Ladies and gentlemen, thank you for standing by and welcome to the Stride, Inc. Second Quarter Fiscal 2022 Earnings 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.

Thank you and good afternoon. Welcome to Stride’s second quarter earnings call for fiscal year 2022. With me on today’s call are James Rhyu, Chief Executive Officer and Tim Medina, 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 the Investors section of our 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 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?

Thank you. Good afternoon everyone. As I enter my second year as CEO, I wanted to reflect on this past year and provide some insight into what I see for our future. Environmentally, here are some observations. Unfortunately, the COVID pandemic continues to wreak havoc, even as vaccines have become widely available. And there continues to be significant disruptions and uncertainty to K-12 learning. American workers are quitting their jobs at record high levels, with more than 4.3 million public sector workers quitting in November 2021 alone. The national teacher shortage continues to be acute and issues with in-school districts across the country made getting back to normal that much more difficult. As a nation, we continue to politicize issues that should not be political and education unfortunately, continues to be one of those areas. And employers and employees are settling into the work-from-home trend, with estimates showing that almost one-third of all workers were remote at the end of 2021. This environment will continue to cause uncertainty across many sectors of our economy. We already see rising inflation and interest rates and continued disruption in the supply chain. I believe Stride is well-positioned in this environment to continue to thrive by providing solutions that meet the very demands of our times. People of all ages are searching more educational choice and flexibility and they're seeking training options to prepare them for economically sustainable careers. Meanwhile, employers are looking for well-trained workers to fill the nearly 11 million job openings in the U.S. Last April, I said that I believe Stride would grow through the pandemic and that I believe that pandemic has created a longer term structural opportunity for us. And my belief is stronger now than it has ever been. One aspect of our culture that helps us…

Thank you, James and good afternoon everyone. First, let me recap our reported results. Revenue for the quarter was $409.5 million, an increase of 9% from the same period last year. Adjusted operating income was $60.7 million, up $10.6 million or 21% from last year second quarter. And capital expenditures were $14.2 million, an increase of $3.4 million over last year. We exceeded the revenue and profitability guidance we provided last quarter. We continue to see strong demand for our General Education and Career Learning programs. We believe this demonstrates that families value our virtual programs and are choosing us even when other options are available. And as I will outline later, we are increasing our revenue and profitability guidance because of this strong demand. Returning to our results for the second quarter in more detail. Revenue from our General Education business was down just slightly to $313.2 million. This is due primarily to the expected decline in enrollments offset by an increase in revenue per enrollment. General Ed enrollments were 145,600, down from last year's COVID impacted results of more than 161,000 enrollments. Revenue per enrollment in General Ed increased 11% from the second quarter last year. We continue to see favorable funding and for the full year, we expect to see revenue per enrollment that is substantially higher than our fiscal 2021 results. Career Learning revenue was $96.3 million, up 55% from the second quarter of last year. This is driven by growth in Stride career prep enrollments and growth in our Adult Learning business. Middle and high school Career Learning revenue was $75.3 million, up 47% from last year. This was driven by 38% increase in enrollments and a 7% increase in revenue per enrollment. Like our General Education business, we expect our revenue per enrollment in…

[Operator Instructions] And your first question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thank you so much. You kind of opened up talking about next year when he talked about the potential three new states for Gen Ed, so let me focus on that. I know it's probably too early for any enrollment indicators, but if you can give us a little bit more color on those three new states, if you're willing to give us an enrollment indicators, that'll be great. And then also, I'm just wondering what you're thinking for the funding environment for next year? Thanks.

Yes. Thanks for the question, Jeff. I think -- so we've got three -- I think we've got at least three new states for sure. Georgia, which is sort of in the public domain already; New Hampshire, I think, which is also in the public domain; and West Virginia, also in the public domain, also, I think set up for the fall. I think the enrollment -- we know for sure, long-term, Georgia has incredible enrollment demand. In the short-term, our arrangement, there will be under a cap. So, we will not be able to meet all the demand in that state. But I think long-term, it presents a tremendous opportunity for us. The other states, obviously are a little bit smaller, but I think they're states that were we've worked hard to get and are really good important states for us. And I think they represent also just an increase in the openness of states that previously may not have been open to us to really have meaningful conversations and I think the roadmap pass that into the years, past that also look good. So, I think without giving specific numbers, but I think that just the trajectory looks pretty strong and the ability for us to continue to open new states in the coming years looks pretty good.

That's great. And I'm sorry did you address the general funding environment for next year?

No, I'm sorry, Jeff. The general funding requirements, it's continued to be I think, strong. We don't see at the state level, a lot of headwinds. I think you'll see -- you'll continue to see tailwinds around funding. I think the thing that I would -- it's not even a caution, you'll see tailwinds. But there's I think there's pockets in the education sector in grades K-12, where districts are really sort of a washed [ph] money and that's flowing to some of our education, maybe, peers. That sort of flood of money that's gone from the federal government down that pipe is not going to give us a huge lift next year in funding, but I think the general environment remains very strong.

Okay, great. And I think last quarter you talked about some issues in terms of finding teachers. I'm just wondering if we can get an update on that, how that's going and what you see going into next year next? Thanks.

Yes, so the national teacher shortage remains an issue across the country. It's not just us, we see this across the entire landscape of the U.S. It is -- I think, this year, we found a -- so I say equilibrium now in here, now that we're in January. I think we work hard all year round to get teachers. I think we've got a good process now -- or approach now to accelerate hiring going into next fall so that hopefully, we will actually get ahead of it more than we did this past year. So, I think we won't experience the type of restriction that the shortage imposed upon us this year, next year. So, I think that will be alleviated somewhat, but I do think the shortage will continue into next year. It's -- we see a lot of teachers that are actually leaving the professional together, we said that I think less so in our programs, because I think there's less controversy surrounding sort of the teacher environment within programs like ours, but certainly across the nation we see actually teachers leaving the profession altogether. I think the long-term macro trend over teachers works in our favor, because the landscape of educators are going into the profession are -- they're more now in tune with and skewing more towards digital -- being digital natives and being I think more aligned with online education that works in our favor. I think as teachers in school districts -- brick-and-mortar school districts increasingly become I think disenchanted with their school districts, that also gives us opportunity. Our teacher satisfaction remains very high. So, I don't think it works the other way around. So, I think the general trend for our teacher shortage as a nation remains intact, but I think the trends for us specifically will improve here going into next year.

Okay, that's great to hear. I'll jump back to the queue. Thanks so much.

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

Hey, thanks for taking my questions. On the enrollment numbers here looks really, really solid, so I would love to just get some more color on what you saw, especially in the last few weeks in terms of retention rates for the start of the new semester and whether you saw any notable benefit from new students maybe signing up for the first time this semester. So, maybe just high level commentary on retention rates and new enrollment trends for the second half of this fiscal year?

Yes, so retention rates, we saw last year, I think unexpectedly to a lot of us, retention rates that were better than prior years. And I think there was an assumption last year that retention would actually get worse once schools -- brick-and-mortar schools reopen and kids would go back to leave our programs go there. And we've seen this year that our retention rates remain improved against pre-pandemic levels, similar to last year. So, they're not -- there's not a step function change improvement from last year, but they remain improved to pre-pandemic levels. So, I think retention is a good news story for us and continues into this year to be a strong story for us. I think for new enrollments, the trend that we're seeing -- and it's mentioned a little bit in my comments, but since we announced our count date back in October, enrollment for -- enrollment demand for our programs is up actually -- this morning I was looking it's up -- it's actually a little north of 30%, the applications are up a little north of 30%. And it just remains very strong. We see -- we continue to see strength in the demand side of this equation, we see customers really looking for alternatives. And I think they see that we're a very viable alternative in many cases. And as we stand today, here on January 25th, actually, year-over-year, our enrollments now have surpassed last year. So, again, just from all fronts, we see the demand side of the equation continuing to improve. Now, the reported numbers you see are obviously from last quarter and they're blended across the quarter and we started out the year, down 3%. So, the reported numbers look different. But as we stand here today, year-over-year, we have surpassed last year's number. So, I think the new enrollment trends and the retention trends that continue to remain strong; the demand side of the equation continues to remain robust; we see no abating of that, at least as far as we can see from the data we see for our products and services.

Got it. That's great to hear and really helpful. And then I guess it was a follow-up, I know it's a small business, but what can you share about what you're seeing in the institutional business? How is that been performing relative to your expectations? And how are you thinking about the growth potential there as we as we think about the next few years?

So, I think the institutional business over the next few years is really going to surprise a lot of people on the upside. We struggle with that business, we've had fits and starts, we've had issues around our sales teams and things like that. I think, now, we see with -- I think we have the smallest sales team, we've had pretty much in the history of this company and we see order of magnitude, the largest pipeline we've ever built. So, I think the demand side of this equation is strong and I think you're going to see that our offerings in the market are just going to get stronger, we're going to put some new products into the market in the fall over the next couple years, that's going to be -- really capture some digital trends in education in K-12. And I think we're really going to make some inroads on our institutional business, I think it's going to be a winner for us long-term.

Great to hear. Thanks for taking my questions.

[Operator Instructions] And your next question comes from Tom Singlehurst with Citi. Please go ahead.

Yes, good evening. It's Tom here from Citi. Thanks for taking the question and congrats on the results. A couple of, I suppose, moral questions. First one, revenue per sort of enrollment, I just wanted to understand and this is just the training, it's like lack of knowledge on my part, but just understand whether there's a sort of seasonality to those figures and can you go over again what your expectations are for the full year. I missed that in Tim's commentary. So that will be the first question. And the second one, I'm interested, once again, this is a point on disclosure. I think you mentioned there's still a bit of a sort of an M&A to the anniversary impact on the growth rates for the pure Adult Learning, can you just give us the pure underlying revenue growth? I know you mentioned the impact of M&A, but just whether there's a proper underlying number that we can focus on? That'd be a great question to start off if that's okay.

Great. Sure Tom. Well, I'll start with the second question. This is Tim Medina. What we said in our prior call that I would still repeat here that we expect the Adult Learning business overall to approach $100 million for the year. We would still say that and so rather than giving you a year-over-year comp, I would just say that if you take that into account that that was suggest that Q3 to Q4, that's going to have very strong completely organic growth year-over-year. On the first question, the -- on the revenue per enrollment, what we also have said is that we expect revenue per enrollment this year to not just be higher than FY 2021, but actually go all the way back to FY 2021, and in fact, surpass FY 2020, excuse me level, so to surpass the pre-pandemic levels that we saw in FY 2020, Tom. So, we will continue to say that that we expect the full rebound back to even above FY 2020 for both Career Learning and general enrollment. No particular seasonality to the way our numbers come in, really, we may have some -- when we do have any adjustments in our estimates, Tom, there is sort of a year-to-date effect, sometimes that'll cause from quarter-to-quarter anomalies, but there really is no particular seasonality that I would highlight at this time.

One thing I would add is our most recent acquisitions, Tech Elevator and MedCerts. I think as Tim mentioned, they continue to perform very well against our acquisition plan. They're both organically growing north of 25% year-over-year. So, I mean, it's very strong growth. We've got great leaders in those businesses, they're doing a fantastic job about continuing to grow those businesses finding opportunities to expand, and they've been tremendous strategic assets as leaders across Stride. So, we continue to be very, very bullish on those acquisitions and we think they're going to just pay off for our shareholders and states.

Perfect. And that leads on to the next question, which is on -- well, actually going to be two questions on cash flow, but I'll start with the with the second part of that, which is given you mentioned M&A and I'm surprised you guys haven't done more transactions of a bolt-on nature. I mean -- I'm just interested in whether that's just the way it is, and the pipeline's relatively forward. Is that sort of delayed in the last year, is that a sort of conscious delay that -- is that for a reason?

Yes, so I think--

Yes, sorry, Tim.

No, no. I think I think there's no delay. We have a very active pipeline of deals that we look at. I think valuations within our sector, in the public markets, they've really trended down in the private markets, where a lot of the deals that we would look at. I don't think they've trended down as much, I mean in fact, I think there's a recent deal in sort of a public company and education space that tell them they announced recently a deal to sell piece of their business that I think was sort of indicative of some of the private market valuations that you'll see. And I think we want to be -- I think we want to be responsible deployers of our capital and when we do, we want to do it evaluations that we feel like warrant that deployment of capital. And so while there are some strategically interesting assets in the space right now, particularly on the career side that we might otherwise think about, I think we will only do it when the valuation equation makes right for us and our shareholders. And we just haven't found that equation. MedCerts in Tech Elevator, I think that equation made a lot of sense. We got strategic value out of it. We got great leadership out of it. They continue to perform well. And if we can find more deals like that, we'll continue to pursue them.

Okay. And one very final one for Tim, on working capital. I mean, obviously, the first quarter relatively big working capital outflows, I think it's normal. Should we expect a fairly big working capital inflow across the balance of the year?

Yes, that is correct. We expect to have strong free cash flow in Q3 and Q4, driven by good inflows of working capital.

That’s magic. Thanks very much.

[Operator Instructions] There are no further questions at this time. This concludes today's conference call and thank you for your participation. You may now disconnect.