, plus or minus. Trailing 12-month reported EPS and reported operating income are both up 3x the levels prior to my appointment as CEO. We've got the right team in place and are executing against the strategy that we previously outlined. Thank you. And I will now turn the call over to Donna. Donna?

Thanks, James, and good evening. I know James already discussed our enrollment numbers, but I think it's important to put it into perspective. It was just 2 quarters ago that we were fielding questions about whether we'll still return to year-over-year enrollment growth following the pandemic. And now we're talking about exceeding pandemic highs. This speaks to resiliency of our offerings and the sustained demand for alternative educational options. We are proud to be able to give families a choice, and we believe that the trends point to a long-term growth in our business. All of that have resulted in the first quarter in our history that we achieved over $0.5 billion in revenue, as we've updated our revenue guidance for the full year such that now it exceeds $2 billion at the midpoint. Turning to our quarterly results. We reported revenue of $504.9 million, an increase of 10% from the second quarter of fiscal year '23; adjusted operating income of $94.9 million, up from $76.3 million or 24% from the same period last year; earnings per share of $1.54, up $0.35 from last year; and capital expenditures of $12.7 million, down slightly year-over-year. Career Learning, middle and high school revenue grew 7% to $165.1 million. This performance was driven by enrollment growth of 9% year-over-year, somewhat offset by a slight decline in revenue per enrollment. During the quarter, enrollments grew over 3,000, continuing the in-year enrollment growth trends we saw last year. In our General Education program, revenue was $313.9 million, up 14% from last year. This strength was also driven by continued enrollment growth in the quarter with enrollments finishing the quarter up 5,400 from the end of September and average enrollment growth of 9% from last year. Revenue per enrollment for gen ed increased 8%. We continue to see strength in funding for education. And while we saw some timing impacts on our Career Learning revenue per enrollment, we still expect to finish the year with revenue per enrollment growth of between 4% and 6% for both lines of business. Our adult learning business revenue declined $4 million to $25.9 million, on the weakness in our tech business we discussed previously. MedCerts continued to perform well, though growth in that business did not fully offset the declines in our boot camp. Gross margin for the quarter was 39.8%, up 270 basis points from last year. We're still seeing the effects of the efficiency efforts we put into place last year and continue to implement. Given the timing of the impact last year, we don't expect gross margin increases to be as strong year-over-year in the second half. We still expect to see gross margins improve by 200 to 250 basis points for the full year. Selling, general and administrative expenses increased 15% to $116.9 million. Stock-based compensation for the quarter was $7.6 million. We now expect to finish the year with stock-based compensation in the range of $29 million to $33 million. Adjusted operating income for the quarter was $94.9 million, up 24% from last year. Adjusted EBITDA was $118.3 million. Interest expense for the quarter was $2 million. Our effective tax rate for the quarter was 24.9%, and diluted earnings per share for the quarter was $1.54. Turning to our balance sheet and cash flow. Capital expenditures for the quarter were $12.7 million, down slightly from last year. Free cash flow, defined as cash from operations less CapEx, was $160.6 million, up $13.2 million from the prior year period. We finished the quarter with cash and cash equivalents of $364.4 million. Based on the strength of our enrollments, we are raising our full year revenue and profit guidance, and we now expect revenue in the range of $1.99 billion to $2.04 billion, adjusted operating income between $265 million and $285 million, capital expenditures between $60 million and $65 million, and an effective tax rate between 25% and 27%. For the third quarter, we are forecasting revenue in the range of $500 million to $520 million, adjusted operating income between $85 million and $95 million, and capital expenditures between $14 million and $17 million. Thank you for your time. Now I'll turn it over to the operator for Q&A. Operator?

[Operator Instructions] Our first question for today comes from the line of Greg Parrish from Morgan Stanley.

Congrats on a strong quarter. I guess start with margin, really good expense management, again. Unpack the margin beat. Is there anything to call out on the expense management side where you're able to outperform your expectations going into the quarter? And then related, if you continue on a trajectory, there's upside to the full year, at least the way I look at it. So is there anything timing related or any reason why the back half margin won't be quite as strong second quarter?

So on the gross margin, some of the things that we talked about last year, we are continuing to do this year. One of the things you heard me talk about last quarter, just the timing of when we -- the teacher hiring had an impact on our margins. We did a much better job with that hiring process. The material that we send out, using more digital, using innovation and technology, using our size and scale, all the things that we talked about, we continue to do that. And as you might recall, I spent a lot of time talking about gross margins last year. And I said the changes we were making were structural changes, and that still holds true. In terms of the rest of the year, the year-over-year comparison won't be as favorable, one, because some of those efforts we put into place, we put into place later in the year. So from a comparison perspective, you won't see that. And then also in Q4, we typically have more sort of school-level costs like state testing and some restricted funding that we had to spend in Q4. And so that's where you might see Q4 gross margins typically not as high as you might see in Q2 and Q3.

Okay. Great. That's helpful. I guess it sounds like you ended at 196. So everything was trending positive throughout the quarter. So I think I know the answer. But I think we're asking this quarterly now, but so far, 23 days in January, we're seeing similar trends. So it sounds like -- and I think third quarter, it's harder to add students than in the second quarter, but this thing is still trending upwards, it seems, through January here so far.

Yes. I think we're not going to talk about the specifics of January today, but yes, January so far looks pretty good. I think what you said is right, meaning it's harder. There's just less spots even open in Q3. A lot of the enrollment window has actually shut down in the quarter, so the ability to even add kids sort of closes during the quarter. But I think just from a funnel perspective, we continue to like what we see.

Okay. Fair enough. And then I get asked about adult learning. I know it's small. It's 5%, 6% of revenue. Last quarter, we talked a little bit about macro headwinds. But it seems like -- I don't know, did something shift in the quarter? Or was there sort of a big client loss or anything to call out there? And then, I guess, how long does this kind of last or maybe it's just macro dependence? But when do you expect this to get back to how it was growing in the past?

Yes. I mean, I think, the macro headwinds continue. I think you'll see that across the industry. So I don't think we're immune to what's happening across the industry and from an adult learning perspective. I think that certainly through the rest of the year, I would expect the headwinds to continue. Next year, I think we have to see -- we're excited -- I think the difference with our business, the adult learning, than the industry or sort of the broader industry, if you will, is our -- we're a little bit of a tale of 2 cities. We have the technology-based stuff, the boot camp stuff, which, again, macro headwinds. I think everybody is going to see that. Everybody is seeing that. But we have our health care side, which continues to perform well. And as that continues to grow and we think, perform well, at some point, it will offset, I think, any declines in the other side. So whether that's next year or not remains to be seen, but I don't think -- either way, it won't be a material impact, up or down, for next year.

Our next question comes from the line of Jeff Silber from BMO Capital Markets.

Wanted to focus on the different segments. I'm going to start with General Education. I know you have not broken out this as a separate segment for too many years. But kind of looking back historically, I think this is the first year we've seen sequential enrollment growth in gen ed between the first quarter and the second quarter. I know you cited some improvements in retention, but if we can get a little bit more color, it was actually a nice surprise there.

Yes. I think, generally speaking, we did find a sequential improvement. That is -- I think you're right, generally speaking, Q1 to Q2 in almost every year, we'll see a decline. A lot of that happens just because the September period, the end of Q1, we get a little bit of actually a push of enrollment because a lot of families sort of adjust, if you will, what they're trying to do in September, and many of those adjustments sort of come to us. And then you sort of have this tail off in October and November and then into December. Obviously, we were able to reverse that for this year sequentially. And I think part of it's just we had strong execution. I think it remains to be seen whether there's a macro trend here for future years or not. We definitely see improved execution, so I think that helped contribute to a stronger second quarter. We see funnel metrics like conversion and things like that continuing to improve. So -- and I think that's really our execution, which is improving. I think we still have a ways to go to continue improving it. But I just -- there's not enough data that we can see, I think, that would suggest that the sequential trend is a macro sort of ongoing tailwind Q1 to Q2.

Okay. That's helpful. I appreciate it. If I can move on to Career Learning and let me focus on middle, high school. Although we did see growth on a year-over-year basis, the growth did slow. Again, we don't have a lot of historical data, but I think it's the first time that we've seen single-digit year-over-year growth in that segment. And so it looks like it did slow. Can we talk about what was going on there?

Yes. I mean I think -- single digit, we're in the 9-plus percent range, so like, yes, I mean, single digit -- we've got, I think, a business that's starting to scale. We have a business that now, in some respects, it's a same-store comp because we're not adding a lot of new programs. And I think for the year, we'll probably still be -- we'll still probably average out into a double-digit growth. And so I think that's -- for us, I think that's -- if we continue at that sort of low double-digit career growth, we're going to be pretty happy. But there's a little bit of mix. There's a little bit of -- we're talking on the margin here, and the difference between 9-plus percent and 10% is a few hundred kids -- several hundred kids. So we're talking on the margins here, I think, a little bit.

Yes. I was actually referring to revenue. So I know you have revenue per student. There was a little pressure there.

Sorry.