Ladies and gentlemen, thank you for standing by, and welcome to the Stride Third Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Tim Casey, Senior Director, Investor Relations. Please go ahead.

Thank you, and good afternoon. Welcome to Stride’s third quarter earnings call for fiscal year 2021. Before we begin, I would like to remind you that in addition to historical information, certain comments made during this conference call may be considered forward-looking statements. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. They should be considered in conjunction with cautionary statements contained in our earnings release and the Company’s periodic filings with the SEC. Forward-looking statements involve risks and uncertainties that may cause actual performance or results to differ materially from those expressed or implied by such statements. In addition, this conference call contains time-sensitive information that reflects management’s best analysis only as of the day of this live call. Stride does not undertake any obligation to publicly update or revise any forward-looking statements. For further information concerning risks and uncertainties that could materially affect financial and operational performance and results, please refer to our reports filed with the SEC. These reports include, without limitation, cautionary statements made in Stride’s 2020 Annual Report on Form 10-K. These filings can be found on the Investor Relations section of our website at www.stridelearning.com. In addition to disclosing financial results in accordance with Generally Accepted Accounting Principles in U.S. or GAAP, we will discuss certain information that is considered non-GAAP financial information. A reconciliation of this non-GAAP financial information to the most closely comparable GAAP information was included in our earnings release and is also posted on our website. This call is open to the public and is being webcast. This call will be available for replay for 30 days. With me on today’s call are James Rhyu, Chief Executive Officer; and Tim Medina, Chief Financial Officer. Following our prepared remarks, we will answer any questions you may have. I would now like to turn the call over to James. James?

Thank you. Good afternoon, everyone. Since I became CEO three months ago, I’ve heard one consistent question. What will happen with education after the pandemic is over? Well, we’re soon approaching that point it looks like and I don’t think any of us know. But many critical thought leaders seem to believe the shift to online learning is not temporary. In fact, a lot of the key trends we’re seeing from recent research on education, careers and economy support this idea. A recent New York Times article carried the headline, “Online Schools Are Here to Stay, Even After the Pandemic”. The premise of the article was that the ongoing pandemic has changed the landscape of education permanent. One quote, “a subset of families who have come to prefer online learning are pushing to keep it going”. Additionally, a recent study by the Society for Industrial and Applied Mathematics found that one-third of high school students would choose a fully online or hybrid education, even after things return to normal. These and other researches like them support my long-held belief that the momentum in digital transformation is difficult to reverse, and that the trend toward online and hybrid education will continue, and more students are recognizing that college is not the only effective or most affordable path to a career. The ECMC Group released findings from a study it conducted, that shows today’s high school students are seeking lower cost, quicker paths to careers. In this study, 25% of Gen Z teens said, they were more likely to attend a career and technical education school due to their pandemic experience. This trend is playing out in college as well. Last fall, there was a 7% drop in enrollment to higher education. This means more students will seek out other educational paths.…

Thank you, James, and good afternoon, everyone. Revenue for the quarter was $392.1 million, an increase of 52% from last year. Adjusted operating income was $54.9 million, an increase of 146%. And capital expenditures were $11.3 million, an increase of $1.9 million versus Q3 last year. In each case, these results met or beat the expectations we provided in our guidance last quarter. As James mentioned, our general education business continues to perform very well, and career learning remains on a strong growth trajectory as it has been for the past several years. Given the strength in these businesses, we have raised our guidance again for the full fiscal year. Returning to our results for the quarter, revenue from our general education business increased $89.2 million or 38% to $322.3 million. This was due primarily to higher enrollments, partially offset by lower revenue per enrollment. General ed enrollments rose 43% year-over-year, while revenue per enrollment declined 4%. For the full year, we expect revenue per enrollment to be down compared to last year due to state budgetary pressures resulting from COVID-19 and a higher mix of lower-funded states. We do not, however, expect this decline to become a trend into next year. In fact, we are confident given what we know today about state policy that enrollment funding should improve next year. Career learning revenue rose to $69.8 million, an increase of 191%. This was largely driven by significantly higher volumes in our Stride Career Prep programs, formerly now as Destinations Career Academies as well as growth in our adult learning businesses, including the effect of MedCerts and Tech Elevator acquired in November 2020 and Galvanize acquired in late January 2020. Gross margins were 35.5% in the quarter, up approximately 500 basis points from the same period last year. For…

Thank you. [Operator Instructions] [Technical Difficulty] And your first question comes from the line of Jeff Goldstein from Morgan Stanley. Your line is open.

Hey, guys. Good evening. Can you hear me okay?

Apparently, you can hear me -- many of you can hear the operator. I think some of you can hear us as well, but we cannot hear you or the operator. So, we’re trying to work through here the technical difficulties, if you just give us a moment.

Ladies and gentlemen, we apologize for that technical delay. [Operator Instructions] And your first question comes from Jeff Goldstein from Morgan Stanley. Your line is open.

Hey, guys. Can you hear me okay now?

Yes. Hey there. We can hear you. We’ve actually had to dial in from a mobile phone here. So, I apologize if there’s a little bit of -- if the sound quality isn’t as good. We still have a little bit of technical difficulty on our end, but we can hear you now. Go ahead.

Okay. Perfect. So, I just had a question on revenue per enrollment. That figure seemed to recover in the quarter within both general education and career learning when comparing it to last quarter. So, I was just hoping you could expand on drivers of that recovery. And if some of that recovery in the quarter was giving you confidence for further improvement into next year?

Let me just try to take maybe half of that question, and then I’ll hand it over to Tim. I think, first of all, a lot of factors happened in year. So, I sort of -- I think, it’s probably better to focus on the full year number. The confidence in next year actually doesn’t really have much to do with this year. This year, we were negatively impacted by, you may recall, California didn’t fund new enrollments and some other sort of mix issues. When we look at next year, really, what we look at is, sort of, I’ll say, the policy landscape across states in which we manage programs. And from that perspective, we think that our overall -- the overall environment looks pretty strong and pretty stable. So, it’s really nothing to do with how this year is shaping up. It’s really based on what we see across the landscape for next year policy-wise. Tim, I don’t know if you want to add anything.

Yes. The only thing I would add in terms of sequential improvement is that as we get into the year, our revenue -- we’ve earned revenue in some cases where we trade small amounts of enrollments, normal course. And that’s really the driver overall in modest sequential stabilization in that metric.

Okay, got it. And then, I appreciate your comments in the prepared remarks around just optimism you have around returning students for next year. I was curious, though, if the churn you saw in the quarter in general education, like this past quarter, was in line, or was that more than you were anticipating, given students could potentially be returning to their traditional schools? I mean, were you seeing that in any particular age group, or is that not the case, and it was all just kind of normal course? I was just curious of your thoughts on churn in the quarter.

Yes. So, I think there’s -- if anything, churn continues to be better than previous years, I think in that respect, it was, I would say, somewhat better than we expected originally when we set out the year. But we are seeing, I think, just a tendency -- and we’ve seen this over the years, the tendency for in the middle of a semester families do have some reticence. Even as schools are opening back up, I think we see -- we saw families have some reticence just to disrupt sort of the flow of the educational program that they’re child’s in. But we were a little bit pleasantly surprised, I would say, and we have been pleasantly surprised throughout the course of the year on the sort of the trajectory that churn has taken for us.

Your next question comes from the line of Jeff Silber from BMO Capital. Your line is open.

The results were much better than expected, both on the top line and bottom line. Can you kind of focus what was the reason for the beat or reasons for the beat?

The reason for the beat is that -- it’s really the point that James just made. Better retention performance during the quarter really is the primary driver of that improvement on the top line, and that really fell to the bottom line.

Okay. So fairly similar to what we saw last quarter as well?

Yes.

Okay. That’s great. I appreciate the color you gave us on the fall. I know it’s still very early. Can you talk about at least the potential for either new states or new schools, how that pipeline is going?

Yes. I think, unlike probably previous years, our approach to new states and new schools is actually evolving. And I think it’s evolving in a positive way, meaning there are increasingly more opportunities for us to enter new programs, new states with partners. We’re approaching it from a perspective that we don’t always need a sort of new policy or law legislation to be passed. So, we are continuing to work to open particularly career education programs. We expect to open a small handful this coming fall. We expect programs in general, in a number of states to -- new states to open or expand. And so, we’re pretty bullish. West Virginia, Missouri, places like that we expect at least some type of expansion or a new program to be open for the fall.

Okay, great. In your prepared remarks, you also talked about academic outcomes. I know it may be too early to get this kind of data. But I’m just curious, in the pandemic, have you seen your outcomes increase relative to some of the traditional schools that went online? Is there any data that shows that?

Yes. For sure. We have -- we definitely -- there is some data trickling in that suggests -- and obviously, not surprising that most of the brick-and-mortar schools took a pretty significant step back on average in academic outcomes. And we did -- in fact, our schools, our data suggest that we outperformed that significantly. So, at least from our perspective and our data would suggest that based on what we see and what we can sort of -- I’d say the data that is available is that our performance has outperformed and outpaced most other promoter schools that did online learning over this past year.

Your next question comes from the line of Stephen Sheldon from William Blair. Your line is open.

First, great to hear about the higher new registration, I guess, indications. Is there any way to roughly frame or quantify how much higher the percentage of families indicating the return compares to the normal trends that you see?

Well, so I’m reluctant to start providing that type of guidance at this point. I will tell you that our response rates are -- have been materially higher. And I think that for me at least, the signs that point positively is the engagement, the engagement levels we’re getting. And particularly, I’ll give you one sort of a tidbit of information. We did track, I’ll say, COVID-related types of enrollments, meaning some families did very specifically indicate to us that they were coming to us this year, specifically for COVID. Now, of course, a lot of families didn’t indicate that. And so, that doesn’t capture maybe the entire population. But, a very significant proportion of those families who said that they came to us because of COVID, have been engaged with us and have indicated that they expect to return in the fall. So, again, in our prepared remarks, I indicated that we’re not seeing sort of this, I’ll say, mass exodus of families just riding it out with us until the brick-and-motor schools came back online, and then sort of all exiting back to the brick-and-mortar programs. So, we see that as a pretty positive trend that families -- at least a significant number of families have appreciated the experience enough to indicate that they are sticking with it.

Got it. Really helpful. And I know you guys can help students that have fallen behind academically try to catch up, especially with some of the personalized learning that you provide online. With some students at local options falling behind over the last year, I guess, we’ve seen that increased demand at all for general education, especially as you think about indications heading into next fall.

Yes. I think, the slide that’s happened -- I was just actually -- before we came into this call, there was a -- I saw Khan from Khan Academy, he was on CNBC mentioning that 15% to 20%, I think it was the number, the stat that he gave, 15% or so of kids have "gotten lost" in the public school systems. And so, not just a slide of the kids who have been in the system, you see a large number of students who have sort of gone missing in a way, right? And so, we do think and we do see that there’s a very large opportunity and good demand for not just our programs, our full-time online programs and kids to come into those programs, but just in school districts more broadly looking for ways to meet that demand or to meet that gap. And so, I think you should remember that we’re not just running full-time programs. We offer a suite of solutions that also help districts with their problems. And I think that in some ways, that’s going to be an ongoing opportunity for us, because I really emphasize with these school districts, they really need to make sure that they can reach a lot of these kids who have somehow gone missing in their systems, and they need to provide some alternatives for them as well. And I’m hopeful that they are looking at alternatives like online alternatives for those kids as well, and we can certainly help there.

Makes sense. Last one for me just on the guidance. It seems like the guidance implies a sequential step down in revenue in the fourth quarter relative to the third quarter. I think, the normal progression over the last two years has been for a sequential uptick. Anything notable to call out on what would drive a sequential decline this year in the fiscal fourth quarter?

Nothing notable to note there. It is fair that if you squeeze out another quarter just like this one, we would be at the very tippy top of our guidance range. So, there’s nothing in particular to call out there. No particular concern or anything like that.

[Operator Instructions] Your next question comes from the line of Greg Pendi from Sidoti.

Just real quick on the summer courses that you’ll be offering, is that going to create any notable shifts in expenses on a year-over-year basis, especially in structure costs?

Yes -- no. The answer is no. We shouldn’t have any material change in costs over the summer due to those programs. Those programs, they’re not -- they do have some marginal cost to us. It’s not significant. We think it won’t change sort of the overall profit or gross margin trajectory that we’re headed on. But, we also think it’s important. It’s important to help with the summer sort of gap, if you will, and bridge kids over the summer. We think it’s an important offering to get kids to have awareness around some of these opportunities that we can provide them. So, I don’t think it’s going to be a material cost. But I think, irrespective, it’s just an important service that we need to provide to country right now.

Great. And then, just one final one, just on the revenue in terms of next year. Assuming -- would it be a positive benefit, if you a higher mix of specialty students next year in your revenue? I’m not saying that you’re foreseeing that, but just given the trends of some students falling behind, is that typically a higher revenue per student?

Not material. So, I wouldn’t portend that our revenue pursuing trend next year is going to be impacted by that. In fact, in any given year, I think sort of falls out with the wash, and our overall revenue pursuing trends get more impacted by things like mix or what happened in California this year and not by the mix of specialized versus non-special students.

And there are no further questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.