Stride Q1 2025 Earnings Call Transcript

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Provided by Quartr
October 22, 2024

Key Takeaways

  • Stride achieved record Q1 enrollments with 18.5% year-over-year growth—the highest non-pandemic gross enrollment increase since going public.
  • Q1 revenue rose 15% to $551.1 million, adjusted operating income jumped 295% to $58.4 million, and diluted EPS increased to $0.94 from $0.11 a year ago.
  • Career Learning segment delivered over 30% growth, with revenue of $198.9 million and enrollments up 30.4%, reflecting strong demand in higher grades.
  • The end of ESSER funding is a headwind to revenue per enrollment—expected to be flat to slightly down year-over-year despite favorable state funding shifts.
  • Adult Learning revenue declined to $22.8 million as the software development products business continues to slow.
AI Generated. May Contain Errors.
Earnings Conference Call
Stride Q1 2025
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good day, everyone, and welcome to the Stride Inc. Q1 FY 'twenty five Conference Call. At this time, I would like to hand the call over to Mr. Tim Casey. Please go ahead, sir.

Speaker 1

Thank you, and good afternoon. Welcome to Stride's Q1 earnings call for fiscal year 2025. With me on today's call are James Ryu, 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.

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 and business performance at the time we make them, and the company assumes no obligation update any forward looking statements made during this call.

Speaker 2

Following our prepared remarks, we

Speaker 1

will answer any questions you may have. Now, I'll turn the

Speaker 3

call over to James. James? Thanks, Tim. This year marks the 25th anniversary for K-twelve, Stride's preeminent brand. In those 25 years, we have served over 3,000,000 families and students.

Speaker 3

It took us over 15 years to reach the 1st million and it has taken us just over 3 years to reach the 3rd. In that time, technologies have advanced, our footprint has grown and the country has evolved. But one constant has remained, our focus on providing customers choice in education. Just as we have choice in most facets of our lives from shopping to entertainment to healthcare to financial services, so too should customers have choice in education. And all the surveys and research I have seen, irrespective of political leaning, supports the customer preference for choice.

Speaker 3

Education should not be a political issue. It should be a customer focused one. As we prepare for our next 25 years, we are positioning K-twelve to continue to lead by delivering tomorrow's education today. And that vision extends beyond the hundreds of thousands of students we currently serve each year. We believe we can deliver meaningful products and services to millions of students and customers each year with the range of initiatives that we are currently in development.

Speaker 3

A key element of our evolution is to ensure we stay focused on our customers and we see the families that have embraced our programs come from a broad range of backgrounds. Why? Well, because what we offer caters to the needs of families instead of forcing them to cater to the rigidity of the program. That's choice. Our programs are affordable and accessible.

Speaker 3

We embrace being career forward and we are leaning into new technologies and investing in innovation like never before. Now, in our core business, which as you can see remains robust and where demand as indicated by our application volumes is accelerating, the issues that we can address

Speaker 4

for families span a wide range from safety to academics to mental health to mobility to flexibility and on and on and everything in between.

Speaker 3

It is that range of promise that we offer families that will be a cornerstone for our next 25 years.

Speaker 5

Now as

Speaker 3

you saw in our press release, we announced record enrollments for our Q1, an 18.5% year over year growth and an acceleration in demand from this time last year. Apart from the pandemic year, this is the highest recorded year of gross enrollment growth this company has seen since it became publicly traded over 15 years ago. We have seen continual and rising demand for the services we provide and the support for students this enables. In our 25th year, I feel confident saying that we continue to raise the bar for families looking for educational opportunities. We remain as committed as ever to offering tomorrow's education today.

Speaker 3

Our results for the Q1 demonstrate that more and more families are embracing what we have to offer and our guidance suggests we are on pace for another record year. I'll now turn the call over to Donna. Donna?

Speaker 6

Thanks, James, and good evening, everyone. As James mentioned, the demand we saw this quarter has set us up for another strong year. As with every year, I'm incredibly grateful to all the Stride employees who support the thousands of families who come to our programs. It's an incredible opportunity for us to impact the lives of so many students. The strength of our enrollments this year gives me confidence that we remain on track to achieve our fiscal 20 28 targets.

Speaker 6

I think our compelling fiscal year 'twenty five guidance further demonstrates that we are well on pace and confirms the continued underlying demand for our offerings. Turning to our quarterly results. Revenue for the quarter was $551,100,000 up 15% from Q1 of fiscal year 2024. Adjusted operating income was $58,400,000 an increase of $43,600,000 or 2 95 percent from last year. Diluted earnings per share were $0.94 up $0.83 from last year.

Speaker 6

Capital expenditures in the quarter were $14,800,000 down $1,300,000 from last year. As we discussed last quarter, these results reflect the continued demand for our core offerings. Our total enrollments for the quarter exceeded 222,000 almost 100,000 more than we had prior to the pandemic in FY 2020. Families continue to seek out educational opportunities and STR1VE is still in need in the market for virtual options. Our execution around marketing, enrollment and school operations demonstrates our ability to grow enrollment sustainably for the long term.

Speaker 6

Career learning middle and high school revenue for the quarter was $198,900,000 up more than 30% from last year. Career Learning enrollments grew 30.4% to 91,700,000 General Education revenue grew 10% to $329,400,000 on enrollment growth of 11.3 percent to 130,900

Speaker 4

students.

Speaker 6

Total revenue per enrollment across both lines of revenue was $2,303 up slightly from last year. As we mentioned in the Q4, the loss of ESSER funding is a headwind to our revenue per enrollment this year. However, this is being offset by a positive funding environment. While we were up this quarter, we expect to see some impacts from the state mix and timing and therefore believe we will finish the year flattish to down slightly in revenue per enrollment. Adult learning revenue continues to be impacted by the slowdown in our software development products, which we've outlined previously.

Speaker 6

Revenue for the quarter at $22,800,000 was down from last year. Looking at the full year, we think this quarter's adult learning revenue is a good proxy for what we expect for revenue in the upcoming quarters. Gross margins for the quarter was 39.2 percent, up 3 20 basis points from last year. We continue to see improvements in gross margin as our business scales and like last year, we manage our teacher hiring well. Global fees contributed to our strong gross margins in the quarter.

Speaker 6

For the full year, we expect gross margins to improve by 100 basis points to 200 basis points compared to FY 2024. Selling, general and administrative expenses totaled $168,500,000 in line with last year. As I've mentioned before, I think we've done a good job of holding down our administrative costs even as we've continued to grow. While we've managed these costs well, we do expect to see some SG and A increase for the full year. Even with this slight increase, we will still generate significant operating leverage out of the business.

Speaker 6

Stock based compensation for the quarter was $8,400,000 in line with last year. We expect to see a modest increase in stock based compensation due to the impact of some long term performance grants and therefore full year stock based compensation will likely be in the range of $34,000,000 to $39,000,000 Adjusted operating income for the quarter was $58,400,000 up almost 300% compared to FY 2024. Adjusted EBITDA was $83,900,000 up 111%. Diluted earnings per share were $0.94 up $0.83 from last year. Our profitability strength was driven by growth and operating margin improvement as we continue to see benefits of scale as we grow.

Speaker 6

For the full year, we expect depreciation and amortization to increase marginally from last year. Capital expenditures in the quarter were $14,800,000 down $1,300,000 from last year. Free cash flow defined as cash from operations less CapEx was negative $156,800,000 compared to negative $151,500,000 in the prior year period. Cash flow in the Q1 followed our typical seasonality related to school launch and the onboarding of students. As with last year, we expect to see positive cash flow for the next 3 quarters.

Speaker 6

We finished the quarter with cash, cash equivalents and marketable securities of $539,400,000 Turning to our guidance. For the Q2 of fiscal year 2025, we are forecasting revenue in the range of $560,000,000 to $580,000,000 adjusted operating income between $115,000,000 $125,000,000 and capital expenditures between $13,000,000 $15,000,000 For the full year, we expect revenue in the range of $2,225,000,000 to $2,300,000,000 adjusted operating income between $395,000,000 $425,000,000 capital expenditures between $60,000,000 $65,000,000 and an effective tax rate between 24% 26%. Thank you for your time today and for your continued support. Now I'll pass the call back to the operator for your questions. Operator?

Operator

Thank you. We'll take the first question today from Jason Tilton, Canaccord Genuity.

Speaker 7

Good afternoon. Thanks for taking the question. I'm curious in terms of the really strong demand that drove direct enrollment in the quarter, if you can maybe shed a little more light on some of the different drivers of this momentum. There are certain use cases or certain states that you saw really strong growth, some of this driven by some of the more effective marketing spend, any color you'd share would be greatly appreciated.

Speaker 4

Yes, I

Speaker 3

think it's pretty broad based. We actually I think as Donna mentioned in her remarks, our SG and A was pretty flat year over year. And so the increased demand sort of would imply, all things being equal, lower cost of acquisition profile, which I think from everything we can see at least points to a lot of sort of growth in organic demand. I think word-of-mouth organic demand, the sort of general word-of-mouth type of variety that we're seeing for our programs has been pretty strong. And so, just over the past couple of years, we keep seeing that growing and it's I think it's sort of a good indicator that the customer voice for our product is strong and continues to grow.

Speaker 1

Great. That's really helpful.

Speaker 7

And then just one follow-up. I'm curious in terms of the you talked a little bit in the prepared remarks around how school choice becoming a more bipartisan issue over recent years. I'm curious as we look at the election coming up in a few weeks, are there any states or even from a national perspective, anything we should be focusing on in terms of any potential benefits or risks to the company either from a school choice perspective or from a funding perspective?

Speaker 3

Listen, I certainly don't want to project what's going to happen in a couple of weeks here for the election. I think that's probably a dangerous thing to do. What I would say is double down on my comment that I don't think education should be a political issue. I think that the customers have spoken that this is a pretty bipartisan type of product. We see a lot of demand from people with all different kinds of backgrounds, and I just think that our politicians should govern the country and focus on educating everybody and providing this kind of choice for people who really need it is an important part of the educational system.

Speaker 3

And so hopefully, we can get all of our politicians irrespective of party to focus on those things.

Speaker 7

Great. Thank you very much.

Operator

The next question is from Jeff Silber, BMO Capital Markets.

Speaker 8

Thank you so much. I wanted to focus on the comments about revenue per student. I know there's been some questioning in terms of the impact of the roll off of Esther funding. Can you talk about what the impact of Esther funding was on your company last year from a revenue perspective and if possible from a profit perspective and how that's impacting your guidance this year?

Speaker 3

So, I think we previously discussed that last year, the revenue impact was less than 3%. I don't believe we previously disclosed the exact profit impact of that, although I think it's not even if it's in the range of our normal profitability, it's completely immaterial. If it was anything significantly more than that, I think you would have seen a different profile this year than we're giving. So clearly, it's not out of the range of sort of profit margin that we saw for the overall company last year. And so I'd rather we get everybody looking forward for this company.

Speaker 3

We've got a tremendous demand profile. Customers are really gravitating to our products and services. And I think we've set ourselves up for a really strong year.

Speaker 8

Okay. And as long as we're looking forward, can we talk about the impact in the current fiscal year in terms of nuke schools or schools that were lost and going forward or any major schools at risk that we should be aware of?

Speaker 3

Yes. I mean, I think we've talked before that, generally speaking, we see long term there's going to be an opportunity to add a school or 2 here or there. We have not lost any significant programs for this year. We are currently unaware of any significant programs that we would lose for next year or future years. So I think we would consider continuing to add programs.

Speaker 3

Not all of those programs that we would add would be in new states necessarily. We like the diversity sometimes of having multiple programs serving different customer constituents in the same state gives us greater flexibility and helps us meet customer demand in those states. So we think we're set up pretty well for future for meeting future customer demand.

Speaker 8

Okay. Appreciate the color. Thanks so much.

Operator

Gregory Parrish from Morgan Stanley has the next question.

Speaker 9

Hey, good evening. Thank you. Yes, congrats on the pretty incredible result here. Can you talk about enrollments a little bit differently again? Maybe drivers this year, if you think about kind of retention, what you're doing there, maybe reaching new students, the messaging that you're going to market with, the conversion rates that you have, what really what were the biggest drivers this year?

Speaker 9

I imagine it's a combination, but maybe kind of flesh out really where you're finding success and what's improved versus last year?

Speaker 3

Yes. I mean, I think, well, to sort of reiterate, I think that the biggest piece of this equation that is helping drive our business is the demand side. Customer demand has been strong. And everything else, all things you mentioned, retention, conversion, all the other stuff, sure, we're always looking to make those things better. I don't think that they were in any one of those things, by the way, were the single driver of our performance this year.

Speaker 3

I think it was clearly customers have said that they want this product. And the demand side of this equation has been very strong. It continues to look very strong. We continue to obviously drive as good conversion as we can, retention, all those metrics. But this year wasn't driven by those things.

Speaker 3

This year was driven by the demand side of the equation.

Speaker 9

Yes. Okay. It's helpful. And on the margin, I think guidance here is up nearly 400 basis points at the midpoint. Regarding the 11% revenue growth, so I think a lot of this is operating leverage.

Speaker 9

But Donna, I guess maybe if you could help sort of flesh out how much is operating leverage, how much is from efficiencies, if you could kind of contrast the 2, if you could?

Speaker 4

Yes. So on the gross margins, we are expecting 100 to 200 basis point increase in margins. And that's certainly driven by the strong demand that we saw and the leverage that we have in the business. And we expect to continue to see that. And you've heard me talk over the past couple of years about making sure that we continue to see that strong to maintain that strong leverage.

Speaker 4

And then on the SG and A side, look, we talked about being disciplined, right? We talked about how we've been able to grow the business this year without adding more marketing spend, without adding more enrollment spend, showing discipline around that without adding some additional headcount. So there's a combination of the flow through that we see on the topic from a gross margin perspective, but also, on the SG and A, which is driving the AOI that we're seeing.

Speaker 9

Okay. That's great. And then for my last one, I think this could be helpful for a lot of the investors. Maybe talk about why the public financials of some of the non profit schools that you manage, why those don't necessarily line up with what flows to you, why there can be differences? And then maybe more specifically, why some of those nonprofits could take ESSER funding and why that wouldn't necessarily go to you and what those could be used for?

Speaker 9

I think that could be helpful here.

Speaker 3

Yes. I'm not going to speak on behalf of all of our clients. I think that's good that's a very responsible thing for us to be doing. I'll speak for what we do and how we do it. And I have great respect for how our clients manage what they do.

Speaker 3

And I'd let them speak for themselves. But I think that whatever our clients do, we want to be supportive of their mission and their goals. And indirectly, that means that we're supporting the students that want to be participating in these programs. And so the rest of that stuff, like what our clients are doing, I mean, first of all, we have no providence over that. And so it's not like we have an ability to even always have insight into how they make all those decisions.

Speaker 3

Those are proprietary to them, and I'd rather leave it to them to describe.

Speaker 6

Okay. Fair enough. Thank you.

Operator

And next up is Alex Paris, Barrington Research.

Speaker 2

Hi, guys. Thanks for taking my questions. Congratulations on the super strong quarter. I'm wondering in terms of your guidance, Donna, for fiscal 2025, have you embedded in that any expectations for new states or states in which you have caps that may be or will be lifted or raised?

Speaker 4

We have not factored in any

Speaker 6

new

Speaker 4

states. We have some increases in some caps that's already factored into the results that we have in Q1 as well as for the full year. But the overriding factor that is driving our revenue is, as James has said, the demand that we're seeing. And so we are able to meet the demand with our ability to execute via our marketing, via our enrollment, but it really is us being able to capture the demand that's in the marketplace.

Speaker 2

Great. Thanks for that. And then looking at the 2 programs, general education and career learning, I think last fall, you had 91 GE and 56 career learning. Do you anticipate opening up additional career learning programs in existing states in fiscal 'twenty five?

Speaker 4

We have the same number of programs this year that we did last year in terms of our career learning programs in total.

Speaker 2

Okay. The idea and do you envision opening up additional career learning programs this year or next year?

Speaker 3

Not for this fiscal year. I do think that there is a chance we might open a couple next year.

Speaker 2

Got you. And then last question and it's

Speaker 5

a follow-up on some of

Speaker 2

the other questions regarding ESSER funds. How do the ESSER funds come to Stride? It's my understanding that they've largely been used by school districts within your Learning Solutions business. Is that accurate?

Speaker 3

Like I said, really it's tough for us to be able to answer how ESSER funds go to all of our partner clients because that's something that they manage that they're responsible for. What we know is that during the time that ESSER was in place, certainly, there are some of our clients who made the decision to support programs that we provided that were eligible for those funds. But it's sort of I don't know, I don't say it's sort of beside the point at this time because for this fiscal year, Esser is in the rearview mirror, and we've got tremendous demand for the business that we're running. And that's with ESSER in the rearview mirror. So I think we set ourselves up well from here to grow, and that's with all that in the rearview mirror.

Speaker 3

So I think I want this company to stay focused on this year, which doesn't really have the ESSER benefit in it and moving forward from there.

Speaker 2

Got you. Not only does it not have the yes or benefit, it has a little bit of a headwind on a year over year basis. You had previously said less than 1.5% of revenue would be the impact in fiscal 'twenty five. Is that still a good thought?

Speaker 3

Yes. And so yes, year over year, it would be as you're defining it a headwind, correct.

Speaker 2

Got you. But that will be largely offset by state funding increases and mix. So we're expecting flat to slightly down revenue per enrollment for the full year, just to clarify?

Speaker 6

That is correct.

Speaker 2

Great. Thank you both. Congratulations again.

Speaker 9

Thank you.

Operator

Next, we'll hear from Tom Singlehurst, Citi.

Speaker 5

Yes. Thank you for taking the question and congrats on the results. I mean, apologies to ask about ESSA as well, but I'm interested in any second order impact from reduced assets. I think actually I'm thinking about this on the positive side. I mean is there other programs that would have been handled by school districts or schools internally that now might be outsourced?

Speaker 5

Any views on that would be very much appreciated. That's my first question.

Speaker 3

Yes. I don't know that I see any second order impact of that nature having any material or significant impact on our business for this year. And again, I just I don't want to guess how district clients out there either have or are using or intend to use any remaining ESSER funds as it pertains to us. So I don't really have a lot of comment there.

Speaker 5

Perfect. And second question, if it's okay, is on whether you've seen or expect to continue to see sort of intra year enrollment growth? I mean, the last couple of years, we've had a sort of new normal where the 1Q enrollment numbers, not the high watermark, it happens later in the year. I'm interested in whether you think that might happen again in 2025?

Speaker 3

Yes. It's a great question. As I said, we continue to see strong demand. I don't know if it's a new normal yet, but it has been 2 years running, as you said. I can tell you that as of yesterday I haven't looked yet today, but as of yesterday, we can continue to see that strong demand come through.

Speaker 3

So we are, as of yesterday, higher than we were as of September 30. And if the trends continue, yes, I think we would expect that. But I don't think we're guiding to that and we're not indicating that right just yet. We want some more of this in year period to mature for us to feel comfortable. We're only 3 weeks into this in year period.

Speaker 3

So I don't know that it's a complete set of information for us to be making those statements yet. But like I said, 21 days in, demand remains strong.

Speaker 5

Perfect. But the guidance is not based on that, probably?

Speaker 4

The guidance reflects, certainly taken into account what's happened in the past 2 years, but also take into account that we only have 2 years behind us, right? So it's a balance of what's happened over the past 2 years, but not ignoring what's happened over the past 23 years, right? And so it's a balance of it. But to James' point, what we've seen today, is more upside. And so the full benefit of it may not be taken into account.

Speaker 4

But again, we're only we're still in the month of October and that number could change. And so there could be some more upside. But again, we don't know what that trend will look like for the rest of the year. So the 3 years end is not quite yet a trend.

Speaker 5

Okay. Perfect. And one very final one, I promise. Any change to the 2028 outlook and guidance on the

Speaker 3

back of today? We're not providing any update to the 2028 today.

Speaker 4

Other than say that we feel confident in our 2028 numbers, as I said in my prepared remarks, and we are reiterating our confidence in our 2028 guidance.

Speaker 5

Got you. Thank you.

Operator

We'll go next to Stephen Sheldon, William Blair.

Speaker 10

Hi, team. We've got Pat McElwee on for Sheldon's team today. Just a couple of quick ones here. So you talked about the demand side a few times now, but can you just talk us through what supported the outsized growth in career learning this quarter and if you've made any progress in building out that kind of separate marketing funnel you've talked about in the past there?

Speaker 3

Yes, really good question. So I think the I'll take that second part first and then circle back on the first part. Unfortunately, I don't think we've made a lot of progress in building out the separate funnel. So it's something we continue to work on. I think for all the great work that the marketing team has done over the past year or so, that's one area where I think we still haven't cracked the nut and we continue to look at ways to do that.

Speaker 5

But

Speaker 3

the first part of your question, you have to remember that pretty much now at this point, most of our high school is basically a career program. And so the growth in career learning is, in some respects, a proxy for the growth in certain grade levels. And so we're seeing a lot of strong demand in those grade levels that support career learning. And I think that that's been a trend that we've seen for some period of time. And so we're going to continue to support all the grades, but we are seeing a little bit stronger demand in certain grade levels that really cater to the career learning programs that we have.

Speaker 10

Okay. Makes sense. And then in tandem to the questions on the elections and career learning program expansion as well, you've previously talked about opening schools and hopefully a handful of new states in 25, 26. Can you just provide any updated thoughts on state expansion targets at this point in

Speaker 3

time? Yes. Listen, it's any state expansion is a multiyear effort that has a lot of uncertainty to it. We, of course, want to plant flags in every state that we're not currently in as long as it makes sense for the business, right? And there are probably a couple of cases where it actually just doesn't make sense because of whatever the regulatory environment, demand characteristics, whatever.

Speaker 3

But by and large, for most of at least the states that we're not in, we have efforts underway that look to expand into those states. I think as we diversify some of our portfolio, whether it's things like tutoring or other things, we see that there's opportunities potentially to plant flags in those states that may not include just the pure core managed program. And so we're looking to do things in a lot of states that may not just be around the core managed program, but may include some other types of products and services that we can provide. Of course, to the extent that we can break down and get into these states that don't have the sort of the full time online programs, we're trying to do that as well. But like I said, no new news to report for this fiscal year.

Speaker 3

We are cautiously optimistic that over the next couple of few years, we will be able to make some progress on some new states.

Speaker 10

That's great. Thanks for the color, James.

Operator

And at this time, there are no further questions. That does conclude our conference for today. Thank you all for your participation. You may now disconnect.

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