Stride, Inc. (LRN) Q2 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the Stride, Inc. Conference Call. At this time, 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. 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 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'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 and volatility in 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 getting to play out and we are executing better. The year began with some uncertainty regarding the trend 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 that 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 196.5 thousand enrollments, were 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 U.S. the ability to attend a 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 continued to see reports that support our move into the Career Learning space. This fall freshman enrollment in four-year institutions for 18 year to 20 year old declined by 5.2%, and the reason for this decline was that this age group is increasingly choosing to enrollment 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 career programs, data like this supports our decision to focus on certificate and career pathways in fast-growing in-demand careers. Students in our programs can graduate high school knowing they've got skills to go directly into the workforce or to choose to attend a post-secondary institution. There is 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 entrants into the market. A study out of Texas showed a case of two students who received individual virtual tutoring during last school year demonstrated higher reading test scores by year-end, and Virginia launched a state-wide high dosage tutoring effort part of the $400 million investment in education to recover some academic decline. We know that our tutoring offerings 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 they 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 incomes are both up 3 times the level 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 two quarters ago that we were fielding questions about whether we could return to year-over-year enrollment growth following the pandemic, and now we're talking about exceeding the pandemic high. This speaks to the 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 toward 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 updated our revenue guidance for the full year, such that now it exceeds $2 billion at the mid-point. 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 programs, 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 5.4 thousand 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 in 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 clients 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. The growth in that business did not fully offset the declines in our boot camp. Gross margins 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 basis points 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 was $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. 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 will turn it over to the operator for Q&A. Operator?

Thank you. [Operator Instructions] Our first question for today comes from the line of Greg Parrish from Morgan Stanley. Please go ahead with your question.

All right. Thank you. Congrats on the strong quarter. I guess, we will start with margin, really good expense management again. You unpacked the margin beat, is there anything to call out on the expense management side where you able to outperform your expectation going into the quarter? And then related, if you continue on that trajectory there is 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 our -- on a gross margin, some of the things that we talked about last year we are continuing to do this year. One of the things you've heard me talk about last quarter, just the timing of the teacher hiring had an impact on our margins, but they did (ph) a much better job with that hiring process. The materials that we send out using more digital, using innovation and technology, using our size and scale, all the things that we talked about, we've continued 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 were 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 say, testing and some restricted funding that we have to spend in Q4 and so that's why you might see Q4 gross margin typically not as high as you might see in Q2 and Q3.

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

Yeah. I think we're not going to talk about the specifics of January today, but yeah January so far looks pretty good. I think what you said is right, meaning, it's harder due to less spots even open in Q3, a lot of the enrollment window is 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'm going to ask you about Adult Learning. I know it's small. It's 5%, 6% of revenue. Last quarter, you talked a little bit about macro headwinds, but it seems like, I don't know if there's 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 for? Maybe it's macro dependent, but when do you expect this to get back to how it was growing in the past?

Yeah. 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 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, it's our -- we're a little bit of a tale of two 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 healthcare 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 will remains to be seen, but I don't think either way it won't be a material impact up or down for next year.

All right. Fair enough. Thank you very much and congrats again.

Thank you. Our next question comes from the line of Jeff Silber from BMO Capital Markets. Please go ahead with your question.

Thank you so much. Wanted to focus on the different segments. I'm going to start with General Education. I know you have not broken out. This is 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.

Yeah. 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 will 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 enrollments 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 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 continue 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?

Yeah. I mean, I think what [indiscernible] is single-digit, we're in the 9% plus range, so like, yes, I mean, single-digit. We've got -- I think our business are starting to scale. We have a business set now in some respects, it's the same-store comp because we're not adding a whole 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 for us, I think that's -- if we continue at that sort of low-double digit career growth we're going be pretty happy. But there's a little bit of mix -- we're talking on the margin here and the difference between 9% plus and 10% is a few hundred kids or several hundred kids. So we're talking on the margins here, I think a little bit.

Yeah. I was actually referring to revenues, so I know your revenue per student [indiscernible] there so, that's okay, no worries. But I guess -- your answer to that is valid as well. Okay. I'll jump back in the queue. Thanks so much.

Thanks.

[Operator Instructions] Our next question comes from the line of Stephen Sheldon from William Blair. Please go ahead with your question.

Hey. Thanks for taking my questions, and really nice results here once again. I wanted to start with something that I've been getting asked about a lot more from investors, I think I'm sure you guys have too, but what does the opportunity look like to take your Career Learning Solutions into local school districts? I think you've highlighted some programs like that before where students take their core classes in-person locally and then take their electives online in your Career Learning programs, do you think this is a larger opportunity for -- to pursue in the next few years and what could that mean to your team?

Yeah. So I think the short answer is, is it a larger opportunity? Yes. I think part of the -- part of the issue is going to be just with the way that districts across the country will embrace change. Our strategy I think does present an opportunity to get into those districts with our Career Learning program. We will do it in a multi-pronged way, meaning, one is, we will offer them literally the same program that we give our virtual students, which I think can be compelling for some districts. We will also take a little bit of a platform strategy and offer a sort of -- a little bit of a light solution, if you will, through our Tallo platform that will allow for districts to do a little bit more self-serve. It will be a little bit more teacher light. It will be less sort of instructor-led, etc., but it will still offer them what we think will be a best-in-class platform solution for Career Learning at the high school level. So that is -- I mean what probably in a beta phase of that upgrade to our platform, I don't think just given the selling cycle you'll see much traction for this coming fall just because the selling season for districts is sort of going to get behind us pretty quickly, but I would expect us to be able to offer it a little bit more robustly in the following fall from a platform perspective. But I think the short answer to your original question, yeah, it does offer a good longer-term opportunity. I just don't think we're going to see it in the next 12 months.

Got it. Makes a lot of sense. And then just quickly on the Career Learning, the revenue per enrollment, and apologies if I missed this, but would that mainly lower due to the mix of students by state, anything else to call out there in terms of that contracting a bit year-over-year? I know that the comps there was also pretty difficult. And then Donna, I think you reaffirmed expectations for revenue per student or enrollment to be 4% to 6% of what you talked about last quarter, our trends are kind of coming in as you would have expected so far this year.

And so I'll answer part of the second one first. Yes. We expect our revenue per enrollment for Gen Ed and Career to be up 4% to 6%. Will you see a decline in the Career for this quarter? Yes, partly due to mix, as you know, overall our revenue per enrollment with Gen Ed and Career combined was up over 5%. You may recall, that last year in this quarter, we talked about some of the upside that we saw in the revenue per enrollment for Career was due to timing. So this is just the offset of that that makes for a tougher comparison.

Got it. Yeah. It makes sense. And then just last one, maybe just -- when do you think you start building a separate marketing funnel for the Career Learning programs? I know this isn't something you've done historically, but you've talked about it more as an opportunity, has that started yet, and if not, when could that become a bigger initiative?

Yeah. I'll say in some respects, we've had fits and starts with it already. I think that this is an area where, unfortunately, we have not executed well. I'd say, actually, we've executed poorly. I do think it's an opportunity and I think we will make some investments for this coming fall season in incremental enrollments around Career, remains to be seen if we can be successful, but we definitely think it's a very significant opportunity. We definitely believe that part of our issue has been around execution, and we will definitely make some investments in that direction for this fall.

Got it. Well, thanks again for the time and congrats on the results.

Thank you.

[Operator Instructions] Our next question comes from the line of Alex Paris from Barrington Research. Please go ahead with your question.

Hi, everyone. Thanks for taking my questions, also add my congratulations on the beat and raise for the quarter. I just had a couple of questions. First of all, I wanted to ask about the press release that you put out last week regarding MedCerts. It looked like you did a big new contract with Virginia State University, can you expand on that a little bit? And then just talk about the MedCerts business overall. What sort of growth rates are we experiencing without -- I know you don't give granular detail on it, but orders of magnitude, perhaps?

Yeah. I mean, I think -- okay. So when we bought the MedCerts asset three years ago, it was a predominantly B2C business and it still is by the way today predominantly a B2C business. I think what we see is that, that B2C part of the business is, it continues to be very attractive, continues I think to have a lot of opportunity to grow, but I think the B2B side of it is in some ways, it's just going to have more legs to it. It's I think a bigger market opportunity actually. I think they're better easier clients and a lot of respects to manage on a B2B basis. And so we think that the B2B side is going to be long-term larger than the B2B -- than the B2C side of the business. So, I think that means, I think we could double the business over the next several years just by growing the B2B side of the business. I think that would imply some double-digit growth rate, long-term growth rate on that business. Even at that rate, it's not going to be a major contributor to the overall company anytime soon, but we are very bullish about our opportunities in that space.

And is the Virginia state contract the biggest or the first in this B2B effort?

Not the biggest nor the first. I think it's University -- I think it was University of New England or some other university, but not the biggest nor the first I think. We don't (ph) have dozens yet, but I think we're making a lot of good progress with a lot of good conversations. So I think a lot of good traction -- a lot of good early tractions.

Great. That's good to hear. And then the other and related question is about tutoring. You talked about it in your prepared comments a little bit, James. You said in the past -- among your new products these are -- this is one of the ones that you're most excited about. It addresses 'earning losses. It has AI components as well, anything to report there in terms of wins and go-to-market?

Yeah. I think one is we have -- had a couple of nice wins. You can go, there's a public sort of the announcement or press release, there was district called Pulaski, I think a district in Virginia, and we didn't -- I don't think you know that -- I didn't know that they were going to do this, maybe somebody my organization did, but they really -- there's like a YouTube video or something out there on it, there's a press release, they made a big deal about how our platform helped with their learning loss. And you can -- those kind of testimonials, particularly when we didn't even know or ask completely unprompted (ph) by us, I think bodes well for the long-term prospects for that business.

Got you. So just to be clear, you're in the market with this product right now?

Yes. We are in the market with this product. We're also -- we think for next year, we're going to have a pretty good upgrade to the product, which is going to embed more AI elements into it, but yes, we are in market today.

Great. Thank you. That'll do for now.

Thank you, ladies and gentlemen. As we have no further questions at this time, we will conclude today's conference call. We thank you for participating and you may now disconnect.