Stride Inc
NYSE:LRN
Earnings Call Analysis
Q1-2024 Analysis
Stride Inc
Stride Inc. paints a picture of a transformative force in education through their latest earnings call. Amidst a challenging macroeconomic climate fraught with volatility, sustained debt, and geopolitical threats, Stride emerges as a beacon of innovation and choice in the K-12 educational space. The company acknowledges the widespread recognition that the U.S. education system requires repair and seizes this opportunity to advocate for virtual education as a viable alternative. This drive for change is reflected in their recent performance, boasting an 8% increase in enrollments and consequent record revenue and profitability.
Demonstrating strong financial health, Stride reported a 13% rise in revenue, amounting to $480.2 million for the quarter, with adjusted operating income shifting from a loss to a gain of $14.8 million compared to the same period last year. Signifying prospering segments, both General Education and Career Learning programs saw growth, with Career Learning revenue up by 18% and General Education climbing over 10%. The company has also prudently managed their capital expenditures, which slightly decreased. This financial turnaround signals a return to growth following a period of elevated enrollments due to the pandemic.
Stride is optimistic about its future performance, projecting revenue growth per enrollment between 4% to 6%. Investors are assured that efficiency improvements in operations and a more effective approach to teacher hiring will result in increased gross margins throughout the year. For the second quarter of fiscal year 2024, revenue is forecasted to be in the range of $490 million to $510 million, with an annual expectation set between $1.96 billion and $2.03 billion. These promising forecasts are underpinned by the company's strategic adjustments and ongoing demand for their diverse educational offerings.
Stride credits a part of its success to refined marketing strategies, with a departure from traditional TV advertising to focusing on search engine marketing. This strategic pivot is fortified by the introduction of a new Chief Marketing Officer and enhanced efforts in the enrollment process, utilizing technologies like AI to create more personalized experiences. The company acknowledges areas needing improvement, such as social media presence and career segment marketing. These initiatives align with observed customer trends of strong and steady enrollment, further improvement in academic outcomes, and the benefit of flexibility afforded by Stride's online programs.
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Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stride First Quarter Fiscal 2024 Earnings Conference Call.
[Operator Instructions]
Thank you. Tim Casey, Vice President, Investor Relations, you may begin your conference.
Thank you, and good afternoon. Welcome to Stride's first 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 will answer any questions you may have.
I will now turn the call over to James. James?
Thanks, Tim, and good afternoon, everyone. At Stride, I believe we can change the future of education. We can provide opportunities for our customers that are desperately needed in today's evolving landscape. The macro outlook today portrays an increasingly cloudy picture, economic volatility and uncertainty, chaos and dividedness in our political system that is often extremist, unsustainable debt levels, geopolitical threats just to name a few. These are some of the macro themes our country is going through right now, and it doesn't appear they will abate anytime soon.
Many of these same themes also impact our education systems and institutions. Most Americans agree and understand that our education system is in need of repair and that our students are falling behind. I don't think there's any question that we need to rethink how we approach education and ensure we are setting up the next generation for a future we are proud to hand down to. But I do think that will require fundamental change, and I believe Stride is positioned to change the future for our kids, for our teachers and schools, our communities and our country.
I believe this change includes offering families choice in education. And in our case, that choice is a virtual education. That choice has saved countless thousands of families from the outcome they did not want. And demand for our program is growing, enrollments for this fall increased 8% to almost 188,000 enrollments, both our General Education and our Career Learning business grow. I think our numbers for this quarter speak for themselves. Record revenue, record career enrollments, record career revenue. And except for the pandemic year, our highest profitability. Also except for the pandemic year, our highest growth rate in the past decade.
Total revenue growth for the past few years, including at the midpoint of our range for this year has been right around 9% a year. Adjusted operating income at the midpoint of our range is up over 400% from fiscal year '20, up well over 50% from fiscal year '21 when we had the pandemic benefit. Our net income will be up something like 600% from fiscal year '20. Our EPS will be over $3.60 a share, which is 6x higher than fiscal year '20.
Now as we return to a sense of normalcy following the worst of the pandemic, while our programs have continued to flourish, unfortunately, many public school systems have largely reverted back to doing exactly what they were doing pre-pandemic. I had hoped the significant learning laws and access to new educational tools would challenged schools to embrace change and some have but far too many have not.
Parents of school age children share these same concerns about our public education system, and they are becoming more vocal about their dissatisfaction. As a result, we're beginning to see more bipartisan efforts to expand school choice. Our recent survey showed that both Democratic and Republican voters support school choice by a margin of more than 2:1. A poll conducted in August by Gallup demonstrates just how frustrated Americans are. Over 60 of Americans said they are dissatisfied with the quality of K-12 education in the U.S.
Conversely, while almost 3/4 of parents rated their own children's teachers positively. This tells me that the dissatisfaction lies in the educational system and not with the incredible teachers within the system. We are starting to see this widespread dissatisfaction lead to change at the legislative level. And I think we're just at the beginning stages of changing the future of education. When we ask parents why they selected a K-12 school, we're hearing they are coming to us to solve those same issues that are leading to dissatisfaction with our public school system. Stride has always been a leading advocate for parent choice. And I think we're starting to see more and more parents opting for a school that fits the specific needs of their child, and that's a powerful position for parents to be in.
We also see continued strength in our career programs, crossing 70,000 enrollments this year. While we continue to see most of these enrollments coming from our general full-time virtual program funnel, we still believe there is a compelling case for parents and students to choose a career program and more and more Americans agree with us. Parents and students want skills that will help them be successful in their career, and they want to develop those skills earlier. Our programs do exactly that, while also helping to alleviate student loan debt pressures and very importantly, fill the skills gap for U.S. employers.
We're continuing to see employers being more open to hiring based on skill rather than degree. In fact, in 2022, almost 30% of paid job postings on LinkedIn omitted any degree requirement, that's up from just over 20% 4 years ago. We're also seeing support for skill-based hiring from state policymakers and governors across the country. So far, the governor of 10 states have announced initiatives to remove degree requirements from state jobs.
Now there's still work to be done. We still need to drive awareness of our career programs, but the underlying drivers of demand demonstrate that we made the right decision to move into this fast-growing space. Our key objectives and strategies have momentum like never before. As I've mentioned, our guidance suggests we are primed for record revenue and profitability performance for this year. I mentioned last year that I felt generally enrollment had bottomed out and it looks like that turned out to be accurate. We think this demonstrates the strength of our K-12 full-time virtual school business, and all the indicators suggest we will continue to see strong demand for these offerings for the foreseeable future.
This also allows us to invest in other growth areas and new products. As you know, we're still early in these efforts and I'm excited to share more information at our upcoming Investor Day, which is going to be scheduled for November 14 here in our offices in Reston, Virginia. One of our core advantages is in our ability to move and change and innovate with the needs of the marketplace. If we are able to create a better educational future, I believe Stride can be part of the solution. And together, we can change the future.
Now I'll turn the call over to Donna to discuss our first quarter results and guidance. Donna?
Thank you, James, and good evening, everyone. Our strong enrollment growth for this year is a testament to the incredible work that our teams put in day in and day out. Making sure parents and students were supported at the beginning of the year, sets them up for a strong year. I am very proud of the work we put in to make every student successful in our programs.
Turning to our reported results for the quarter. Revenue for the quarter was $480.2 million, an increase of 13% from the first quarter of fiscal year '23. Adjusted operating income was $14.8 million compared to an adjusted operating loss of $19.9 million in the same period last year. Earnings per share were $0.11, up $0.65 from last year. Capital expenditures were $16.1 million, down $700,000 from last year. These results reflect the return to enrollment growth following out pandemic high. We're starting this year with enrollment more than 50% higher than a year ago. We saw growth in both our General Education and Career Learning program, underscoring the continued demand for school alternatives that James outlined in his comments.
It's clear that the effects of the pandemic has had a lasting impact on the awareness and acceptance of full-time virtual offering. Returning to our quarterly results. Career Learning revenue grew 18% to $180.8 million. This performance was driven by continued strong enrollment growth in our career learning program. These programs generated $151 million in revenue on double-digit enrollment and 6% revenue per enrollment growth. Our adult learning business grew 7% to $29.9 million.
Turning to the general education programs. Revenues increased over 10% to $299.3 million for the quarter. Enrollment in Gen Ed increased 4.7% from last year. Revenue per enrollment grew 7.4%. First quarter revenue per enrollment increases for both Gen Ed and Career Learning was somewhat impacted by timing. We think we will finish the year with revenue per enrollment growth of around 4% to 6%. Gross margin for the quarter was 36%, up 550 basis points from last year. We're continuing to see the positive effects from last year's efficiency efforts and expect to see gross margin improvement throughout this year. We also feel like we manage our teacher hiring well this year, and that contributed to the strength and gross margins this quarter.
For the year, we expect to see gross margins improve by 200 to 250 basis points. Selling, general and administrative expenses increased 7% to $169.6 million, driven by increases at net search to support its continued growth, investments in new products and the impact of stock-based compensation. Stock-based compensation for the quarter was $8.4 million, up from the prior year due to a timing of some long-term performance plan. We expect to finish the year with stock-based compensation in the range of $28 million to $33 million.
Adjusted operating income for the quarter was $14.8 million. Adjusted EBITDA was $39.8 million. Historically, the first quarter has not been a profitable quarter for us. So the strength this year highlights the work that we've done to execute on efficiencies and improve future hiring. This, coupled with the strength and our enrollment sets us up to be profitable every quarter this year and demonstrates the underlying financial strength of Stride.
Returning to our quarterly results. Interest expense for the first quarter totaled $2.1 million. We expect full year interest expense to be similar to last year. Our effective tax rate for the quarter was 23.9%. For the full year, we believe we will finish with a tax rate in the 25% to 27% range, similar to prior year. Capital expenditures in the quarter was $16.1 million, down slightly from last year. Free cash flow, defined as cash from operations less CapEx, was negative $151 million compared to negative $160 million in the prior year period. This is our normal seasonality of cash flows and related to school launch and the onboarding of students. We expect to see positive cash flow for the next 3 quarters. We ended the quarter with cash and cash equivalents of $254.6 million.
Turning to our guidance. For the second quarter of fiscal year 2024, we are forecasting revenue in the range of $490 million to $510 million; adjusted operating income between $80 million and $90 million; and capital expenditures between $15 million and $18 million. For the full year, we expect revenue in the range of $1.96 billion to $2.03 billion; adjusted operating income between $250 million and $275 million; capital expenditures between $65 million and $75 million; and an effective tax rate between 25% and 27%.
Thank you for your time. I look forward to seeing you in November when I will give more detail on the longer-term financial plan.
Now I'll turn it over to the operator for Q&A. Operator?
[Operator Instructions] Your first question comes from the line of Jeff Silber with BMO Capital Markets.
I wanted to start with the General Education business. The numbers were really strong, I think a lot stronger than most people had thought. What was behind that? I know the past couple of years, we've kind of seen that business move or decline a bit, and you saw a nice rebound. What's different this year?
Jeff. So I think there's really 2 basic things that I would highlight. The first is -- and I said this last year, and this is 100% on me, but I think our execution last year was not great. And I think we improved it this year. And that's -- it's a real tribute to, I think, some of the team that we brought in, but also some of the turnaround that the team executed that -- they've been through a number of cycles, and they were able to identify things that we could do better.
So one, I think it's clearly execution. And I think that has a lot of legs to it still because I think while we improved execution this year, I think we keep identifying things that we could do actually a lot better, and I expect our execution to improve through the coming years. And so I think that's still a work in progress that I think we'll see more returns from.
The second is -- and I think we've been saying this directionally for a while, but we look at our enrollment sort of in aggregate. There's a lot of sort of cross-pollination cannibalization that goes on this year, we didn't really have a lot of new career programs. And so I think a lot of our enrollment strength overall is that a testament to the fact that the market is still there for our business as a whole.
And some of this sort of nuances between General Education and Career Ed. There's, like I said, there's a little bit of cannibalization. There's some puts and takes here and there. But I think the overall story is that the market for our types of programs, whether the Career Ed or General Ed remains very strong, and we think that we've got a lot of room to run.
Okay. That's really helpful. And I know typically, in the first quarter, I think, Donna, you had mentioned that you typically lose money, and I think the bottom line strength was also really surprising. Were there any timing differences this year? I know you talked about the efficiency, but did we shift some expenses from 1Q to 2Q?
No. I think it's what James has talked about, right? And so it's the strength of our enrollment in the quarter, is still the efficiency efforts that we put in place last year, some of which we didn't put in until later on in the year. I think it's also the timing, I think we did a really good job at teacher hiring. So we were careful not to over hire as well as not under hire, so striking the right balance are all the things that contributed to us having a strong financial results in Q1.
And Jeff, just if I could add. I think our goal as a company at this kind of scale we're at now needs to be profitable every quarter. There is always going to be some seasonality in our business. So you'll still see a level of seasonality. But I think at the scale we're at, and at the -- I think, as Donna mentioned, the efficiencies that we've got, I think our goal has got to be profitable every single quarter going forward.
All right. Great. If I could sneak just one more in. I think you said that you expect revenue per enrollment to be up 4% to 6% this year. Is there a difference between Gen Ed and Career Learning?
So we expected both to be within that range, just given sort of where we were in Q1. I would expect Career Learnings growth for the full year to be on the lower end of that versus Gen Ed, just again, just based probably still in Q1.
Your next question comes from the line of Tom Singlehurst with Citi.
And congrats on the results. It's quite something, it's really enrollment break, which is very exciting. A couple of questions. First one, can you just talk about whether they're going to get a volume component to go by how many new schools have opened and whether any new states that are coming on screen within -- particular in General Ed? That was the first question.
And then the second question is on the sort of guidance. You've said '24 guidance at a level which actually just slightly encroaches on the '25 guidance. I suppose probably the answer is you're going to say, wait till the Investor Day on the 4th of November, but I'm just interested in whether we should infer anything from the midpoint of '24 to the midpoint of '25 in terms of the growth in margin progression?
So I'm going to try my best to answer your question but we had a really hard time in hearing you. But I think your first question was around the number of states. And so we are in the same number of states in Q1 that we were in, in Q4 for both Gen Ed as well as for Career Learning. We've added some new programs, about 5 new programs for Gen Ed and 4 programs for Career. . With respect to our -- I think you said to 2024 were sort of bumping up against our 2025. And so I think when we have our Investor Day, in November will be a good time for us to talk about where we think we will be from a long-term perspective. We have said last year, every single quarter that we were confident in our 2025 revenue and AOI numbers. And so that should lead to the path, I guess they will be different, but I felt really strongly that we would get there. And I think this is just indicative of the strength of the business. And again, we had a really strong enrollment growth and revenue growth in Q1, and that's impacting, obviously, our full year numbers.
Sorry, you managed to interpret my question. So I really appreciate that. One quick follow-up. Adult Learning sequentially was down. Is there anything to read into that? Is that seasonal? Or is there a little bit of softness coming through from end markets and tech?
Yes. So I think there is something to read into that, meaning that we have -- I think we have defined the overall market conditions around the tech sector, the tech education sector, in that we've had growing profitable businesses in that space, I think, for a lot longer than most of the market has been able to do so. But -- and you could sort of see, I think, probably across the landscape and also you can look at sort of Google searches for this and things like that.
But the specific technology-focused boot camp business as a whole in this country is down significantly. We believe we are down less, but there is definitely a macro headwind around that piece of our business, which, just as a reminder, represents less than -- which is less than 2% of our overall business. It has 0 material impact on our growth prospects. It has almost is negligible impact on profitability profit or margin prospects. And our MedCerts certificate business continues to perform very well, and we see very long runway of growth for that business. But yes, on the technology side, specifically in a very small portion of our revenue, there is a little bit of softness.
Your next question comes from the line of Stephen Sheldon with William Blair.
You have Matt Filek on for Stephen Sheldon. I wanted to start with one on enrollment trends. Can you provide a little more color on the enrollment trends, particularly when it comes to new student enrollments versus students that reregistered? And did either of those come in differently than you would have expected?
Yes. So both performed well. Our rereg cohort -- if you take away the pandemic here because, obviously, that 1 year was very, very anomalous. We basically had on both sides of it near record-breaking years. And so I think both continue to perform strong, I think it speaks to, one, the strength of our program is increasingly sticky with our customers. We have worked really hard to provide programs that really meet the needs of our customers at their point of need.
And our outcomes are also improving, meaning you can see our academic outcomes improving, our state scorecard outcomes are improving. And so I think all of this sort of translate -- our Net Promoter Scores are high, so all this is translating into higher year-over-year retention. We also see new enrollment demand continue to be very strong. And I think more importantly than the strength in the enrollment demand is our ability to convert new enrollments also continues to improve.
And we learned some things in this past season about both demand gen on the new enrollment side but also a version that we think are going to translate into future gains. So it's really across the board. We don't see a lot of soft spots in either reregistration withdrawal rates or new enrollment trends. And in fact, I will say one other thing. Now through 24 days of this month, if you remember last year at this time, we said that while counting enrollments last year were soft, our in-year enrollment trends were looking strong. That was last year. This year, and again, it's only through 24 days or actually 23 days off today's date as yet. But through 23 days, we're outperforming last year.
So we just -- we see a lot of strength in our business. We see a lot of demand. I think the one thing the pandemic structurally for our business did change a little bit, that is new and a benefit to us, is that family feel like they have just a lot more flexibility in their choices.
And part of that translates into families don't feel as rushed to have their kids start school actually on time as much anymore. And we've got a lot of family situations where that's important to them for whatever reason, and we're able to meet their needs there, and they're coming to us increasingly through the in-year period. So that's also really important, I think that -- from an overall structural demand perspective going forward.
James. That's super helpful color and great to hear as well. And then I had one on revenue per enrollment as well. It sounds like you're expecting revenue per enrollment growth in the range of 4% to 6% for the full year. And I was just wondering if you could talk about some of the factors that could push the revenue per enrollment growth to either end of that range? And if you would consider that range to be on the more conservative end of the spectrum?
We feel comfortable with the range that we actually provided. It's a little softer as I said in my comments, a little bit softer because Q1, the comparison year-over-year was an easier comparison because the enrollment grew and we got stronger last year. And so Q1 is easier comparison. So yes, we feel good about sort of where we stand from the 4% to 6% range.
And the one thing I would -- you guys talk about this a lot, mix obviously plays a part in that, right? And so throughout the course of the year, what happens with that in the enrollment, et cetera, the mix is one factor that could impact that growth number.
Your next question comes from the line of Alex Paris with Barrington.
I want to add my congratulations on the very strong first quarter results and the equally strong guidance. Question about execution. You mentioned it several times, James, in your prepared comments. And part of that is, I'm certain, marketing. What are you doing differently now versus last year or the last several years in terms of marketing that has made a difference? And as I recall, I think you brought in a new Chief Marketing Officer, you have a new k12.com website. Just maybe a little review on what you're doing on the marketing front?
Yes, sure, Alex. Great question. And yes, I think I'm a huge believer in 2 fundamental pillars for our business. One is the macro environment, and I think that the tailwinds work in our favor for the macro environment and our internal ability to execute. And like I said, last year, we did not execute well. We did bring in a new Chief Marketing Officer, Deb Hannah. She's coming, feet running, hit the ground running. We also have an existing set of team members, the Head of our enrollment center, the Head of our operations team, our IT group, like they all contribute to a better kickoff for our season this year.
Specifically to your question on the marketing side, we saw some tactical things over the past several years, by the way, that I think we're always trying to figure out how to improve. One is, obviously, there is a -- there's a structural shift, so macro shift away from linear TV or regular TV. And so we actually moved away from that channel a fair bit. We didn't spend as much in that channel because it's -- our analytics tell us it's less productive.
Conversely, our analytics suggested that we had a lot of opportunity in just regular search engine marketing, sort of the Google paid search, click ad stuff that you do and refining our search terms, we've got a real rock star that runs that team for us that he just continues to mine opportunities in that channel for us that are really compelling. What we're still not yet hitting all cylinders on is some of our social media efforts, some of our incremental crude demand efforts for our Career segment. Those things, I think, we can still improve upon.
Our enrollment center, which is what we consider marketing and the enrollment set apart of sort of the overall marketing funnel. And our enrollment center really did an incredible job looking at ways that we can improve conversion. The families that come to us and apply, they want to come to us. And sometimes, we make it harder for them, unnecessarily. And so when we find ways to smooth the path for them, they come to us. And so we're doing a bunch of stuff in our enrollment center, which includes, by the way, self-serve. Everybody loves to hear the word AI.
So we've got some AI initiatives in the enrollment center as well that automate some things, create more bespoke responses for our families. But like I said, we've got a long way to go still. I think the trajectory of improvements that we're going to make, we've got a multiyear trajectory of improvements we're going to make and market demand is going to continue to be strong. So hopefully, that answers your question.
[Operator Instructions] There are no further questions at this time. And this concludes today's conference call. Thank you for attending. You may now disconnect.