Ladies and gentlemen, thank you for standing by, and welcome to the Stride, Inc. Fourth Quarter Fiscal 2023 Earnings Call. [Operator Instructions] Tim Casey, Vice President of Investor Relations, you may begin your conference.

Thank you, and good afternoon. Welcome to Stride's fourth 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 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?

Thanks, Tim, and good afternoon, everyone. The past few years have brought change and disruption to how people live, work, entertain and learn, among other things. There is no doubt to me, however, as these challenges and opportunities present themselves, core primary education will remain key to our society. The latest disruption seems to be generative AI and how it will change every aspect of our lives and all facets of the economy, including education. But we must also recognize that change is a constant and I believe the best organizations embrace change. I believe that this iteration of change will have a massive impact on our industry. First and foremost, I think we need to appreciate that K-12 education as we know it today will not be going away anytime soon. In fact, I think AI has the ability to transform K-12 education in a very positive way that will enable our students to accelerate and personalize their learning in ways we have dreamed about but not really achieved previously. For example, when we consider the training and education required to become a computer engineer, well, maybe we should be teaching some of those skills in high school but not in terms of computer programming, but instead in terms of navigating the functional output of the code that AI will provide for them. Since Stride was founded over 20 years ago, it has been at the forefront of personalized learning for students. And AI has the ability to personalize student feedback, assessments and content at the individual level like nothing before. AI-powered content can provide customized lessons to students based on their learning style and free up teachers to spend more time with students and less time on administrative tasks. And giving teachers more time to actually teach will…

Thank you, James, and good afternoon, everyone. I'll start with a recap of our reported results for the full fiscal year. Revenue for the year was $1.837 billion, an increase of 9% over the prior fiscal year. Adjusted operating income was $201 million, up 7%, and capital expenditures were $66.5 million, a slight decrease from last year. Once again, we were able to beat the expectations we provided in our guidance last quarter for revenue and profitability. I'm incredibly proud of our results. We were able to deliver revenue and profitability growth even while facing inflationary headwinds. More importantly, we did this while continuing to deliver strong academic results for the students we serve. Let me provide more detail on our results for the year. Career Learning remains a strong growth driver for us, increasing more than 70% this year to $706 million. In our middle and high school business, revenue totaled $586.8 million on enrollments for the year of 65,900. Enrollments were up 57% from last year. Revenue per enrollment finished the year up 16.3% to $8,885. Adult learning revenues came in at $119.2 million, up over 30% from last year. General Education revenues finished the year with revenue of $1.131 billion, down 11% from last year. Gen Ed enrollments for the year were 112,300. Revenue per enrollment increased to $9,270, up 14.4% from last year. We finished the year with gross margins of 35.2%, just slightly down from last year. We were able to significantly mitigate inflationary pressures this year and believe there are still opportunities for additional margin improvements in the coming year. We are still confident we can achieve our long-term gross margin target of 36% to 39% by 2025. For the year, selling, general and administrative expenses were $481.6 million, up 9.5% from last year.…

[Operator Instructions] Your first question comes from the line of Jeff Silber with BMO Capital Markets.

I just want to clarify something. I think you said that -- again, I know it's early but you think that you'll be returning to overall enrollment growth in fiscal '24. That was not necessarily a comment by the different segments, Gen Ed versus Career Learning. We're just talking about the total pie. Is that correct?

Yes, that's correct.

Okay, great. Thank you for clarifying that. And I know again -- I know you're not giving specific numbers, but I think on prior calls in August, you've talked a little bit more about some of the early enrollment indicators tracking in terms of inquiries, et cetera. I don't know if there's any more color you can give like you've done in prior years?

Yes. So I think generally speaking, we consider demand as really a function of our application volumes. Year-over-year so far through this enrollment season, our application volumes are stronger than last year. That's 1 indicator that makes us believe that our enrollments are going to grow. If you actually parsed the commentary from last August a little bit, I was, I think, pretty careful about saying I thought we were going to grow this fiscal year. I actually didn't refer to enrollment growth for this fiscal year. I am referring to enrollment growth for this fiscal year, so I think that is a little bit different than last year. We continue to see -- within the demand, we continue to see strong conversion, which I think in case that we're able to generate demand that is, I'd say, higher quality demand and so we continue to see improvements there. And yes, I think overall, we're feeling -- as we sit here today, we feel pretty good about enrollment growth for the fall.

One thing I'd add, Jeff, to that, we're still -- as James mentioned, we're still like very early in the process and the enrollment season. But 1 thing that I talked about, I've been talking about all year is that we had strong in-year enrollment growth this year. And so we ended the year with strong retention in-year enrollment, and so we're starting from a stronger place. Again still very early but that's something else that gives us a little bit of insight into why we think we'll grow enrollment next year.

All right. That's really helpful. If I can just sneak one more in. James, I really appreciate your initial discussion about the impact of generative AI on the business. And again, I know it's way too early, but if you can give us some insight in terms of things that we might be seeing being rolled out over the next year or two, whether it's internally or externally, I think that will be helpful.

Yes. So listen, I think -- I doubt there's a company out there that you cover that isn't thinking about how generative AI can impact their business, either from an efficiency internal standpoint or from an external product standpoint. I think we believe that it's going to impact us positively on both fronts, meaning internal efficiency as well as sort of external product-facing stuff. I think we're big believers in the positive impact generative AI can have on the K-12 online school experience. And I could sort of give you a couple of examples of how we're thinking that these aren't products necessarily that we're going to be rolling out next year or two but how we're thinking about it. Our teachers, which I think -- I believe, are going to continue to be at the core of our product. And good teaching is, I don't think in any near term, going to get displaced by generative AI. The connections that teachers can build with students, I don't think we're at a point where I see generative AI being able to replace. What I do see is generative AI being able to replace a lot of the administrative work that teachers do and therefore will allow them to spend more direct time with students. Whether that's grading papers, whether that's administrative tasks around the taking attendance and things like that process, but there's certainly a lot of efficiency that we can roll out for our teachers that will directly impact the customer experience, i.e., the students. And so I think we're focusing on a lot of those. But I think we're also -- I think we're very clear in our commitment to delivering a teacher-focused experience as well. So I think where we stand today, we're committed to our teachers.…

Your next question comes from the line of Greg Parrish with Morgan Stanley.

I'll spare you the enrollment question, I think we covered it well. I just want to talk about marketing this year versus prior years. I think you talked on a few calls about being a little bit more aggressive than you have in the past, also maybe some missteps last summer. And you highlighted a few in your prepared remarks utilizing AI. If you could unpack that a little bit, talk about what you're doing different this summer and some of the early successes you might be seeing.

Yes. I mean, I think -- so last year, I think we had some operational missteps in our marketing program. And listen, that's on me. I think some of our marketing missteps were actually around discipline and being disciplined about where we invest, how we invest, which channels we invest in. I think when we see volumes softening, having the discipline to pull the course on making good investments as opposed to just trying to sort of pray and spray in hopes we get higher volumes. I think that this year, I give Donna a lot of credit. I think she's really instilled in this company an incredible amount of discipline. And we're seeing that we get better returns when we're more disciplined around how we spend operationally. And so I think that's a big improvement we made over last year. As Donna keeps saying, we still have a long way to go in the season, and I think we have to continue to stay focused and disciplined. All marketing is to us actually our investments and their investments for return. And so we're trying to get the right customers. We're trying to send the right messages. I think the creative side of it, we've been able to use generative AI for some of our creative messaging. I think that's been a great learning experience for us. It happens to also, I think, have been proved productive for us. So I think we'll continue to get better at it. I think we definitely, this year, operationally have taken an incremental step forward in our marketing programs. But I also think we have a long way to go so I think we can continue to get better. But we definitely are -- I think we've got more discipline. We're investing for a better return. We've got some, I think, better creatives out there. I think our fundamental platform for A/B testing has gotten better. So a lot of sort of incremental improvements that we're seeing, greater discipline and I think it's going to translate, like sort of over time, incrementally better over the next couple of years as well.

Great, that's helpful. And I wanted to ask, I know it's tough to answer but a competitor of yours, Connections launched Career Pathways, which I think is a form of flattery, given the success that you've had in that business. But how does that change, if at all, the competitive dynamic? And then how do you sort of maintain differentiation in the market to districts that you serve?

Yes. I think, listen, at least for as long as I've been with the company, I don't think it's any secret. I hope it's not any secret that Connections has been a very, I think, strong player in the marketplace. I think they tend to be sort of a fast follower. I think that strategy has really actually played well for them. They've been able to avoid maybe some of the mistakes that we make as a little bit more of the pioneer. I have a tremendous amount of respect for what they're doing in the marketplace. And I think this marketplace has opportunity for both of us. I think it's a growing marketplace. I think them being in the market with us helps us be better. But I think there's a lot of other players besides Connections as well, so I think that just the marketplace really has grown and blossomed and evolved. But Connections is good for the marketplace and as well as all the other competitors out there, and I think there's a lot of them. And so we're excited for what Connections is doing work site for the fact that Connections is following us and taking -- is following our lead in many aspects, it validates what we're doing, I think, in many aspects. And I think the market is big enough and rich enough for all of us.

Great. And I'll just slip one more in. And maybe if you can give us an update on staffing capacity heading into the year. And then last year, you sort of gave us some color on wages there. I don't know if it's too early to do that as well.

Yes. No, I think staffing has been, I think, in the industry a struggle. I think you continue to hear about staffing shortages, teacher shortages, school districts are still struggling. I think with that, I think we're a little bit better positioned. I think we have, over the past couple of years, continued to be a little bit better positioned. We tend to find that we are now increasingly an alternative for teachers who may want to stay in the profession but maybe a little frustrated with sort of the dynamics of where they are. So I think it can be a competitive long-term advantage for us. And I think that what we offer teachers, I think, is pretty compelling. They get to have a degree of opportunity, innovation. They get to participate in a lot of things. We have teachers also that have incredible career trajectories with us. We have teachers that are allowed to focus on the things that are meaningful to them and not get distracted with other issues with us. So I think we offer a real competitive advantage in the teacher marketplace. And I think it's a sustained advantage that we're going to be able to have. As we introduce more tools, generative AI tools for teachers, I think it will continue -- we see a lot of variability in the market around how districts are embracing generative AI. And I think that variability plays to our advantage because we will embrace it for our teachers. So I'm pretty bullish about the teacher marketplace for us and where we sit with teachers.

And to answer your question about the wages, and so as you know, we saw a big increase in our wages last year in line with inflation, which we were largely able to mitigate by some efficiency efforts that we put forth. We think we'll still see some increases in wages this year, certainly not to the extent that we did last year. And we'll continue to deploy efficiency efforts to mitigate the impact of those increases.

[Operator Instructions] Your next question comes from the line of Stephen Sheldon with William Blair.

Nice work to end the year, and I appreciate the early enrollment commentary. It's very helpful. I guess more qualitatively, what have you seen in terms of enrollment demand heading into the fall, specifically for Career Learning programs? And I'd also be curious if you've seen anything notable over the last year or so about the verticals that students are pursuing within those programs. For example, are some paths like IT or health care way more frequently being pursued than others? Just curious what you're seeing there.

Yes. So I think qualitatively, we continue to see great demand for our career programs. There's a lot of interest. I think that the theme of -- that is, I think being by a lot of corporates now that college degrees are not necessarily required. Skills are what's required for a lot of jobs, a lot of high-paying jobs, a lot of what white -- formally, I think we thought it was more white-collar jobs. I think that theme is resonating and increasingly. We do continue to see a lot of strength in the health care field, particularly within our adult businesses. I do think that the technology fields are seeing some softening. I think if you look sort of at traffic statistics and things like that and Google Analytics stuff around search terms, you're starting to see softening in some of the sort of technology-related fields. I think that's industry-wide. I think that we are holding up probably better than many in the space, but I think we are seeing some softening. I don't think that really so small to our overall business that I don't think it really will impact us much long term. But we certainly -- I think the industry as a whole and on the -- particularly on the adult certification bootcamp tech side is probably seeing a little bit of softness. But we've got two of the premier assets there. They continue to perform well. We're still bullish about their ability to perform and I'd say bullish to outperform the overall market.

Got it. That's very helpful. And then James, I think you've been optimistic about more states potentially opening up to allow virtual alternatives and choice in K-12. So it'd be great to get an update on that front. And if you still think there could be more states that open up to Stride's solutions over the next few years as we look out.

Yes, for sure. And I think the way that our thinking has evolved on the state question, I think, is very positive for us, meaning it used to be that our ability to enter a state was somewhat 1 or 2-dimensional. And I think that now the ability for us to look at states in a more multidimensional way over the next couple of years is going to bear some fruit. That could be in a unique district partnership that we haven't deployed before. Definitely, we see a lot more state demand. That state demand is materializing in sort of some different ways, though. And so I think we're going to be able to take advantage of that. So I am bullish that over the next few years, we will open up in more states.

Great. And then, Donna, I just wanted to ask one question on the initial fiscal 2024 comments. I think you said you expect SG&A and CapEx to increase slightly. So I just want to clarify on that comment. Is that more about absolute dollars increasing slightly or more about looking at those as a percentage of revenue?

Absolute dollars.

[Operator Instructions] There are no further questions. This does conclude today's conference call. Thank you very much for joining. You may now disconnect.