Stride Inc (LRN) 2025 Q2 法說會逐字稿

Good day, everyone and welcome to the Stride Inc Q2 FY 2025 earnings call. Just a reminder, today's call is being recorded. I would now like to hand things over to Mr. Tim Casey. Please go ahead, sir.

Thank you and good afternoon. Welcome to Stride's second quarter earnings call for fiscal year 2025. With me on today's call are James Rhyu, Chief Executive Officer and Donna Blackmon, 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. Now, I'll turn the call over to James.

Thanks, Tim. We have once again posted record enrollments -- helping 230,000 students. We continue to execute against the backdrop of ongoing strong demand. Coming out of the pandemic, we were all uncertain if the increase in demand for our programs was structural or temporary. And for three consecutive years now, we have seen increasing growth in our business. And also for three consecutive years we see continued in-year strength in demand.

The macro environment for our business is as strong as ever. And as long as we can continue to execute effectively, I believe we can benefit from these conditions.

While every business has challenges, I believe most of ours are currently within our control. Many of our most significant challenges are to just continue improving and executing well. Not just in how we have traditionally run our core business but across all of our issues. That includes initiatives that I believe to take our core business to a new level while also providing us with new market opportunities.

We see some early signs that our investments will pay off but we need to remain vigilant to ensure we are setting ourselves up for success over the long run. I remain very bullish on our prospects for future growth. We're seeing continued demand for our core offerings, growing support for school choice options, and a student base seeking real career training. As a company, we're in a strong financial position and have an incredible team committed to delivering for our customers.

Thank you and I will now turn the call over to Donna.

Thanks, James, and good evening. This quarter confirms we're now in our third year of in-year enrollment growth in our full time programs. We've talked a lot about market conditions that are pushing families to seek education alternatives and our results demonstrate that our programs can be an effective solution for many of these students.

And light up this continuous strength, we're raising both our revenue and profitability guidance for the full year which I'll cover in more detail later. Turning to our quarterly results: we reported revenue of USD587.2 million, an increase of 16% from the second quarter of fiscal year '24; total average enrollment of 230,600, up 19.4%; adjusted operating income of USD135.6 million, up 43% from last year; earnings per share of USD2.03, up 32% from last year; and capital expenditures of USD14.8 million, up from USD12.7 million last year.

Revenue in our career learning: middle and high school programs grew 29% to USD213.1 million. This strength was driven by enrollment growth of 30.9% year-over-year. General education revenue was USD354.3 million, up 13% from last year further driven by continued enrollment growth in the quarter. Average enrollments were up 12.5% from last year to 135,800. During the quarter, we saw accelerating enrollment growth in both of these lines of revenue.

As I mentioned earlier, this is now the third year in the role that we've seen strength in-year enrollment. Total revenue per enrollment across both lines of revenue was [USD2,395] -- essentially flat to last year. As we mentioned last quarter, we're seeing some impact from state mix so we're still seeing a largely positive funding environment.

Given these dynamics, we expect to finish the year down 1% to 2% in revenue per enrollment. [Business] in our adult learning business continues and we finished the quarter with revenue down USD6.1 million from last year to USD19.8 million.

Gross margins for the quarter were 40.8%, up 100 basis points from last year. We still expect to see gross margins improve 100 to 200 basis points for the full year. Selling general and administrative expenses decreased marginally to USD114.8 million. While we've seen declining SG&A spend in the first half of the year, as I mentioned in the first quarter, I expect to see some increase in the back half of the year. We should finish the year up slightly compared to FY24.

Stock-based compensation for the quarter was USD7.9 million. We now expect to finish the year with stock based compensation in the range of USD33 million to USD37 million. Adjusted operating income for the quarter was USD135.6 million, up 43% from last year. Adjusted EBITDA was USD160.4 million, up 36%. Interest expense for the quarter was USD2.7 million. Our effective tax rate for the quarter was 25.7%. Diluted earnings per share for the quarter were USD2.03.

Our EPS calculation includes incremental shares related to our convertible notes on an as it's converted basis for GAAP reporting purposes. These shares are included in our diluted share count but are not yet issued. However, some of the dilutive impact of these shares will be offset by the cap call transaction we completed at the time of the note issuance up to an upper strike price of USD86.17 per share.

We're now including a table in our quarterly investor presentation that shows the potential dilution from our convertible note at various share prices as well as the offset from the cap call. Turning to our balance sheet and cash flow capital expenditures for the quarter were USD14.8 million, up from USD12.7 million last year. Free cash flow defined as cash from operations less CapEx of USD208.6 million, up USD48 million from the prior year period. We finished the quarter with cash and cash equivalent of USD515.1 million.

Given the continued growth in enrollments and margin improvements, we are raising our full year revenue and profit guidance and now expect revenue in the range of USD2.320 billion to USD2.355 billion up from USD2.225 billion to USD2.3 billion last quarter. Adjusted operating income between USD430 million and USD450 million, up from USD395 million to USD425 million last quarter. Capital expenditure is between USD60 million and USD65 million, unchanged from last quarter, and an effective tax rate between 24% and 26%, also unchanged from last quarter. For the third quarter. We are forecasting revenue in the range of USD585 million to USD600 million. Adjusted operating income between USD130 million and USD140 million, In capital expenditures between USD15 million and USD17 million.

Thank you so much for your time this evening. And now I'll turn the call over to the operator for Q&A, operator.

(Operator Instructions) Jason Tilchen, Canaccord Genuity.

Great. Congrats on the strong results and thanks for taking my questions; I have two if there's time. The first, I'm just wondering if you could unpack some of that enrollment momentum a little bit, maybe talk about some of the differences in the funnels you're seeing for career learning and general education and how some of the enrollment numbers on a gross basis are trending versus how retention has been compared to last year.

Yeah. Hey there, Jason. I think the basic trend we continue to see is across the board, strength in our enrollment funnel. You know, I think, we've been, I think a little bit surprised by how strong it continues to be year over year.

You know, we're in a third year of year-over-year growth and you know, I think we're executing well against it but I actually think a lot of the underlying demand that we see at least has been just really strong. It's been pretty broad based across the board and I think if there is I'll say, you know, [if there's five] which we have said repeatedly that the incremental career funnel has not materialized as strongly as we would have expected [as we have thought].

We think that longer term that continues to be an opportunity for us. But I would say if there was a weakness -- that we probably did.

Great, that's really helpful. And I just want to follow up, you recently announced the rollout of K-12 tutoring nationwide. I'm just wondering if you could share any early learnings from that rollout. And sort of any additional color on sort of how the go-to-market is going to develop there when you expect sort of more material contribution from that on the overall business. Thanks.

Yeah, I think that -- so for us, it's a clear adjacent business. The way that, I mean, this is kind of weird the way that the accounting works on it. We -- if you think about other businesses like a Doordash or something like that that have gross merchandise value and then sort of net revenue. We have a sort of a similar mechanic or with our tutoring business where we have sort of gross tutor value but we really record everything on a net basis.

So in the context of our financial statements, you know, for I think for some very long period of time, it's just going to be immaterial. But strategically for us, I think it can be very important because one is we know that high-dose [tutoring] is effective for learners. And we have a terrific pool of educators within our network. We can leverage those through the platform. It also gives those teachers opportunities to earn more.

So we think it's a really good platform to teachers within our network, earn more money. And we've already seen numerous cases both within our programs and outside of our programs in district programs where they're using our product and are very satisfied and are getting tremendous outcomes.

So while I don't know, in the short term, it will be financially significant. I do think it continues to be strategically significant. We're going to continue to invest in that product. And you know, I think, unlike other, you know, tutoring companies out there where -- and I think this is in most cases where tutoring is their only product -- they have to make margins to survive.

We actually don't; we can invest in this product, grow the product, we get to test it out. I think some different innovation around the product on our platform. We recently rolled out a sort of AI summary feature which we've got two of the feedback around. So we were pretty happy.

Great, really helpful. Thanks a lot.

Jeff Silber, BMO Capital Markets.

Thanks so much. Just wanted to drill down a bit on the prior question. There's not a lot of good industry data out there, but from what we've been able to see, you guys have really been dramatically outperforming the industry. Is there anything specific that you're doing that maybe some of your competitors are not to drive that outperformance?

Hey, Jeff. So, yeah, I think I have to sort of, I mean, I tend to agree with you. I hate to say it this way, but I -- the data that we would see would I think suggest that we're probably overindexing on industry performance. I sort of hate to say it because I want all of our competitors actually to do well. I want the industry to grow. I think that would be our primary goal is to see the entire industry grow and let all those rise.

But I think I would have to agree with you. I really credit, I think to the team, is really, I think [honed] in on their execution. You may remember, and it was just a couple of years ago, where I got on the same call and talked about how we had execution issues that was hampering our ability to grow and that if we can fix those issues, we should be able to accelerate growth and I think we have.

I think that the team we've got in place now it is executing much better. And I think that is, I think, when you execute well in any industry or in any company, you have the opportunity to take share from some of your competitors. And I think that's probably a little bit of what's happening. That's good news for us, I think.

And I won't sort of speak for the industry here is that I see -- while we are executing better, I do think that overall, we still have a lot of opportunities to even perform better, you know. So I don't think we're sitting here resting on our laurels and finished with the trajectory that we can put ourselves on.

That's helpful. If I could switch gears and talk about the funding environment, you've been seeing a lot of noise out of Washington in terms of freezes or pauses, et cetera. I know you don't get a dramatic amount of revenues directly from the federal government. But is there anything maybe that indirectly comes to you from Washington through the States? I'm just wondering what kind of exposure you might have.

Yeah. So our exposure is pretty limited -- very limited. It's, you know, I think without getting into specific numbers, I think I've said previously on a similar question that it's well less than 5%. I think we saw the same thing that maybe some of you saw today, and we just before getting on today, we did validate that it continues to be that for this year -- well less than 5%. So I think our exposure is pretty limited.

You know, listen, I think, what I will say is that regardless of what the administration announces, I believe -- I want to believe, I think I do -- I do believe that the intent is, and I want to encourage everybody to focus on the intent is, to help too.

And you know, I don't want to get into a political, discussion or debate here. I have faith that the administration is going to try to do the things that are going to help students. And I think that's what hopefully all of our political governments are trying to do. That's what we're trying to do. And whatever impact it has to us, we're going to manage through it. If it's negative, we'll take it on the chin and just keep marching forward; if it's positive, I think, hopefully, you know, it can help our business.

But I do think the administration is trying to figure out ways to ultimately to help students. And I think that the downstream impact that people maybe aren't yet seeing is, you know, maybe an approach or philosophy to empower the state. I think that's sort of some of the state goals that this administration has talked about and, you know, we support things that are going to help students.

I really appreciate the call, James. Thanks.

Alex Paris, Barrington Research.

Hi, guys. First of all, I'd like to ask you a couple of clarifying questions. In the first question, James, you responded about strength across the board in enrollment. I'm presuming you're talking about new student enrollment. The question would be, how has retention been faring?

Yeah. So retention, I think, a couple of years ago, I think we talked about how we saw sort of what we believe was a structural improvement in retention post-pandemic. I think generally speaking, that trend continues. I think year-over-year, we're seeing retention numbers that are sort of plus or minus within the same ballpark. So we're not seeing ongoing dramatic improvements like we saw a couple of years ago.

But I think, for us, the retention game is also a slightly longer-term game, meaning what we're doing is we're identifying structural areas of the program that we can see based on all of the feedback that we get in areas that we can improve the program. That we believe will have structural long-term benefits to retention.

And that is things that I think most people would expect. People -- they think that sometimes that there's a lack of socialization in virtual programs -- that's true; that's very valid feedback. We're investing in platforms that allow kids to safely interact with each other in an environment. We call it the K12 Zone where they can go in and they can meet on a virtual playground, they can play games, they can have communication with each other. And you know -- and so we're investing in those types of things that we think tap the thematic elements of why students and families made a trip.

But year-over-year, I don't think we're seeing right now any sort of, major plus or minus difference. But I do think longer term over the next three to five years, the structural things like the one I mentioned are going to provide some longer-term benefit in our retention numbers.

Great. That's helpful. And then on that same question, the final comment you made was you said something about incremental career funnel has not materialized as strongly as we expected or hoped. But then, I looked at the career learning enrollment of 31% year-over-year. Did I misunderstand your response or perhaps you could respond to color?

No, I think you got -- you understood the response correctly. I think that, yeah, in spite of what I think the strong numbers suggest, it's my very strong and long-held belief that our career programs operated well, applied well, they can put kids on a trajectory to be career ready when they graduate high school. I think increasingly, the macrotrends on education support that as a larger need. I think the industry dialogue, if you will, not education industry and corporate industry dialogue, supports that.

And so I think it's a market opportunity for those programs indicate something much larger than what we're seeing and doing. And so I think that there's just a lot more offsite opportunity there if we can effectively go to market with it and capture it. I don't think we've done that effectively yet. And so I think that presents even more offsite for us.

Great, good to hear. Last question, and I hate to pick at the only negative thing in this report. Adult revenues were soft, USD19.8 million -- even a little bit below where they were in the first quarter. I guess the first question that is what's the makeup of that segment? Now, I realize there's two boot camps and MedCerts, maybe a proportion; MedCerts, I'm assuming, is the largest. But whatever color you could give there would be helpful. I know it's very small as a percentage of the total. I think 4% on a last 12 month basis. But I was just curious.

Yeah, I think that we're not going to bring out the percentages exactly for that. That's productive for any of us. I think that we're disappointed in this office and the business, that's for sure. I think one of the factors in this is in no way, shape, or form an excuse because we didn't think it was going to be the -- so as we go through this transition, but particularly for the MedCert business, we are longer term -- that business is a structurally better business for us and for our customers if it's structured as more of B2B type of business. It has historically been a primarily B2C type of business. And and so we are visiting that business into a much more sort of B2B focused business.

It doesn't mean that we're abandoning the B2B side of it. It's just that, when you have a B2B business, it just one, obviously you don't have to deal with the daily customer return as much. You have much more stable contracts, it's much more recurring revenue. It actually happens to be a higher margin, generally speaking. And so we're still very bullish about the business.

I think there is, and I don't know exactly how long it's going to be, but there's going to be some period of time as we transition through. As you said, it's immaterial. If it continues to decline for some period of time, I don't think it materially impacts our overall trajectory of the company or our ability to continue to grow in spite of those kinds of declines.

But we remain invested in those businesses and we are continuing to invest behind them. And we do think that there's long-term value creation for our shareholders with those businesses.

Great. And then -- and just one more clarification question came into my mind. In answering the question about federal funding, you said before, it's well less than 5% of revenue. Is this ESSER we're talking about or are there other things in there like [title one] and so on?

Yeah. So it's a good clarifying question. There are other things in there like -- the answer now at this point is, I mean, it's basically nothing. So I don't even think that we should be talking about. It is not a thing for us anymore. But there is other very small revenue streams that sort of flow through from federal dollars, again, well less than 5%. And yeah, so I think it's -- so that it is more than just that what was historically [asked].

That's great. Thank you so much for answering my questions and congratulations on the strong quarter.

(Operator Instructions) Stephen Sheldon, William Blair.

Hey, James, you have Matt Filek on for Stephen. Great results this quarter. And thank you for taking my questions. Has your optimism about being able to open new schools in new states changed at all? Especially with the President pushing for universal school choice. Just curious how you're thinking about that.

Yeah. So again, I try to keep us focused either way. You heard this four years ago, you heard this eight years ago, you're here now, like try not to be too sway in how we run the business either way, given changes in administration predominantly at the state level do this anyway for us.

I do think that the general tone and tenor of this current administration support school choice and the types of programs that we run. I think broadly speaking, that is and can be a positive halo effect on our business.

I don't see that the administration is going to specifically advocate for us or our programs in any given state. And I don't know that it we'll have a tailwind in opening new programs or states to the extent that there is a tailwind from it. We will absolutely try to take advantage of that tailwind.

I just don't know that I see that materializing right now. So I don't want anybody to believe that. And by the way, I mean, I hope, it -- in whatever period of time in the future, if it's a different type of administration, people understand the flip-side of this commentary which is we believe that this is a great business. And it historically and predominantly has been a state-run business and we respect the state's views and the way that they manage these businesses. And I think the current administration also does and we're supportive of that. So you know, and I think above and beyond that, by the way. My understanding is that the current administration is also looking for other ways to again help students.

And to me, that's positive for the country. So that's to me, the commentary from my view is if the government's here to step in and try to help students from their vantage point, that's a good thing. If it helps our business or not, it's almost secondary at this point; we're focused on running our business well, whatever conditions we're in.

Got it. That's a helpful explanation, James. Thank you for that. And then I wanted to ask one on career learning. I think you have talked about your desire to build out pilot programs for skilled trades like plumbers, HVAC repair. So can you talk a little bit more about that and what that opportunity could look like?

Yeah. So we have run a couple of tests already, actually. I think the early indications of the test suggest that we still have a lot to learn, clearly. And you can see that in other public market comps out there that the overall demand for skill trades appears to be growing.

I think that's a good thing. I think the country needs it. I think that there's just a phenomenal courage trajectory for a lot of people without having to incur college debt to earn very, very lucrative living, doing skilled trades. We continue to think that's an opportunity for us. I think we've got to figure out where we can effectively play in that space.

We're going to continue to explore it but we want to be -- we want to proceed cautiously about how we explore it because the last thing we want is to make big bets on something that don't materialize for us because we haven't tested it properly.

And so you know -- and I don't think it's a trend that's going away tomorrow. I think that there's time for us to try to figure it out and see what we can explore in the space. So -- but yeah, we have already begun the testing of it and I think we still have a lot of [going].

Okay. Sounds good. And then lastly, just wanted to quickly confirm, are there any schools that are currently getting close to hitting enrollment caps especially in light of the strong enrollment growth in the recent quarters?

Well, we're always dealing with programs that have enrollment caps actually like that; it's not a new thing. The good news is that in most of the programs, the enrollment caps are generally not long-term fixed. So there's two flavors of enrollment caps, generally speaking. One is I'll say a government imposed cap i.e. state imposed enrollment cap in a certain state for a certain program. And the other is I'll say sort of a partner-imposed cap or one of our partners, for whatever good reason they have, imposes a cap.

And in both of those cases over time, generally speaking, there is a conversation to be had to raise the caps when necessary. We have been reasonably successful in raising caps of when the demand warrants. Meaning if there is an excessive amount of demand for a program, you know, we go with the data to whoever, whichever counterparty it is and we show them the data that suggests that there's strong demand, it's being unmet and you know, where there's need.

And we usually go with the sort of the story that you will need. Meaning these are usually families that don't have other alternatives for one reason or another. They are very valid alternatives or they are very valid reasons to not have other alternatives.

And and we want to be able to serve students. And where students and states aren't being served through another mechanism and we may be the only mechanism through which they can be served, we think it's justified to raise caps and we've been fairly successful in our history and we think we can continue to be successful in having those conversations with our partners or with state government agencies to do that for the benefit of students.

Great. Thank you, team. Appreciate the time.

And that does conclude our question and answer session. That also concludes our conference for today. We would like to thank you all for your participation. You may now disconnect.