Q4 2021 Stride Inc Earnings Call
Good day, and thank you for standing by and welcome to day Stride, Inc. Fourth quarter fiscal 2021earnings call.
At this time all participants are in a listen only mode.
And third the speaker's presentation, there will be a question and answer session.
I think question during the session you will need to press star 1 on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero and.
I would now like to hand, the conference over to your Speaker today, Mr. Timothy Casey. Please go ahead.
Thank you and good afternoon, welcome to strides fourth quarter earnings call for fiscal year 2021.
With me on today's call are James <unk>, Chief Executive Officer, and Timothy Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a slide presentation that can be found on the investor Relations website.
Please be advised that this call may include certain non-GAAP financial measures during the discussion of our financial results a reconciliation.
<unk> of these measures is provided and the earnings release issued this afternoon, which is also posted and the investors section of our website.
In addition to historical information today's 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 described and the Companys latest SEC filings the.
The company assumes no obligation to update any forward looking statements made during this call flow.
During our prepared remarks, we will answer any questions. You may have I will now turn the call over to James James.
Thank you and good afternoon.
We all appreciate what a difficult year. This is Dan.
Even in the face of this incredible adversity stride has been able to thrive.
And when he is and I'll only been able to do so because of the commitment of our thousands of team members.
Folks have been dedicated to our customers and the.
Families that need and alternative approach to education now more than ever before.
So I want to start by saying, Thank you to all of our dedicated staff.
This was also a year and which the country and the world notice of online and distance and a mainstream way.
But the experience is not always positive.
Across the country, many schools struggled with uncertainty and inconsistency.
Students and families as they vacillated between online and in person and structure.
Thankfully, our 20 years of experience was able to deliver a seamless experience for our customers.
Our teachers platforms content and curriculum were all developed to meet this need.
Everybody now knows what online learning.
Many have not and Bruce.
Others realize its potential is done the right way.
We stand alone and having serve millions of students and our online book.
And while many schools struggled with learning loss and deteriorating test scores and our results outpaced them in the face of Onboarding and a record number of families from our programs.
I'll get to how we are training for this volume.
First I want to review some of our fiscal 2020.1.
By almost any measure we had a record year by a long shot.
We helped over a quarter of a million full time learners and millions of other users became interested and our programs.
Learning loss became the norm.
Except in the schools, we matched.
No wonder what national data showed an overall enrollment decline, 1 and a half million students.
We published our first ever ESG report backed by a number of key initiatives.
And your partnership with National Association of blackmail educators designed to increase the diversity of teachers across the country.
Our program with Keith for America to share.
Practical online experience student teachers.
Our we stand together college scholarships.
At $10 million multiyear commitment to support underrepresented students.
But we are not relying on the tailwind of the pandemic to set our long term path forward.
We rebranded our company from K 12 to strive to ensure that our name better reflects our commitment to providing education opportunities for learners of all loans.
We acquired 2 high growth higher margin companies to expand our adult career learning.
And the Investor day to outline our strategy and growth trajectory through fiscal year 2025.
A trajectory that I believe we are well on track.
And we raised almost $360 million through a convertible note offering could you still take further investment and both organic and inorganic.
And our general education business, we saw student enrollments increased by almost 50%.
With all the uncertainty this past year, we saw dramatic improvements in retention and both our general education as well as a career education business.
And we did not see the massive Charles students and the second half of the school year as many states begin to reopen their brick and mortar schools.
This is a testament to the stickiness and value proposition of our programs.
As we've mentioned previously.
<unk> enrolled and are there any programs tend to retain at a higher level and our general education.
And we believe this trend will continue.
Yeah.
We also had a record number of free registration families.
Indicating that they will be returning for the fall.
Our career learning business finished the year with over $250 million and revenue.
This is an increase from less than $10 million, just 4 years ago.
150% compounded annual growth.
This year, we saw growth of over 125 per cent to almost 30000 students.
These programs offer a career path without the need for expensive College degree.
And we are increasing the programs for our <unk> acquisition, and we will offer to high school students.
Typically and health care industry.
Both our med search and tech elevator acquisitions continue to grow and contribute to the bottom line and.
Are exceeding our expectations from when we purchased.
They are high growth high margin market opportunity platforms for us that we will continue to leverage into other areas of our business.
Particularly our high school programs.
We will continue our focus on it and healthcare training because these and your stories are projected to add more than 2 and a half million new positions and the U S by 2029.
On the other hands, our galvanized acquisition has not performed reported to our plant.
We have restructured this business and believe we now have a glide path to both.
And it's renewed growth and profitability heading into next year.
We will also look.
For waste and we get that invest behind and expand.
Our adult learning offerings with a lens from making career learning 1 billion dollar plus business.
Okay.
In June we released our inaugural ESG initiatives.
And education and career learning company, we have a significant opportunity to help achieve global education work force and diversity and inclusion goals.
All of our ESG initiatives are based on the 4 cornerstones outlining the reported.
Spanning lifestyle and learning for today's competitive workforce.
Supporting ratio and associated economic equity and inclusion.
Foster and transparent leadership governance and professional development.
And contributing to a more sustainable world.
For me, our focus on learning outcomes and as the most important aspect of all our ESG assets.
Stride as and a unique position.
And to influence the lives of millions of students all ages.
Not many other companies have that kind of impact.
We're carry that responsibility and we don't take that responsibility lightly.
By now everyone is aware of the significant shortages impacting the work force.
Stride is well positioned to help alleviate that shortage.
To that and.
We have set 10 year goals that are driven by learner outcomes.
And so by 2030.
Our goals are to graduate over 100000 students from our stride career High school programs.
To graduate hundreds of thousands of students from our adult programs.
And to achieve leading graduation, and learn and growth rates.
And 1 million students.
Ah report contains a lot more specific information on our ESG efforts and Kurt.
Jeff you want to read it and can be found on our Investor Relations website and is a direct link and today's earnings presentation.
Now I want to turn to fiscal year 'twenty.
The long term trends prospects for our general education and career learning business both remain schmitz.
The COVID-19 pandemic has raised consumer awareness around the need for and the benefits of online education in grades K 12, and and adult care.
Well it doesn't work for everyone. Many students and families have realized that online learning and the flexibility provides is a preferred alternative.
Increased awareness and openness to different options to meet educational needs and fundamentally provides for a long term tailwind for all aspects of our business.
As we do every year, we will provide formal fiscal 'twenty 2 guidance during our first quarter earnings call in October.
So while we're not providing guidance right now.
I do want to provide some insights into how the current enrollment season this strength.
And even now and all I guess, we're still less than halfway through the volume of our typical enrollment season.
And this means that these trends could shift in the coming weeks.
Additionally, the pandemic has increased uncertainty around all of these metrics. So please do not extrapolate what I'm about to say.
We have not seen the mass return to brick and mortar schools.
Richard.
We're currently exceeding the number of re registrations that we saw during fiscal 'twenty, 1 and in previous years.
Right now we are well ahead of where we would be normally and enrollments versus pre pandemic.
Awareness for our offerings is at an all time high.
Pandemic helped to drive awareness and we no longer need to explain what this is a virtual learning is the fact they get.
And now they just need to choose.
Conversion rates from our new lead are all time high.
So and family seek us out theyre more likely to enroll.
We believe that health and safety continue to be top priorities for families.
And we're seeing that.
And we're seeing even stronger demand and states, where the Delta Berry surged.
Our goal is clear it's to.
Grow every year.
And importantly, we remain on track to achieving the long term revenue and profitability targets.
<unk> targets that we outlined during the Investor day last fall.
We still anticipate and sheet achieving revenue of 1.9 to $2.2 billion adjusted operating income of $250 million to $350 million by the year 2025.
Thank you for your time today now I'll hand, the call over to Tim to discuss our full year 2021 reason Kim thank.
Thank you James and good afternoon, everyone.
First let me recap our reported results.
Revenue for the full fiscal year, 2021 was $154 billion and increase of 48% over the prior fiscal year.
Adjusted operating income was $161.4 million up 160% compared to the prior year.
Capital expenditures were $52.3 million and increase of $7.3 million over last year.
And each case these results met or beat the expectations, we provided and our guidance last quarter.
The outperformance was primarily driven by favorable revenue per enrollment and retention.
Looking ahead to fiscal 2022, it is still too early to confidently forecast, our count date enrollments for the reasons James just outlined.
Given where we are and the process there remains variability around 2 key factors, firstly ongoing re registration and new enrollments and secondly, the retention of these enrollments once school starts and through the month of September.
Now here's what I can say today about fiscal year 2022.
We expect to grow adjusted operating income and adjusted EBITDA year over year compared to our strong fiscal year 2021 results.
And that is thanks to an expectation of continued strong revenue growth and career learning.
Margin improvements and higher operating leverage.
Furthermore, we believe that the increased awareness and acceptance of online and hybrid education accelerated by the COVID-19 pandemic has sustainably reset the baseline for the general education business.
Therefore, we are confident that general education revenue in fiscal year, 2022 will be significantly larger than it was in fiscal year 2020.
Yeah.
As we have done and the past, we will refrain from providing guidance and so we report our first quarter of fiscal 2022 results in October.
By that time, we will have much greater visibility into enrollments for the new school year.
Yeah.
Returning to our results for fiscal year 2021 Red.
Revenue from our general education business increased $346 million or 37% to 1.28 billion.
This was due primarily to higher enrollments, partially offset by lower revenue per enrollment.
General and enrollments rose, 45% year over year to more than 156000, while.
While revenue per enrollment declined 5%.
The decline in revenue per enrollment was due primarily to state budgetary pressures, resulting from COVID-19, and a higher mix of lower funded states.
As we stated last quarter, we expect revenue per enrollment to improve next year, given what we know today about state budgets and policy.
Career learning revenue rose to $256.6 million and FY, 'twenty, 1 and increase of 140%.
This growth was driven by significantly higher volumes and our strike career prep programs as well as organic growth and new acquisitions and our adult learning businesses.
We expect to continue growing our strike career prep programs and FY 'twenty 2 with plans to open 4 new programs and expand 8 existing programs and FY 'twenty 2.
Gross margins were 34, 8%.
Up 140 basis points compared to fiscal 2020, driven by an increased contribution from the higher margin adult learning businesses and lower costs from efficiencies and automation initiatives.
We expect margin improvement to continue into fiscal 2022.
We are confident that we will achieve our 36% to 39% gross margin targets much sooner and fiscal 2025, which was our original target communicated during our November 2020 Investor day.
Selling general and administrative expenses were $424.4 million up 35% from fiscal 2020.
The increase in SG&A was driven primarily by higher costs associated with our enrollment growth.
And increase in stock based compensation expense and the <unk> of expenses for our adult learning businesses.
Adjusted EBITDA of $239.9 million reflects an increase of 87% over FY 'twenty.
Adjusted EBITDA margin improved 400 basis points from 12% of revenue and FY, 'twenty, 216% and FY 'twenty 1.
The margin improvement and growth and adjusted EBITDA are driven by higher revenue and improved operating leverage.
Stock based compensation expense came in at $39.3 million up 67% year over year.
Driven by the timing of certain stock based grants tied to our career learning business.
We currently expect stock based compensation expense to decline to a range of $30 million to $34 million and FY 'twenty 2.
Interest expense totaled $18 million for fiscal 2021 in line with the expectations, we provided last quarter.
This consisted of approximately $5 million and cash interest and $13 million and noncash amortization of the discount and fees on our convertible senior notes.
And the first quarter of fiscal 2022, we early adopted new accounting guidance related to our convertible notes. This will result, and the elimination of the noncash debt discount expense among other impacts.
As such we expect our interest expense in FY 'twenty 2 to.
To be materially lower and more in line with the cash interest we recognized in FY 'twenty 1.
Our full year tax rate for FY 'twenty, 1 was 26%.
Low the guidance range, we provided last quarter.
We had some positive tax benefits related to stock based compensation and that had the effect of lowering our tax rate for the year.
And FY 'twenty, 2 we anticipate and increase in non deductible compensation that will cause our tax rate to be closer to the 28% to 30% range.
Capital expenditures for the year totaled $52.3 million up 16% from the prior year due mainly to higher capitalized software development costs associated with adult learning automation and improvements to our platforms.
Capex as a percentage of revenue was 3.4% and that is lower than our historical average of approximately 4% to 5% over the past few years.
Free cash flow defined as cash from operations less capex totaled $81.9 million for the FY 2021.
This was approximately $45 million below the expectations provided at Investor Day last November due entirely to the timing of receipts, which drove drove lower than expected cash from operations.
Some of the timing issues were associated with our growth and states that regularly pay and the following year.
And some were related to delayed payments due to COVID-19.
And fiscal 2022, we expect to have significantly higher free cash flow, reflecting these timing issues from fiscal 2021.
Finally, we ended the year with cash and cash equivalents of $386.1 million.
And increase of $173.8 million compared to the same period a year ago.
We believe that our strong free cash flow generation and liquidity will continue to provide the financial flexibility to fund our existing operations and pursue strategic acquisitions.
To summarize fiscal.
Fiscal 2021 was a landmark year for stride.
We saw record enrollments and both our general Ed and career learning businesses, which drove double digit growth and revenue adjusted operating income and adjusted EBITDA.
Our career learning assets, which accounted for less and $7 million of revenue 4 years ago generated over a quarter of $1 billion and revenue during the year.
And of the tremendous demand for career education offerings, and strides innovation and leading position within this market.
In addition, we continue to improve our margin profile and bolstered our cash and liquidity position, while maintaining a low level of indebtedness.
As James mentioned, we could not be more excited about the prospects for our business and we will continue to execute on our high growth career learning strategy and margin expansion initiatives.
And with that I'll turn it over to the operator for Q&A operator.
And as a reminder to ask a question youre going to need to press star 1 on your telephone to withdraw your question.
Press the pound key please standby, while we compile the Q&A roster.
First question comes from the line of Jeff Goldstein of Morgan Stanley.
Hey, guys good evening.
So I know in your prepared remarks, you mentioned re registrations are performing very well. So I have to ask are you able to put some numbers either around that or are other figures that could help us better understand the trajectory of enrollments to this point or if not I guess broadly speaking our enrollments coming in above your expectations at this point and then when.
You mentioned enrollments are doing well where delta has surged.
Would you characterize that as making up a majority of your enrollment base.
Just trying to think overall like additional color that you have around either enrollment trends and and how delta is affecting that rally.
Hey.
It's changed.
As we said, we're not providing any guidance right now so.
And I can't give you a lot more color than what we've given you.
Enrollment trends re registration and trends are are very strong, we're seeing more and we've ever seen.
Yes.
We're not disclosing.
Sort of new percentages the delta there.
You can see a lot of the a lot of the states that have spikes and that delta.
And in places like Texas.
C sort of unprecedented demand very similar to what we actually saw last year. So we see that.
And that spike happening now and.
We think that.
We think that a lot of people are going to have ongoing concerns about safety and and we think it bodes well for the long term prospects for our business, but we're not going to provide more color right now.
Okay, No problem and that's what I would ask.
And then I know a bigger focus for you recently, just trying to sell more digital services on an AD hoc basis for districts that may not need a fully managed program. So I'm just curious for any update on progress there and what type of demand you're hearing from districts for those services as we enter another year of that likely has some virtual options.
Yes, it was really good last year.
That sort of district business, if you will almost doubled and so.
We saw a lot of good business. There we continue to see a lot of interest our pipelines I think at this stage and the year our pipeline for that business is actually stronger than it's ever been.
We also have.
States like California that are sort of mandating <unk>.
Sort of get ready there is some legislation there that sort of helps us and helps providers like us so.
And and frankly, I think that that trend meaning that.
So district demand trend.
That's 1 irrespective of the pandemic.
They go away because who knows what the future holds and I think districts can't be caught flat footed going forward and most districts just don't have the resources or skill.
To stand up and down programs like ours.
Easily and and frankly, I think that they need to concentrate on that.
The programs.
Programs that they've got going and so I think in many cases, just makes more sense to outsource to somebody like us.
Alright, Thanks, a lot and I appreciate the color.
Next question comes from the line of Jeff Silber from BMO capital markets.
Thanks, So much again I appreciate that you're not providing guidance for the current year, but you did give us some indication in terms of where you expect both adjusted operating income and adjusted EBITDA to go can we get a little bit more color.
What's driving that specific segment specific leverage anything you can help us out and would be great.
I think the biggest thing is.
And is what we sort of laid out and our Investor day presentation, which is.
And we think gross margins are going to improve we think that drives great leverage and our business.
And obviously, we will keep up keep.
<unk> a line on the SG&A expenses.
We're pretty confident.
That that we can continue to grow our bottom line irrespective of what happens here for the rest of the.
For the rest of the season.
Okay fair enough.
And you had also talked about and expectations for revenue per student and your general education business to grow and the current fiscal year based on I think you said budgets that you've been tracking so far.
And I know a lot of the federal stimulus money is not directly allocated to you but are you seeing benefits are you do you expect benefits from that and if so will that continue beyond fiscal 2022.
Yes, the good news and the Bad news is is that we.
We really we're not seeing much of a benefit for us I think those dollars as you said theyre not really directed towards us either directly or indirectly.
We could provide some limited services I think in some instances where districts may choose to allocate some of those dollars for some things that.
We can help them with but we're not really seeing a big bump and that we don't expect to see it but.
And the other side of that is is that it's also nothing that's going to go away and future years. So.
Having that 1 kind of onetime bump for us I don't think it's going to it would have been that meaningful anyway, and we're really just focused on helping the districts that we can and any way, we can and where.
We're not just focused on those dollars.
Okay, that's great to hear thanks, so much.
Thank you.
Next question comes from the line of Alex Paris Barrington Research.
Thanks for taking my questions.
Want to ask U K.
Any more regarding the fall.
But I'm glad to see that.
Early leading indicators are positive and wanted to dive a little deeper into per pupil funding.
It was down.
This year I noticed though at least from the press release it looked like it was down more on the career learning side than the general education side.
And what's going on there.
Tim and probably spend a little more and I think it's predominantly a function and mix.
A lot of our career learning programs and where we have a lot of larger programs. It just happened to be and states that have slightly below average.
Volume levels.
I wouldn't read too much into it and frankly and.
And I think over the next several years it will normalize back probably more in line with the overall average I wouldn't add anything to that James.
Okay Fair enough and then specifically during fiscal 'twenty 1.
Yes.
California's approach to funding impacted revenue per enrollment for the full year for example, as I recall they did not fund incremental students. Yet you served them anyway is California and finish their budget and what are their plans for the coming year and how do you expect your California schools to be funded.
Yes, we do expect our enrollments to be fully funded from California, and fiscal 2020 till Alex.
Okay.
And then and that will contribute to an increase in revenue per enrollment and 22 versus 21.
That's correct.
Just a follow up on a prior question and comments federal stimulus. It is not aimed at you, but but the school districts benefits. So would you expect day.
A benefit to <unk> and you're learning solutions business as a result.
Yes, I don't think were seeing a material benefit of.
Of course, there could be some.
And.
But just in the overall context of our business.
Theyre not dollars that will specifically chase if you will.
We're doing is we're trying to provide a virtual learning programs for as many districts needs. It stood up either for the fall or even in an emergency situation and we sort of leave it to the districts decide how they funded whether it's from escrow dollars federal dollars anchor or any other.
Pools of money that they have that's really that's really up to them and we really leave it up to them. So we don't want to get too much into the how they allocate their dollars.
That's the job and the districts.
Okay fair enough and I guess, the last 1 and I'll ask you is that and I think I know the answer to this I don't think you have any new states planned for the coming year I. Appreciate the fact that you're going to open up 4 new straw.
Stride career, perhaps and youre going to expand 8 but what about new states and general.
No new states anticipated for fiscal year 'twenty.
'twenty 2 at this point.
Okay, that's what I thought thank you very much.
Thanks, Tom.
Again to ask a question you May press Star then the number 1 on your telephone keypad net.
Question comes from the line of Stephen Sheldon with William Blair.
Hi, Thanks for the question so.
So it seems like the gross margin improvement is trending a bit ahead of schedule here I just wanted to ask if you have any update on the efficiencies from the efficiency improvements that you were that you had and progress such as the automation of the enrollment process that we that you all had spoken about previously.
Sure well this is the first enrollment season, where a parent and.
And a fully automated manner without interaction with the human on our side enroll their students. So that's a big plus for us from an efficiency standpoint, it's also outstanding customer satisfaction.
Now many most parents still want some.
Interaction they have some questions et cetera, but that capability has been turned up entirely Steven as I think is a big example.
Okay. Thank you and then.
Another quick 1 so.
It seems like for the most part trends were positive and career learning.
With the obvious exception of galvanize. It just curious if you could expand a little bit on what's going on there what kind of headwinds you're seeing.
Yes, I mean, if you may remember.
The galvanize business, there's really sort of 3 pieces.
There was a direct to consumer piece there is our enterprise piece and there was a a non work force piece around.
And what they call the community business.
Like are we work type of.
Real estate business.
And.
And I think obviously and the past year since the pandemic hit that third leg of the stool.
And just crumbled underneath underneath us and so we closed the acquisition early in the first calendar quarter of last year, and then the pandemic hit late and that calendar quarter.
And so.
Hi, Brooks.
This entire year.
We were hit our fiscal 'twenty 1.
We had a very very weak community business.
In addition.
The pipeline and at the enterprise business did not materialize and the way that we thought it would and so the enterprise business also underperformed.
The consumers they are a great consumer product and and I think that consumer products are going to continue to thrive.
They place.
Place their students in a lot of the preeminent technology companies across the country.
And so I think that that trend is going to continue and.
And we're going to double down on that and more business and.
Cut out the costs from those other businesses and turn this thing around this year and so while it may be smaller overall than what we had originally expected.
And I still think we can put it onto a path to create a lot of value for us.
Okay makes sense. Thank you for the questions.
Thank you.
There are no further questions at this time.
Presenters you may continue.
Great. Thanks for the call today, everybody and we'll see you in October with the guidance.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music] and.
Yeah.
Thanks Stuart.
And so.
[music].
And then.
[music].
And.
Yes.
[music].
Good day.
Thank you.
[music].
And the.
And.
[music].