Q3 2022 Stride Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Stride, Inc. Third quarter fiscal 2022 earnings call.
<unk> been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time.
Star followed by the number one on your telephone keypad, if he would like to withdraw your question Thats Star one again, thank you.
AC head of Investor Relations you May begin your conference.
Thank you and good afternoon, welcome to strive third quarter earnings call for fiscal year 2022.
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 presentation that can be found on the strike Investor Relations website.
Please be advised that todays 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 in the investors section of our 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.
I'll now turn the call over to James James.
Thanks, Tim and good afternoon.
As you can see from our results our business remains strong and continues to grow.
Now more than two years into the pandemic and with multiple closings reopening.
Mandates to return to normal only defined that there is a near normal.
The World of education is not going to return to its pre pandemic ways along multiple fronts.
Demand for alternative learning remained strong.
We see this in our core business as applications for dish in year period, which just ended.
Over 30% higher than the previous year.
And even past that we see acceptance for online learning and growing.
Just this past year some of the largest school district in the country, notably Los Angeles, and New York have announced initiatives to offer more online programs.
Homeschooling has increased over 50% just starting to pandemic.
So around 4 million students and increasingly those families need online resources.
The associated press recently published an article indicating that the vast majority of families that began homeschooling during the pandemic have not returned to their brick and mortar schools career.
Career learning opportunities continue to expand for us more importantly, the focus on career skills as opposed to career college degrees is gaining mainstream appeal.
Just the other week the Wall Street Journal published an article.
Blue collar workers make the leap to tech jobs.
No college degree necessary.
So the macro environment I believe has reached a tipping point where skills training like the kind we offer is becoming a more valuable asset for an increasingly large segments of the workforce.
And we hold multiple competitive advantages.
Our focus on the high school and Middle School markets.
Ability to provide a holistic solution and the approach we won't be taking to ensure we make our offerings financially viable for the customers we serve.
The vast majority of our programs are free to the families. We serve.
This summer.
We will be launching a pilot program, where we will take high school students in partnership with the school district and offer them a single platform.
Engaging for discovery and exploration.
To take career related courses.
Earn career certificates and to get placed and well paying jobs.
We will focus at first on the health care and technology industries and expand from there.
And all of this will be offered to school districts for free.
Again no charge.
<unk> district or their families.
Additionally, when students and families come to us they are more likely to stay.
The result of our general education parents' satisfaction survey demonstrates the success.
Our schools have a net promoter score of 63.
Which is dramatically higher than most school districts.
And ranks favorably with other consumer products you may use everyday.
Our customer satisfaction survey suggests satisfaction ratings in excess of 80%.
This year parents feel more supported by school staff and students are more motivated to learn and work independently than in prior years.
This has led to more parent satisfaction and more loyalty and.
We see our investments pay off.
We invested this year and in U K through five curriculum and as a result satisfaction with curriculum and our cases five programs has improved by 400 basis points.
That curriculum took pressure off the parents and learning coaches to supervise their students.
A new grade case, or two and three to five parents' satisfaction with their experience increased 700 basis points over last year.
Our focus on improving our customer experience and delivering value for our customers will drive greater lifetime value for them and for us.
Yeah I realize most of you are focused on the fall enrollment numbers and as you know with our season just underway, it's still too early to gauge where we are but.
As I said last year at this time.
Our plan is to grow next year and.
And we see the demand characteristics to achieve that growth.
I also want to provide a quick update on some of the new programs I mentioned last quarter. We continue to see more states interested in offering full time online options for their students.
It was now officially opened our new programs in both West, Virginia and Georgia.
Both of these programs are now accepting enrollments for the fall school year.
We are also looking to expand our footprint by leveraging our core assets to offer more products and services to a broader range of customers.
In the past we have focused our innovation on a full time programs and we built some of the best digital learning products and services around.
However, these are only use that small percentage of the students teachers and families in the United States.
We are now in the process of adapting and improving those innovative products to make them more mainstream.
Some cases, this means making them more easily accessible to consumers, sometimes it's rethinking the go to market approach to an existing offering.
What is most compelling about this to me is that we're able to make this investment through organic growth without increasing our capital expenditures as a percentage of revenue.
As Tim will outline our guidance for Capex. This year is $65 million to $70 million or just over 4% of Brent.
And this is in line with our typical capex spend.
And this investment allows us to launch our products into much larger markets.
Just this morning, we announced a partnership with the U N endorsed global ecosystem for Ocean solutions.
Introduce a fun and educational angle for students to get involved in their environment.
Applying the gaming skills, they Larry in the popular Minecraft game.
We also offer an E sports summer again open to all students.
Students participate in coding classes taught by industry professionals and had the opportunity to play some of that was popular esports games.
However, this is just the beginning.
Of our esports ambitions.
The last few years, we've seen many of our full time programs launch E sports teams and we are now looking to formalize these teams into elite.
This represents a unique opportunity for us esports is one of the worlds fastest growing sports.
Our position as a leading online education provider. It means there's opportunity for us to bring together learning and gaming to better prepare students for the jobs of tomorrow.
By making these and other investments stride will now offer more flexibility and options to students families and teachers and schools than ever before.
And in an effort to build large communities around these products, we anticipate making many of these products available at little or no cost.
We believe these communities will help all students achieve their goals and we want them to be broadly available.
We will start rolling some of these products out in the next few months to stay tuned for more information with that.
To pass the call over to Tim Medina to discuss our financial results for the quarter Tim.
Thank you James and good afternoon.
First let me quickly recap our reported results.
Revenue was $421 7 million an increase of seven 5% from the same period last year.
Adjusted operating income was $69 4 million up 26%.
And capital expenditures were $18 4 million, an increase of $7 1 million.
We had another strong quarter of enrollment and operating performance.
And as a result were able to once again exceed the revenue and profitability guidance, we provided last quarter.
Our third quarter enrollment actually exceeded last year's third quarter enrollments.
And by strong in year enrollment and retention.
As a result, we are increasing our revenue guidance and the bottom end of our profitability guidance range, which I'll provide more specifics on later.
Returning to our quarterly results in more detail.
Revenue from our general education business was down slightly to $315 9 million.
As we've mentioned this is due to the expected decline in enrollments after last year's large COVID-19 driven surge somewhat offset by an increase in revenue per enrollment.
Gen Ed enrollments in the third quarter were more than a 143000 down 8%.
We started the year down over 10% in enrollment, but we've been able to close the gap somewhat due to strong end user demand.
We believe this shows the strength of the sustainable demand in the business.
Revenue per enrolment in Gen Ed increased 7%.
We now expect to see revenue per enrollment for the full fiscal year that exceeds last year by about 10%.
Career learning revenue came in at $105 9 million up 52% and.
In fiscal year 2020, just two years ago. This business did $100 million in revenue for the full year.
Now, we are achieving $100 million in the quarter.
Revenue for Middle and high school career learning was $83 2 million up almost 60% from last year.
This was driven by a 42% increase in enrollments and a 13% increase in revenue per enrollment.
As with our general education business.
Revenue per enrollment growth in our middle and high school career programs has been solid.
We expect it could end up just over 10% higher than last year.
Adult learning revenue was $22 6 million up 30% from last year's third quarter.
Since we acquired med surge and tech elevator in the second quarter last year. This quarter is the first full quarter comparison.
To show the organic growth we are achieving in this business.
Gross margins for the quarter were 36, 7% up 120 basis points from last year.
We continue to see improvement in gross margins from our adult learning businesses and managed school operations.
It is worth, noting that inflationary pressures, including teacher and staff costs.
Put a little pressure on our gross margins.
Regardless of the inflationary environment, we still believe we are on track to achieve our long term gross margin targets.
Third quarter, selling general and administrative expenses were $94 2 million down 6% from the prior year period.
We still expect that SG&A expense for the full year will be in line with last year.
Our fourth quarter is when we begin to rollout marketing for next school year. So seasonally the third quarter is a low point and our SG&A spend.
Stock based compensation was $5 6 million.
We expect we will finish the year with stock based compensation in the range of $19 million to $21 million at.
Adjusted operating income was $69 4 million exceeding the guidance, we issued last quarter.
Adjusted EBITDA was $93 million.
Our profitability has been driven by continued strength in retention enrollments revenue per enrollment.
A return to a more normal seasonality of expenses as we've outlined during previous earnings calls as well as the continued growth in adult learning.
Diluted earnings per share totaled $1 two sets up from 57 a year ago.
Our effective tax rate was 28%.
And capital expenditures were $18 4 million up $7 1 million from the third quarter last year.
And as James outlined we are investing behind organic growth as we position ourselves for incremental long term growth and mainstream markets.
Free cash flow was $74 6 million and we finished the quarter with cash and cash equivalents of $308 6 million.
As we typically do we expect to see strong cash flow in the fourth quarter.
We also updated and raised our full year guidance and we are now forecasting <unk>.
Revenue in the range of 1.64 or five to one 660 billion up from 162 to $1 64 billion previously.
We're now forecasting adjusted operating income between 180, and 185 million up from $175 million to $185 million previously.
And we are forecasting capital expenditures between 65 and $70 million.
And lastly, an effective tax rate between 27% and 29%.
Thank you for your time today I'll turn the call back to the operator for the question and answer session operator.
At this time I would like to remind everyone. If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
And your first question comes from the line of Jeff Silber with BMO capital markets. Your line is open.
Yeah.
Thanks, so much and congratulations on the strong results James I just wanted to clarify one of the things you said in your opening remarks, you talked about applications for in year being over 30% higher year over year is that applications for the current school year or for the upcoming fall sorry, Yes. Good question, Jeff that's applications for the current <unk>.
Our period as you know.
We enrolled.
Not really enrolling like now, but we enroll all through the year and that was for the in year period applications for next fall have really just begun theres not really enough volume to give an indication.
Okay, Great I, just wanted to clarify that either.
Again applications have just started any leading indicators you can give us in terms of <unk>.
Meetings et cetera, any guidance would be great for next spot.
I think the in year. This in year period is actually a good indicator because that shows that there is continued interest in our programs through this.
In year period, which we think will translate into the fall, but again not enough numbers for the fall, but if there is an indicator I think that would be it.
Okay, that's really helpful and how about what youre expecting for the funding environment next year.
So so far what we see across the landscape of where we manage programs to the political landscape. The policy landscape. The funding environment continues to be.
Neutral to strong.
Across our heat map there is.
No red, maybe just yellow or tube and largely green.
Okay, that's great to hear I'll, just sneak in one more.
And in the new schools in West, Virginia, and Georgia are there any limitations any cap anything else that we need to be aware of there is Georgia has a cap it's actually a fairly small cap year, one it's about 500 students.
West Virginia, it's a small state so I don't think it's going to be a meaningful number regardless, but it is just good.
I think expand our programs, but it won't be a meaningful number.
Okay, and the Georgia cap is that lifted after the first year or are there ongoing cast after that.
Ongoing cabinet rises a couple of hundred each year.
Okay, Alright, alright, I will jump back in the queue. Thanks, so much. Thank you.
Your next question comes from the line of Alex Paris with Barrington Research. Your line is open.
Yeah.
Alex Paris with Barrington Research your line is open.
Hi, I'm, sorry, I had it on mute.
My congratulations as well thanks for taking my questions I have a follow up question or two.
To jeff's questions as well as some of your overview comments I know, it's way way too early to tell about next fall but.
Sure.
Taking into account the comments that you just made how about that.
That was good.
To ask if you could give us any model logic so to speak.
General education.
Enrollment down a little bit I mean, just stands to reason given schools going back.
Revenues for student positive career learning.
Strong continued strong.
Similar.
With regard to revenue per student in the.
<unk> business is growing so the way to think of it.
I'm not going to comment specifically I don't think I don't think you have poor logic generically, but currently not going to comment.
On any of the specifics.
I think as I mentioned, we intend to grow next year, that's our plan.
I think theres a number of variables that will come into play to do that I think we've got a momentum around certainly our career business I think our adult businesses are performing well I think the overall environment for online learning continues to improve.
So I think that generally speaking the environment for the businesses and customers that we serve remains strong and I think that sets us up for long term growth and I think that we continue to be on pace for our long term projections that we put out our long term guidance that we put out a year ago.
And then a follow up or two.
Obviously, a big year and revenue per enrollment.
Sort of a recovery from the prior year.
How should we think about that given your comments with regard to the heat map how should we think about revenue per enrollment next year back to sort of the normal range of <unk> to 2%.
I think you should assume back to the normal range.
Mix plays a big part I think as you know in this so depending on the mix obviously it could it could average into something different but we see generically speaking on average back to sort of a normal range.
Not an elevated range like we saw this year.
Got you. Thank you and then new States, Georgia, and West Virginia are up and accepting applications. I think you had mentioned that new Hampshire, I know it'll be a small state as well.
Should be a new state for the coming year any update there.
Yes, I think we still feel good about one or two potential additional.
Clients essentially our partners.
But nothing to announce at this time, but I think we do feel pretty good that we might have one or two more before the summer.
And then I guess my last question for you Jim.
Just an update on <unk>.
Teacher hiring teachers shortages that we experienced early in the fiscal year I think you've got a good handle on those now how do you feel about your positioning with regard to teachers for the coming fall yes.
Yes, I mean I think.
The overall macro environment remains the same meaning that teachers.
There continues to be a teacher shortage I think teachers continue to be.
Leaving brick and mortar school districts in record numbers I think that.
We do we do offer for those teachers that want to continue to gain.
A compelling proposition for them.
Obviously being online no commute.
Mass mandate no vaccine mandate those kinds of things I think will still continue to influence.
Decisions that people make and I think we just offer a compelling alternative I think operationally in addition to that.
We are trying to get ahead this year anticipating.
The enrollment for the fall a little earlier, making offers for teachers a little bit earlier. So hopefully we are operationally also getting ahead of it.
Alright, well. Thank you so much ill get back into the queue. Thanks.
Your next question comes from the line of Tom <unk> with Citi. Your line is open.
Yeah.
Thanks, Tom has some sidney thanks for taking the question.
Uh huh.
You talked a little bit about sort of.
Quite smart or potential gross margin pressure from rising inflation I know you weren't ready.
Brian you can pretty much alone will not but I'm just interested in.
Other than the potential inflationary benefits on revenue per enrollment can you just maybe talk about the.
How inflation pressures.
The funding environment.
Revenue per enrollment that was.
Last question for now.
After the follow up if that's okay, yes, I think it's a great question. So yes.
Yes, I think on the University of revenue side of the equation.
I don't think for this fall.
There will be significant impact of an inflationary pressure I think theres a delay, meaning it's often driven by tax Rev. Tax based revenue there is a delay in that and so therefore.
What I do think though is that over a longer period of time, those inflationary pressures will impact both sides of the equation they have to because the biggest part of the funding mechanisms. They go towards.
Teacher salaries teacher salaries are part of the inflationary equation as we all know and so in order to just to keep up.
We've got to make sure that we.
We're enticing and Scenting teachers to stay in our systems. So I think we sort of have to do that but I do think this is going to be a lag.
Yes.
Huh.
The second question is on the.
The pure adult learners.
30%.
Top line is one hell of a suite of organic run rate I'm just interested in what the pipeline for M&A looks like weather events, whether you guys are in a hurry.
Right.
The build scale in that area given that organic run rate.
Can you just leave at that.
The short term.
So I think I'd look at it this way.
We have to be fair, we don't have a.
Stellar long term track record in M&A.
We've done a couple of recent deals I think that has really panned out well and I think that part of the reason they pan out wells, we had good planning going in we had a good strategic logic.
And we Didnt overpay, we werent too anxious to get a deal done and I think that discipline will pay off for us in the long term and future deals as well. So we have a lot of capital that we can deploy we've got a lot of dry powder in our back pocket. Our board I think is supportive to deploy for the right assets that capital and.
And we are actively looking to deploy that capital.
But I think it also is important that we stay disciplined.
And I think if we continue to do that will return.
We will earn a good return for our shareholders, but.
So I think we do want to stay active we've got a pipeline of deals that we are always looking at but I don't think that we're going to jump the gun anytime soon.
Irresponsibly.
And then maybe one very final follow up on that.
And in particular at Craig Hallum.
Great.
I mean, there's an online element to it but.
You don't necessarily have.
National coverage is that I mean is there.
Is there any way that you can sort of step on the accelerated that.
Sure.
But building out the cause.
The physical footprint.
Yes, I think I.
The short answer is is that.
We want to balance our growth in in all of our growth businesses.
Ensuring that we do it responsibly tech elevator is is it really special asset because it has the.
Best outcomes in the entire industry not only does it have the best outcomes in the entire industry. It has been profitable virtually since day one.
And you find me and it's a pretty small scale operator.
And we see in the marketplace $100 million plus operators, who still can't make money.
So not only are we getting great outcomes, we're getting good returns.
And what we don't want to do is.
Set that balance.
And so we're deploying capital for the assets like Tech elevator that we think can return but.
But we don't want to do it.
To aggressively where we upset that balance we want to make sure that our customers get served well we want to make sure that our outcomes remained strong and we want to make sure that we retain the financial profile that we think is responsible for our shareholders. So I don't think that that means that we're going to step on the accelerator for tech elevator too much more but I do think it means we will continue to deploy capital behind <unk>.
Elevator that we've got a great leader there I think you know him. He has done a wonderful job and and I think we're going to continue to bet behind him.
Yes.
Magic. Thank you very much.
Your next question comes from the line of Stephen Sheldon with William Blair. Your line is open.
Hi, This is actually Pat Mcinally on for Stephen just a couple of quick ones here.
So on the general education side, we touched on this a bit already but can you just talk a little bit about how much of an impact.
The teacher shortages had on enrollments there versus versus retention and then just.
General demand from new students and families.
Yes so.
This past fall the teacher shortage I think I've indicated before that.
We could have we definitely could have surpassed last year's number probably hit a number like 200.
If it werent for the teacher shortage it was particularly acute in two states, California, and Texas those two states over the past couple of years have been states that have had tremendous pent.
Pent up demand so we see a lot of.
A lot of demand in those states that we have not been able to fulfill we'd had to turn off our enrollments early in those states because of teacher shortage last year.
So.
I think just in those two states.
Obviously large states in terms of gross population.
Increasing acceptance towards alternative forms of education, particularly in for different dynamics Carol California.
The dynamics in that state really I think prompt a lot of families to consider alternative forms of education.
<unk>.
And so I think that they're both just tremendous states with great populations.
For the types of types of products that we serve.
Debt.
The.
In year.
Okay.
And dynamic.
Of the teacher shortage really was getting teachers, we were hiring throughout the first semester.
And <unk>.
And trying to sort of backfill.
Backfill or or ramp up to an appropriate level.
And to ensure that we can service.
Our students as appropriately as possible so.
Yes.
As much of an art as it is a science sometimes.
<unk> got different grade levels coming in you've got retention.
Attrition issues that you are always dealing with and so.
So where we're always in this balancing act I guess I feel I feel pretty optimistic that.
The worst is behind us.
We've we've gone through a pretty I think.
Turbulent year from a teacher hiring perspective, this past year I think the worst is behind US I think we've learned from this past year.
I think from a retention standpoint.
We did not see.
Any meaningful.
Degradation in retention this year.
That we could tie to the teacher shortage. In fact generally speaking retention has stayed pretty consistent with the elevated levels that we saw last year.
Okay.
Understood. That's really helpful. Thanks for the color there and then.
My next one so.
Just one launching programs in new states in general can you just talk a little bit about the cadence of that launch and generally some of the investments required are behind it.
Yes, I mean I think.
Sort of somewhat logical as you might have actually expected right.
The administration infrastructure has to get upset set up first right. So we're hiring administrative staff.
We're hiring staff to do the register the registration the Registrar type of office, we're standing up the systems.
For that.
For that geographic location.
<unk>.
Doing student acquisition type of activities marketing PR things like that and.
And.
Steve.
We have Georgia, where there is a cap and then we also start hiring teachers as well concurrent with that.
So.
So a lot of the work that precedes actually.
Start of school is really at setup work.
And as students start coming into the program.
Predominantly over the summer.
They behave exactly like other schools would behave in a sense that they get allocated to teachers and courses and things like that and so.
So the real the heavy upfront lift tends to be now actually in the spring through to the early summer just making sure we have that infrastructure in place largely that that administrative infrastructure in place and then beyond that we're leveraging whether its curriculum or the enrollment center openings, we're leveraging.
The broader stride infrastructure.
For a lot of those other things.
Got it that's helpful. Thank you and congrats on another good quarter.
As a reminder, if you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad.
We'll pause for just a moment to compile any questions.
There are no further questions. This does conclude today's conference call. Thank you for joining and you may now disconnect.
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Yes.
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