Stride Q2 2024 Earnings Call Transcript

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January 23, 2024

Key Takeaways

  • Record 196,500 enrollments in Q2, surpassing pandemic highs, driven by growth in both career learning and general education programs.
  • Revenue of $504.9 million in Q2, up 10% year-over-year, with adjusted operating income rising 24% to $94.9 million and EPS of $1.54.
  • Full-year revenue guidance raised to $1.99–$2.04 billion and adjusted operating income guidance to $265–$285 million, reflecting strong enrollment momentum.
  • Adult learning revenue declined to $25.9 million due to ongoing macro headwinds in the tech and boot-camp segments, partially offset by growth in healthcare offerings.
  • New K-12 tutoring and MedSerts B2B initiatives are in market, with AI enhancements planned to address learning loss and expand credentialing services.
AI Generated. May Contain Errors.
Earnings Conference Call
Stride Q2 2024
00:00 / 00:00

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the Stridean Conference Call. Thank you. I will now hand the call over to Mr. Tim Casey, Vice President of Corporate Development and Investor Relations.

Operator

You may begin your conference.

Speaker 1

Thank you, and good afternoon. Welcome to Stride's 2nd quarter earnings call for fiscal year 2024. With me on today's call are James Rupp, Chief Executive Officer and Donald Blackman, Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a presentation 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.

Speaker 1

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 business performance at the time may make sense, and the company assumes no obligation to update any forward looking statements made during this call. Following our prepared remarks, we'll answer any questions you may have.

Speaker 1

I'll now turn the call over to James. James?

Speaker 2

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, volatility and chaos in our country has and will continue to increase demand for our offerings. Our 2nd quarter results speak for themselves and demonstrate the macro trends are behind us.

Speaker 2

Our strategy is beginning to play out and we are executing better. The year began with some uncertainty regarding the trends we might see in year given the volatility over the past few years. We've 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 remain the question of whether we could surpass those pandemic highs. Well, we ended the 2nd quarter with 100 96,500 enrollments were an all time record surpassing our pandemic level ties. We saw enrollment growth in both our career learning and general education programs and strength in both new enrollment and retention.

Speaker 2

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 the U. S. The ability to attend the public school in their state that best meets their needs regardless of where they live.

Speaker 2

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 continue to see reports that support our move into the career learning space.

Speaker 2

This fall, freshman enrollment in 4 year institutions 18 to 20 year olds declined by 5.2%. And the reason for this decline was This age group is increasingly choosing to enroll in 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 our decision to focus on certificates and career pathways in fast growing in demand careers. Students in our programs can graduate high school knowing they've got the skills to go directly into the workforce or to choose to attend a post secondary institution.

Speaker 2

There's also continuing support for our new products. In November, I outlined our K-twelve tutoring product along with some of the demand drivers that support our entrance into the market. A study out of Texas showed that K-two students who received individual virtual tutoring during last school year demonstrated higher reading test scores by year end. And Virginia launched a statewide high dosage tutoring effort, part of a $400,000,000 investment in education to recover from academic declines. We know that our tutoring offering using state certified teachers can be part of the solution to the nation's learning loss and help drive student success.

Speaker 2

Taken together, I remain as excited about Stride's ability to change the future for students as I ever have been. The market conditions are ripe for an innovator like Stride to continue to drive student success across multiple markets. This call marks the end of my 3rd 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.

Speaker 2

Gross margins are on pace to expand 300 basis points, plus or minus. Trailing 12 month reported EPS and reported operating income are both up 3 times the levels 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.

Speaker 2

Donna?

Speaker 3

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 2 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 pandemic highs. This speaks to the resiliency of our offerings and the sustained demand for alternative educational options.

Speaker 3

We are proud to be able to give families a choice. And we believe that the trends point to a long term growth in our business. All of that have resulted in the Q1 In our history that we achieved over $500,000,000 in revenue. As we've updated our revenue guidance for the full year such that now it exceeds $2,000,000,000 at the midpoint. Turning to our quarterly results.

Speaker 3

We reported revenue of $504,900,000 an increase of 10% from the Q2 of fiscal year 2023 adjusted operating income of $94,900,000 up from $76,300,000 or 24% from the same period last year. Earnings per share of $1.54 up $0.35 from last year and capital expenditures of $12,700,000 down slightly year over year. Career Learning middle and high school revenue grew 7% to $165,100,000 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 end year enrollment growth trends we saw last year. In our general education program, revenue was $313,900,000 up 14% from last year.

Speaker 3

This strength was also driven by continued enrollment growth in the quarter, with enrollments finishing the quarter up 5,400 from the end of September and average enrollment growth of 9% from last year. Revenue for enrollment for Gen Ed increased 8%. We continue to see strength in funding for education And while we saw some tiny 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 $4,000,000 to $25,900,000 On the weakness in our tech business we discussed previously. Net search continues to perform well, The growth in that business did not fully offset the declines in our boot camp.

Speaker 3

Gross margin for the quarter was 39.8%, up 2 70 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 a strong year over year in the second half. We still expect to see gross margins improve by 200 basis points to 2 50 basis points for the full year. Selling, general and administrative expenses increased 15% to $116,900,000 Stock based compensation for the quarter was $7,600,000 We now expect to finish the year with stock based compensation in the range of $29,000,000 to $33,000,000 Adjusted operating income for the quarter was $94,900,000 up 24% from last year.

Speaker 3

Adjusted EBITDA was $118,300,000 Interest expense for the quarter was $2,000,000 Our effective tax rate for the quarter was 24.9 percent 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 $12,700,000 down slightly from last year. Free cash flow defined as cash from operations less CapEx was $160,600,000 up $13,200,000 from the prior year period. We finished the quarter with cash and cash equivalents of $354,400,000 Based on the strength of our enrollment, We are raising our full year revenue and profit guidance. And we now expect revenue in the range of 1.99 to $2,040,000,000 adjusted operating income between $265,000,000 $285,000,000 Capital expenditures between $60,000,000 $65,000,000 and an effective tax rate between 25% 27%.

Speaker 3

For the Q3, we are forecasting revenue in the range of $500,000,000 to $520,000,000 adjusted operating income between $85,000,000 $95,000,000 and capital expenditures between $14,000,000 $17,000,000 Thank you for your time. Now I'll turn it over to the operator for Q and A. Operator? Thank you.

Operator

Our first question for today comes from the line of Greg Parish from Morgan Stanley. Please go ahead with your question.

Speaker 4

All right. Thank you. Congrats on another strong quarter. I guess, let's start with margin, really good expense management again. You unpack the margin beat, is there anything to call out on the expense management side?

Speaker 4

Were you able to outperform your expectation going into the quarter? And then related, if you continue on the trajectory, there's 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 as second quarter?

Speaker 5

Sure. So on the gross margin, some of the things that we talked about last year, we are continuing to do this year. One of the things you heard me talk about last quarter, just the timing of when we The teacher hiring had an impact, on our margins, but they're a much better job, with that hiring process. The material that we send out, using more digital, Using innovation and technology, using our size and scale, all the things that we talked about, we continue to do that. And as you might recall, I spent a lot of time talking about gross margins And I said, the changes we were making were structural changes, and that still holds true.

Speaker 5

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, we 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 state testing and some restricted funding that we have to spend in Q4. And so that's where you might see Q4 gross margin is typically not as high as you might see in Q2 and Q3.

Speaker 2

Okay, great. Thank you. That's helpful.

Speaker 4

I guess, it sounds like you ended at 196, so everything was trending positive throughout So I think I know the answer, but I think we're asking this quarterly now, but so far 23 days in January, we're seeing similar trends. So it sounds like And I think Q3, it's harder to add students into the Q2, but this thing is still trending upwards, it seems, through January here so far.

Speaker 2

Yes. I think we're not going to talk about the specifics of January today. But yes, January so far looks pretty good. I think what you said is right, meaning it's harder there's just less spots even open in Q3. A lot of the enrollment windows actually shut down in the quarter.

Speaker 2

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.

Speaker 4

Okay, fair enough. And then I'm going to ask about adult learning. I know it's a small, it's 5%, 6% of revenue. Last quarter, I talked a little bit about macro headwinds, but it seems like I don't know, did 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?

Speaker 4

Maybe it's just macro dependent, but when do you expect us to get back to how it's growing in the past?

Speaker 2

Yes. 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 an adult learning perspective. I think that certainly through the rest of the year, I would expect the headwinds to continue.

Speaker 2

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 our we're a little bit of a tale of 2 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.

Speaker 2

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 remains to be seen, but I don't think either way it won't be a material impact Up or down for next year.

Speaker 4

All right, fair enough. Thank you very much. Congrats again.

Operator

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

Speaker 6

Thank you so much. I 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 1st year we've seen Sequential enrollment growth in Gen Ed between the Q1 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.

Speaker 2

Yes. 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'll 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 November and then into December.

Speaker 2

Obviously, we were able to Reverse that for this year sequentially. And I think part of it's just 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.

Speaker 2

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.

Speaker 2

That's helpful. I appreciate it. If I can move

Speaker 6

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. So it looks like it did slow. Can we talk about what was going on there?

Speaker 2

Yes. I mean, I think Well, single digit, we're in the 9 plus percent range. So like, yes, I mean, single digit. We've got, I think, a business that's starting to scale. We have a business that now In some respects, it's a same store comp because we're not adding a whole lot of new programs.

Speaker 2

And I think for the year, we'll probably We'll still probably average out into a double digit growth. And so I think that's for us, I think that's If we continue with that sort of low double digit career growth, we're going to be pretty happy. But there's a little bit of mix, there's a little bit of we're talking on the margin here and The difference between 9% plus and 10% is a few 100 kids several 100 kids. So We're talking on the margins here, I think, a little bit.

Speaker 6

Yes. I was actually referring to revenue. So I know you have revenue per student. There was some pressure there. So That's okay.

Speaker 6

No worries. But your answer to that is valid as well. Okay. I'll jump back to you. Thanks so much.

Speaker 2

Thanks.

Operator

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

Speaker 7

And really nice results here once again. I wanted to start with something that I've been getting asked about a lot more from an investor. 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 piloted 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.

Speaker 7

Do you think there's a larger opportunity to pursue in the next few years? And what could that mean to your TAM?

Speaker 2

Yes. So I think the short answer is, is it a larger opportunity? Yes. I think 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.

Speaker 2

We'll 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 Talend platform that will allow for districts to do a little bit more self serve. It'll be a little bit more teacher light. It'll be less sort of instructor led, etcetera. 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, we're probably in a beta phase of that upgrade to our platform.

Speaker 2

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.

Speaker 4

But I

Speaker 2

think the short answer to your Original question is, yes, it does offer us a good longer term opportunity. I just don't think we're going to see it in the next 12 months.

Speaker 7

Got it. Makes a lot of sense. 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 big year over year? I know that the comp there was also pretty And then Don, I think you reaffirmed expectations for revenue per student or enrollment to be 4% to 6%, You talked about last quarter.

Speaker 7

Are trends that are kind of coming in as you would have

Speaker 2

expected so far this year?

Speaker 5

And so I'll answer the part of the second one first. Yes, we Our revenue per enrollment for Gen Ed and Career to be up 4% to 6%. We see a decline in the career for this quarter. Yes, partly due to mix. As you know, overall, our revenue per enrollment with GenEd and Korea combined was up over 5%.

Speaker 5

You may recall that last year at this quarter, we talked about some of the upside that we saw in the revenue per enrollment for Korea was due to timing. So this is just the offset of that, that makes for a tougher comparison.

Speaker 2

Got it. Yes, it makes sense. And then just last one, maybe just when

Speaker 7

do you think you'd start building a separate marketing funnel for the career learning programs? I know this isn't something you've done But you've talked about it more as an opportunity. Has that started yet? And if not, when could that become a bigger initiative?

Speaker 2

Yes. 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 say 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.

Speaker 2

But it's 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.

Speaker 7

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

Operator

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

Speaker 8

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 MedSerts, it looked like you did a big new contract with Virginia State University.

Speaker 8

Can you expand on that a little bit? And then just talk about the MedSerts 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.

Speaker 2

Yes. I mean, I think okay. So When we bought the MedSerts asset, whatever, 3 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.

Speaker 2

But I think the B2B side of it is, in some ways, it's just going to have more legs to it. I think a bigger market opportunity actually. I think they're better easier clients in 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.

Speaker 2

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.

Speaker 8

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

Speaker 2

Not the biggest nor the first. I think it's University of New England or some other university, but not the biggest nor the first. I think We don't 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 traction.

Speaker 8

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.

Speaker 8

It addresses learning losses. It has AI components as well. Anything to report there in terms of wins

Speaker 1

and go to market?

Speaker 2

Yes, I mean, I think one is we've had a couple of nice wins. You can go there's a public sort of The announcement or press release, there's a district called Pulaski, I think district in Virginia. And we didn't I don't even know that I know that they were going to do this. Maybe somebody in my organization did, but they released there's like a YouTube video or something out there on it. There's a press release.

Speaker 2

They made a big deal about how our platform helped with their learning loss. And you can't Those kind of testimonials, particularly when we didn't even know or ask Completely unprompted by us, I think bodes well for the long term prospects for that business.

Speaker 8

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

Speaker 2

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, are in market today.

Speaker 8

Great. Thank you. That will do it for now.

Operator

Thank you, ladies and gentlemen. As we have no further questions at this time, we will conclude today's conference call.

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