Q3 2021 Stride Inc Earnings Call
Yes.
Ladies and gentlemen, thank you for standing by and welcome to the strides third quarter fiscal year 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Good question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Mr. Tim Casey Senior Director Investor Relations. Please go ahead.
Thank you and good afternoon, welcome to strides third quarter earnings call for fiscal year 2021, before we begin I would like to remind you that in addition to historical information certain comments made during this conference call. Maybe considered forward looking statements. These statements are made pursuant to the safe Harbor provision of the private Securities Litigation Reform Act of.
995.
Should be considered in conjunction with cautionary statements contained in our earnings release and the Companys periodic filings with the SEC.
Looking statements involve risks and uncertainties that may cause actual performance or results to differ materially from those expressed or implied by such statements. In addition, this conference call contains time sensitive information that reflects management's best analysis only as of the day of this live call <unk> does not undertake any obligation to publicly update or revise any forward.
Looking statements for further information concerning risks and uncertainties that could materially affect financial and operational performance and results. Please refer to our reports filed with the SEC. These.
And these reports include without limitation cautionary statements made in stride 2020 annual report on form 10-K filing.
Filings can be found on the Investor Relations section of our website at stride learning Dot Com. In addition to disclosing financial results in accordance with generally accepted accounting principles and the U S. For GAAP, we will discuss certain information that is considered non-GAAP financial information a reconciliation of this non-GAAP financial information and most closely comparable GAAP information was included in.
And our earnings release.
And is also posted on our website. This call is open to the public and is being webcast. The call will be available for replay for 30 days with me on today's call are James room, Chief Executive Officer, and Timothy and our Chief Financial Officer. Following our prepared remarks, we will answer any questions you may have.
I'd now like to turn the call over to D. J.
Thank you good afternoon, everyone.
And so I became CEO three months ago I've heard one consisting question.
What will happen with education and after the pandemic is over.
Well, we're seeing approaching that point it looks like and I don't think any of us know.
But many credible thought leaders seem to believe the shift to online learning is not temporary.
And in fact, a lot of the key trends we are seeing recent research on education careers and the economy support and side yet.
A recent New York Times article carried the headline.
Online schools are here to stay.
Even after the pandemic.
The premise of the article was that the ongoing pandemic has changed the landscape of education for me.
On it.
One quote.
A subset of families who have come through for online learning are pushing to keep it going.
Additionally, a recent study by the society for industrial and applied mathematics, and found that one third of high school students will choose a fully online or hybrid education, even after.
Things returned to normal.
These and other research liked them support and my long held belief that the momentum and digital transformation is difficult to reverse and that the trend toward online and hybrid education welcome.
And more students are recognizing that college is not the only effective for most affordable path to a career.
The ECM secret released findings from a study conducted.
It showed today's high school students are seeking lower cost quicker paths to careers.
In the study 25% of <unk> teens said, they were more likely to attend a career and technical education and school due to their pandemic experience.
This trend is playing out and college as well last fall there was a 7% drop enrollments and higher education. This means more students will seek out other educational.
And and recent article in New York Magazine and make the following case I quote.
People under the age of 40 or fed.
They have less and half of the economic security than their parents did at the same age.
For the first time and our nation history, a 30 year old isn't doing as well as his or her parents at each sorry.
So the paradigm of offering opportunities needs to ship.
And our adult learning business, we're seeing people moving toward non traditional education.
Stride and education network surveys have shown that adult learners, who are looking for education and training options are focused on gaining certification and licensure rather than traditionally degrees.
And they prefer to get this training for online programs are directly from their employer.
And importantly companies are beginning to recognize that non traditional educational pass can be success and successfully college graduates.
Large corporations like Facebook, Google and Amazon and others have begun programs to higher non college graduates and in many cases students right out.
Into professional high paying technology.
And all indications suggest these professionals are excel as such companies are expanding these programs.
These trends support our strategy of providing for skills.
Endemic has accelerated the shift and modality to a more digital approach.
As these markets are poised to grow and increasing rates stride is well positioned to benefit for many years to come.
The immediate impact of these trends are evident and our results for this quarter and and our fiscal 2021 guidance.
We've raised our guidance for the full year and each of the past two quarters year to date, our stride career revenue enrollments are up over 120%.
The EC <unk> study.
I mentioned above and also found.
61% <unk>.
Lead a skill based education makes sense in todays world.
And our strides for our programs offer a clear solution for these students.
The program to provide access to career ready skills answer.
This allows students to develop skills. They can that can lead directly to a career or better prepare them for post secondary education.
Regardless of which path they choose.
Want to provide them with education that will prepare them for high.
The high growth areas like health care technology and business.
Our adult acquisitions are doing well and growing at double digit rates, even though some of them and traditionally focused on in classroom teaching.
For a shift to online programs has gone smoothly and we feel good about the future growth prospects specifically, our two most recent acquisitions tech elevate our investors are performing against our acquisition plans, but more important these companies serve mainstream markets have large scale future opportunities.
As we begin to invest and our stride brand and we.
We believe we will be able to generate meaningful growth for these products incremental to what they would have been able to do at <unk>.
Stand alone business.
As more employers start to take notice that these kinds of pathways and looking to partner with training for buyers to ensure they are hiring the right skilled workers.
For instance, med search recently announced the partnership with Equifax workforce solutions to offer a registered apprenticeship opportunities to employers seeking employees and high demand for yield.
These types of programs demonstrate that strides offerings and address both learner and employer needs.
Beyond that we can help employers build recruitment pipelines with our California.
Talent out those one and a half million users on their part.
This community of both users and employers will help ensure that we are developing the right training program, and while giving them and others to employment.
And as we said during our Investor day in November we expect this growth and the trends, we are seeing and the markets lead to overall career learning revenue.
$650 million to $800 million buy.
By fiscal 2025.
And as excited as we are about the prospects and our career and adult learning businesses. We're also focused on our general education business.
Unfortunately for many students the pandemic has caused a decline and academic achievement.
A recent study by and W. E. K sure. This number of students who regressed academic increased significant nationwide during the last year.
Fortunately for students and families attending established virtual programs like ours, they have been able to attend school on interrupt.
Our partners and provide a seamless education net completely disrupted.
We owe our gratitude to them.
The impact translated each academic outcomes as well.
And a recent study we conducted programs managed by strike handily outpaced schools like the ones in the and <unk> study.
Not all online programs are created equal.
We believe ours is the gold standard data backs that up.
And as all of this translate into future trends.
Just a little over a year ago, we conducted a survey that validate the trends we've seen for many years.
And approximately 2% to three per cent of families. We're considering a fully online I squashed.
Adjusted today received results for our most recent study that.
And that indicated that 2% to 3% it jumped to over 10%.
Similarly consideration for online career programs jumped from 15% to 25%.
The shift to online school from home means that more families are seeking out strides offerings and digital solutions.
And while online school might not be for everyone and many more families now recognize it as an option.
In addition to the increase and awareness the pandemic has brought about structural changes to other parts of our lives.
It wasn't just students who were impacted with parents and families teachers and administrators.
Of these individuals have come to appreciate the flexibility that comes from working and schooling from home.
This shift gives more parents and families the opportunity to support their children's learning at home.
While Theyre also working.
Or for teachers, they can teach out.
We hired and managed more teachers and ever this year.
And the flexibility flexibility for teachers to work out of their homes is another clear trend by great opportunities.
Okay.
Overall, this means that strides offerings on more accessible to more.
Now I know many of you are focused on what will happen with our enrollments. This coming fall as the rollout of the vaccine proceeds and most school districts announced plans to get back into the classroom.
First of all let me be clear that we support the reopening of brick and mortar schools that we tend and open letter supporting president and by bipartisan push to get schools reopen.
Additionally, it's far too early and our enrollment season to know how many new students will come to our programs and the fall.
Fact, less and 10% of our normal overall enrollment volume happens before the end of <unk>.
However, we do have.
Some early indications of the.
The rate at which existing fab.
Are indicating their return for the fall.
As of right now.
Percentage of existing fab.
That are responding to our outreach for.
For returning and the fall is at an all time high.
And the percentage that have indicated they are returned.
He is at multiyear high.
So far we are seeing the opposite of the mass exited back to brick and mortar schools and some have predicted.
This is some very early encouraging news.
I want to stress this is still very early and our enrollment season.
Finally, I want to highlight some existing ex.
Alright, some exciting upcoming programs from strength.
Recently, a survey we conducted founded over 65% of Paris free that their children need additional educational curriculum over the summer to make up for lost time due to the pending.
Given the significant need this summer we are going to offer free summer career experiences for students and grade seven through 12.
These programs are an excellent opportunity for current and prospective students to gain exposure.
Career skills, while engaging and exciting activities for example.
And our esports experience students will work on coding skills on the morning, while spending the afternoon and gaming with their friends.
We plan to offer programs and nursing theater esports and even a jam for musicians.
We will also offer programs for recent strike career graduates and further how and their career right skills, They learned and high school.
All of these programs will help make strides more accessible to more students while teaching them valuable career skills.
So I believe the trends and our business as well as the overall macro conditions and our addressable market continued to work in our favor and grow as time pass passes.
Thank you for your time today and I'll now turn the call over to attempt to discuss our quarterly results Tim.
Thank you James and good afternoon, everyone.
Revenue for the quarter was $392 $1 million and increase of 52% from last year.
Adjusted operating income was $54 9 million and increase of 146% and capital expenditures were $11 3 million and increase of $1 $9 million versus Q3 last year and.
And each case these results met or beat the.
Expectations, we provided in our guidance last quarter.
As James mentioned, our general Education business continues to perform very well and career learning room remains on a strong growth trajectory as it has been for this past several years.
Given the strength and these businesses, we have raised our guidance again for the full fiscal year.
Okay.
Returning to our results for the quarter revenue from our general education business increased $89 2 million or 38% to $322 $3 million.
And this was due primarily to higher enrollments, partially offset by lower revenue per enrollment.
General Ed enrollments rose, 43% year over year, while revenue per enrollment declined 4%.
For the full year, we expect revenue per enrollment to be down compared to last year.
Due to state budgetary pressures, resulting from COVID-19, and a higher mix of lower funded states.
Do not however.
This declined to become a trend into next year.
In fact, we are confident given what we know today about state policy.
That enrollment funding should improve next year.
Career learning revenue rose to 69, 8 million and increase of 191%.
This was largely driven by significantly higher volumes and our stride career programs, formerly known as destinations career academies as well as growth and our adult learning businesses, including the effect of Med search and Tech elevator acquired in November 2020, and galvanize acquired in late.
January 2020.
Gross margins were 35, 5% and the quarter up approximately 500 basis points from the same period last year.
For the full fiscal year, we expect gross margins to be approximately 34% plus or minus 50 basis points.
We believe this improvement will continue into next year.
Last November at Investor Day, I laid out a 2025 goal for gross margin percent of 36% to 39% and <unk>.
I expect us to get there much faster.
Selling general and administrative expenses and the quarter were $100 5 million up 58% and the year ago period.
The increase and SG&A was driven primarily by higher costs associated with the growth and enrollments and higher stock based compensation expense as well as the expenses for our adult learning businesses.
We expect SG&A for the full fiscal year 2021 to be and the range of $420 million to $425 million up from fiscal 2020 due to higher costs associated with the growth and enrollments.
Mark based conflicts op expense as well as the inclusion of the SG&A associated with galvanized net search and tech elevator.
Our expectation for fiscal year, 'twenty, one and interest expense is that it will be between 17 and $18 million Inc.
Including approximately $4 million and cash interest and $12 million and noncash amortization of the discount.
On our convertible senior notes and another $1 million of noncash amortization of debt issuance costs.
Our convertible notes are subject to new accounting guidance, which can be adopted and FY 'twenty two and no later than FY 'twenty three.
Once the guidance has adopted the debt the debt discount will be eliminated from the balance sheet and the associated non cash amortization expenses are eliminated from the P&L on a going forward basis.
EBITDA for the third quarter was $62 2 million up 89% from the third quarter of fiscal 2020.
Adjusted EBITDA was $75 million up 92% from the same period a year ago.
Operating income was $38 6 million.
Adjusted operating income was $54 9 million and increase of 146%.
Additionally, we are raising our guidance for adjusted operating income to $156 million to $159 million for the full fiscal year 2021, and that's up from our previous guidance of $145 million to $155 million.
We ended the quarter with cash and cash equivalents of $329 million and increase of $70 9 million compared to the second quarter.
We expect working capital to be a significant source of cash and the fourth quarter, primarily due to accounts receivable.
So we expect our cash balance at the end of fiscal 2021 to increase significantly.
We believe that our strong free cash flow generation and liquidity will continue to provide the financial flexibility to fund our existing operations and to pursue strategic acquisitions.
Capital expenditures for the quarter totaled $11 3 million below the range of $12 million to $15 million, we guided to last quarter.
We expect full year capex to be and the range of $50 million to $55 million.
Our effective tax rate for the quarter was 32% and.
And we expect our full year tax rate to be and the 27% to 29% range.
We expect that free cash flow defined as cash from operations less Capex will trail, our adjusted operating income.
This timing difference is primarily due to working capital changes related to the timing of payments from certain states some of which are associated with our growth and states that regularly pay and the following year and some of which is related to delayed payments due to COVID-19.
Now returning to our updated guidance to summarize we expect the following for the full year fiscal 2021.
Revenue and the range of one five to two 5 billion to $1 530 billion and.
Adjusted operating income between $156 million and $159 million.
Capital expenditures of 50 million to $55 million and a tax rate of 27% to 29%.
In Q3, we saw another successful quarter, owing to the tremendous demand for our products and services.
<unk> and general education and career learning.
We delivered double digit or better growth and revenue adjusted operating income and adjusted EBITDA.
While significantly improving our gross margins and our robust cash and liquidity position.
We remain very excited about the prospects for our business as a whole and we will continue to execute on our high growth Premier learning strategy.
And with that I'll turn it over to the operator operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question you May press the pound key.
And your first question comes from the line of Geoff gold for any with them.
Hello can you hear me.
Good day.
Okay.
Hello can you hear me.
And once texted me of any gas.
Operator.
And it's a tech issue.
Thank you.
Okay.
Here's where having some technical issues with the operator.
Yes.
Yeah.
And I apologize for that technical delay can everyone hear me now.
Ladies and gentlemen, I apologize for the technical problems.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question Hello.
Okay.
Okay.
And your first question comes on line of Jeff Goldstein for Morgan Stanley. Your line is open.
Hey, guys good evening, and Kent can you hear me okay.
Currently.
You can hear me met many of you can hear the operator.
And do you think some of you can hear us as well, but we cannot hear you worthy operator, so we're trying to work through here and the technical difficulties, which just gives us and all.
Okay.
Q1 was for people.
And I can here.
Okay.
Ladies and gentlemen, we apologize for that technical delay.
And I would just like to say as a reminder to ask a question you will need to press star one on your telephone and your first question comes from Jeff Goldstein from Morgan Stanley. Your line is open.
Hey, guys can you hear me Okay now.
Yeah, Hey, there. We can hear you are we've actually had to dial him from us and mobile phone here. So I apologize if theres a little bit of the sound quality isn't as good.
We still have a little bit of technical difficulty on our and we can hear you know guidance.
Okay perfect. So I just had a question on a revenue per enrollment Dod that figure seemed to recover and the quarter within both general education and career learning when comparing it to last quarter. So I was just hoping you could expand on on on drivers of that recovery and and as some of that recovery and the quarter, what's giving you confidence for further improved.
Men into next year.
Let me let me just try to take maybe half of that question and then I'll turn it over to Tim.
I think.
First of all a lot of factors happened in years, So I sort of I think it's probably better to focus on the full year number but.
The competence and next year actually doesn't really have much to do with this year. This year, we were negatively impacted by you may recall, California didn't funded and.
New enrollments and some other sort of mix issues. When we look at next year really what we what we look at is sort of I'll say the policy landscape.
Across states, and which we managed programs and from that perspective.
We think that our our overall the overall environment looks pretty strong and pretty stable. So it's really nothing to do with how this year shape net it's really based on what we see across the landscape for next year policy wise.
Came out on and if you aren't that and yeah. The only thing I would add in terms of sequential improvement is that as we get ended the year. Our revenue we've earned revenue and some cases, where we and trip small amounts of enrollments normal course, and that's really the driver overall of this and modest sequential.
Stabilization on that and net metrics.
Okay got it.
And then I appreciate your comments in the prepared remarks around just optimism you have around returning students for next year I was curious, though if the churn you saw in the quarter and general education like this past quarter, where it was in line or was that more than you were anticipating given students could could potentially be returning to their traditional school.
<unk>.
I mean, where you're seeing that and any particular age group or or is that and not the case and it was all just kind of normal course for us just curious your thoughts on churn and the quarter.
Yeah. So I think there is.
Anything churn continues to be better.
Than previous years I think.
In that respect.
It was I would say somewhat better than we expected originally when we set up.
The year, but but we are seeing I think just a tendency and we've seen this over the years the tendency for in the middle of the semester families do have some reticence.
Even as schools are opening back up.
I think we see we saw families have some reticence just to disrupt sort of the flow of the educational program at their child, and so but we were a little bit pleasantly surprised I would say and we have been pleasantly surprised throughout the course of the year on.
On the sort of the trajectory that churn has taken and for us.
Okay I appreciate the color.
Your next question comes from the line of Jeff Silber from BMO Capital. Your line is open.
Thanks, so much.
The results were much better than expected both on the topline and Bottomline can you.
And kind of focus you know what was the reason for the beat or reasons for the beat.
The reason for the B is is that it's really the point that James just made it better.
Better retention performance during the quarter really is the primary driver of that that improvement on the top line and that really felt and the bottom line.
Okay. So it's a fairly similar to what we saw last quarter as well.
Yes.
Okay, that's great.
I appreciate the color you gave us on the call I know, it's still very early can you talk about it at least the potential for either new states for new schools, how that pipeline is going.
Yes, I think.
Unlike probably previous years.
Our approach to new states and new schools.
Is actually evolving and I think it's evolving and a positive way meaning.
There are increasingly more opportunities for us to to enter new programs, New states with with partners Inc.
Where we're approaching it from the perspective that we don't always need a sort of new policy or law legislation to be passed.
So so we are we are continuing to work to open particularly career education programs. We expect to open a small handful of this coming fall and we expect programs in.
In general in a number of states to new states to open or expand and so so we're pretty bullish on West Virginia, Missouri places like that that we expect.
On it.
At least some type of expansion or new program to be to be open for the fall.
Okay great.
And your prepared remarks, you also talked about academic outcomes and I and I know it may be too early to try to get this kind of data, but I'm just curious.
In the pandemic and have you seen your outcomes increase.
Relative to some of the traditional schools that went on line is there any data that shows that.
Yes for sure we have we definitely there is some data trickling in.
That suggests and and obviously not surprising that.
Most of the brick and mortar schools took a pretty significant step back on average and academic outcomes.
And and and we did and for in fact, our schools our day to suggest that we outperform that significantly. So so at least from our perspective and our data would suggest that based on what we see and where we can sort of I would say that the data that is available is that our performance has outperformed and outpaced.
Most other brick and mortar schools that did online learning over this past year.
Okay I appreciate the color I'll jump back in the queue. Thanks, so much.
And again.
Your next question comes from the line of Stephen Sheldon from William Blair. Your line is open.
Hi, Thanks, first and great to hear about the highway registration and I guess indication day is there any way to roughly frame or quantify how much higher the percentage of families, indicating they would return compares to the normal trends that you'd see.
Well.
So I'm reluctant to start providing that type of guidance at this at this point I will tell you that our response rates are have been materially higher and and I think that that for me at least the signs.
And that point.
And the point positively is is the engagement the engagement levels, we're getting.
And and particularly I'll give you one sort of as a tidbit of.
For the information we are we did track.
I'll say COVID-19 related types of enrollments meeting some families did very specifically indicate to us.
That they were coming to us this year, specifically for Covid now of course.
A lot of families didn't indicate that and so that doesn't capture maybe the entire population, but a very significant proportion of those families who said that they came to us because of COVID-19 have been engaged with us and have indicated that they expect to return and the fall so again and member.
Paired remarks, and I indicated that we're not seeing sort of this I'll say mass exodus of families. Just riding it out with us until there is brick and mortar schools came back online and then sort of all exiting back for the brick and mortar programs.
So we see that as a pretty positive trend.
That that families at least a significant number of families have appreciated the experienced enough to indicate that they are sticking with it.
Got it really helpful.
And and I know I know you guys can help students that have fallen behind academically and try to catch up, especially on some of the personalized learning or provide online with some students at local options falling behind over the last year. I guess have you seen that increased demand at all for for General education, especially as you think about.
Indications heading into next fall.
Yeah I think.
I think the slide that's happened.
Just actually before we came into this call there was.
Our south on it from Conoco and he was on CNBC mentioning that 15% to 20% I think he was it was the number he said that he gave 15 per cent or sell kids are have clinical gotten lost.
And the public school systems.
And so.
So.
Not just they're not just a slide of the kids, who had been and the system you see a large number of students who have sort of gone missing and a way right and so we do think and we do see that.
There's a very large opportunity and and good demand for not just our programs are.
Our full time online programs and kids come into those programs, but just in school districts more broadly looking for ways to meet that demand or to meet that GAAP.
And so on.
I think you should remember that.
We're not just running full.
Full time programs, we offer a suite of solutions that also help districts with their problems and I think that in some ways, that's going to be and ongoing opportunity for us because.
And really empathize with these school districts, they they really need to make sure that they can reach a lot of these kids, who are somehow gone missing and their systems and and they need to provide some alternatives for them as well and I'm hopeful that they are.
Our are looking at alternatives like online alternatives for those kids as well and we can certainly help there.
Makes sense Lat last one for me on just on.
On the on the guidance it seems like the guidance implies a sequential step down and revenue in the fourth quarter relative to the third quarter I think the normal progression over the last few years, it's been for a sequential uptick anything notable to call out on what would drive a sequential decline this year and fiscal fourth quarter.
And that nothing notable to net there is fear that if you squeeze out.
Another quarter just like this one we would be at the very tippy top of our guidance range.
So theres nothing in particular to call out there.
No particular concern or anything like that.
Great. Thank you I appreciate it.
And again, if he would like to ask a question press Star one on your telephone and your next question comes from the line of Greg <unk> from Sidoti. Your line is open.
And thanks for taking my question just real quick on the summer courses that youll be offering is that going to create any notable shifts and and expenses on a year over year basis, and especially and in structural costs.
Yes, and no. The answer is no we shouldn't have any material change and.
And cost over the summer due to those programs those programs and they're not they do have some marginal cost to us is not significant we think we won't change sort of the overall profit or gross margin trajectory that we're headed on but but we also think it's important it's important.
To help with our with the summer Ah sort of GAAP. If you will on bridge kids over the summer. We think it's an important offering to get kids and to to have awareness around some of these opportunities that we can provide them.
So you know so I don't think it's going to be material costs, but I think irrespective.
And just an important service that we need to provide the country right now.
Great and then just one final one just on the revenue per student in terms of next year.
And assuming would would it be a positive benefit if you're a higher mix of special needs students next.
And next year and your revenue.
I'm, not saying that you're foreseeing that but just given the trends of some students falling behind.
Is that typically a higher revenue person.
Net.
Not not material and so.
And I wouldn't.
I wouldn't pretend that our revenue per student trend next year is going to be impacted by that but in any given year.
Sort of all rolled out with the Washington, and our overall revenue per student trends get more impacted by things like mix or or what happened in California. This year and not by the mix of special adverse and non especially for students.
Okay, great. Thanks, a lot.
Thank you.
And there are no further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
And so.
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