Q4 2022 Stride Inc Earnings Call
At the time, we make them and the company assumes no obligation to update any forward looking statements made during this call.
During our prepared remarks, we will answer any questions you may have.
I'll now turn the call over to James James.
Thank you Ken and good afternoon, everyone.
On the heels of completing another tough school year for many we are already in the throes of what is shaping up to be the third school year with a heightened sense of uncertainty.
This is in the backdrop of broader macro economic and geopolitical challenges.
And the Covid pandemic is not yet in our rearview mirror.
All while we have entered into a period of economic uncertainty that we have not seen for over a decade.
And inflation is pacing at its highest rate in over 40 years.
Employment remains strong and the labor market is extremely tight.
We also face the dilemma with gun violence extreme environmental hazards and the ongoing politicizing of education.
And yet.
I see increasing opportunities for companies like ours.
The solutions that we can provide happens to cater to the uncertain world We live in.
Our broad set of offerings provide practical alternatives for our younger generation to gain the skills and tools to succeed in life without the burden of increasing college debt.
So we believe we are in a unique moment in our history to help shape and evolving education landscape and invest behind that evolution to build.
New end markets for our products and services that may not have been available to us pre pandemic.
And in order to do that.
We have an amazing team of employees and partners, Eric Stride that believe in our mission and want to invest in our future.
I'm incredibly grateful to all of these folks who work tirelessly on behalf of customers and students we serve.
Now some highlights from this past year.
We continue to see strong demand.
As demonstrated by our enrolment accounts this year.
In fact, while we began the year, 3% below prior year's enrollment levels, we ended the year almost 2% higher.
We saw particular strength in both EMEA acquisition and retention.
In fact, we've now seen improving in your retention trends for five straight years.
Awareness for the programs that we manage are clearly dramatically higher than pre pandemic.
That translates into high satisfaction, lower churn and better conversion.
Meanwhile, the skills and career planning programs continue to be in high demand from both students and employers.
89% of employers say they are more likely to hire high school graduates students have learned real world skills.
Our career programs effectively and efficiently deliver those very skills to our students.
The data continues to demonstrate that our approach to career education remains the right strategy and we're seeing the results.
This year, we topped $320 million in revenue in our middle and high school business up over 60% from last year as we supported more than 40000 students.
We also continue to see success with our adult learning business.
We finished the year with an annual run rate of revenue over $100 million.
And we exited the year seeing growth rates well above 20%.
I also previously mentioned the recent R. K through 12 curriculum earlier this year.
And I gave an update last quarter to quarter on the improved satisfaction, we have seen in those programs as a result.
I'm pleased to tell you that strike recently won the 2022, Ed Tech Breakthrough award for Courseware solution provider of the year for this new curriculum.
Obviously, a great tribute to the incredible teams behind this and all of the innovation here at strike.
Now for this current fiscal year, it's important to remember that we still have the majority of the season in front of us.
So too early for us to provide formal guidance.
However.
There are a few things I want to highlight for this year.
Our general Education business continues to pace well ahead of pre pandemic levels.
We believe the underlying demand for virtual education remains robust even as the impact from the pandemic has lessened and students have returned to in person classrooms.
For the upcoming year, we opened a new program in West, Virginia and across all of our programs, we're seeing stronger lead in application volumes than last year.
And our career lending business, we continue to see robust demand.
We've opened a new career learning program in Georgia, and we believe that there are significant opportunities for continued growth in our existing programs.
We expect that this business will have strong enrollment growth in fiscal year 'twenty three.
Our overall cohort of re registering students is the largest ever.
Passing last year on a lower starting enrollment number.
Another data point, indicating the strong student and family satisfaction for these programs.
And the teacher shortage remains.
Drive is in a unique position to be able to mitigate the impact because we can often leverage our nationwide scale to support students across the country.
We also began hiring earlier this year to ensure we can support all the.
Programs.
Inflation is real.
And we are not immune to its impact.
We had a somewhat muted impact this past year.
Given a large percentage of our costs are locked in.
But we will feel some of the pressure in the upcoming year.
And the funding environment.
While continuing to be relatively positive.
Well largely lag.
The magnitude of inflation, we are seeing.
We're also beginning to introduce new products and services into the market.
And we believe these new offerings will allow us to provide online educational options to a broader group of learners.
You've probably heard me mention a few of these products over the past year.
Including a suite of teacher professional development offerings.
Their platform for high school students and of K 12 tutoring platform.
All of these products built on our existing assets.
It allow us to quickly enter new and large markets, where we have a distinct competitive advantage or positioning.
Our teacher professional development services.
It looks like Theyre going to be engaged by one of our five largest school districts for this fall.
Our career learning platform will be piloted with a handful of new and existing district clients, including another top 10 of the largest school districts in the country.
And I had previously mentioned that while the teacher shortage is acute.
We are going to try and find ways to use this to our advantage and in fact, we have launched a teacher shortage product into the market that enables us to leverage our scale teacher model to help districts with their shortages.
We just won a multimillion dollar engagement.
I expect more traction here to come in the coming months and we will build on our wins and learned to also sell fast.
The efforts to seed the market with these products that leverage our core capabilities as part of our overall strategy to reach larger end markets for our offerings.
Our goals are to continue to grow into this fiscal year, but also to begin the expansion of our end markets and take advantage of the tumultuous environment, we live in to reach more customers with our products and services.
The long term trends in education, particularly online and digital solutions for K through 12 remained strong.
The past few years have taught us that while uncertainty remains.
Leave opportunity for US is also significant.
Our long range targets remain unchanged and the options in front of us to achieve those targets continue to grow.
I'd now like to turn it over to Donna Blackman drive new CFO .
I know Tim Medina is joining a summary, retiring and he left us with the most important legacy he possibly could.
I'll transition to our new CFO that has been seamless.
Don has already proved more than capable of the task.
To become an invaluable partner to me in a short time.
She will help me guide this company some exciting new opportunities.
And I'll now hand, the call over to Donna Donna.
Thank you Kim and good afternoon, everyone.
I wanted to start off I think in games and the entire stripe onboard with.
Our opportunity to serve at Stryker CFO .
Always recognize the power of education to change lives.
So when the opportunity was presented to me I knew it was the right choice for me personally and professionally.
I believe that strikes focused on career learning coupled with our investments in new innovative products across both general education and.
Really learning.
Well allow us to accelerate.
Our impact on a wider range of learners nationwide.
Company has grown tremendously over my two years here keep accounting officer.
And I believe right on an incredible trajectory.
I am excited to help drive the next chapter of growth.
Now, let's turn to our reported results.
Revenue for the full fiscal year 2022.
One $1.690 billion.
The increase of nine 8% over the prior fiscal year.
Adjusted operating income was $188 $2 million.
Up 16, 6%.
And capital expenditures was 67 6 million, an increase of $15 $3 million as we invested in new products and services to drive future growth.
In each case these results met or beat the expectations, we provided in our guidance last quarter. We're.
We're incredibly proud of our results. This year as we grew even as long as return to in person education absolute Blackhawk.
For the year General education revenue decreased slightly to $1 billion $270 million.
Or <unk>, 5%.
Due to lower enrollments, partially offset by higher revenue per zone.
Again, Ed enrollment finished the year at $143 2000 <unk>.
Eight 6% from last year.
However, this was an improvement over the beginning of the year driven by the strong in your acquisition we've talked about previously.
Revenue per enrollment increased nine 7% to $8104.
Given what we noted about state budgets and policy, we expect revenue per enrollment to improve next year, but not by as much as this year.
<unk> continues to have strong growth, reaching $412 $9 million in revenue for the year up more than 60% in the middle and high school line of revenue.
Enrollments for the year.
41, 9000 up 41, 6% from last year.
Revenue per enrollment was $7640 up 13, 8%.
So realigning the Middle School and high school revenue came in at $321 4 million.
We believe this business.
We will continue to see strong growth in fiscal year 'twenty three as we open new programs and expand our awareness efforts.
We also expect revenue per enrollment to grow in line with general education.
Adult learning finished the year with $91 $5 million in revenue.
Up from $55 8 million last year.
In the fourth quarter adult learning posted a 32% increase in revenue.
Another indication of our strong organic growth we are seeing in this business.
We finished the year with gross margins of 35, 4%.
Up 60 basis points compared to last year.
We were able to mitigate inflationary pressures.
This year and we still believe we are on track to achieve our long term gross margins of 36% to 39% we outlined in our fiscal 2025 targets.
For the year, selling general and administrative expenses.
<unk> hundred $39 $8 million.
Three 6% from fiscal 2021.
The increase in SG&A was driven primarily by the annualized nation of expenses for that one.
Partially mitigated by a decrease in stock based compensation expense.
Stock based compensation expense was $18 $6 million down significantly year over year.
Due to the timing of stock based grants tied to a career learning.
We currently expect stock based compensation expense to increase marginally in fiscal 2023.
Adjusted operating income for the year was $188 2 million up $26 $8 million from last year and exceeding the guidance, we issued last quarter.
Adjusted EBITDA for the year with $273 1 million.
Profitability was driven by continued career learning enrollment growth increases in revenue per enrollment and improving gross margin.
Interest expense totaled $8 $3 million.
We expect similar interest expense for fiscal 2020.
Our full year tax rate was 27, 2%.
In line with the guidance, we provided last quarter.
For fiscal 2023, we expect our tax rate will be in line with what we saw this year.
Diluted earnings per share totaled $2 52.
81.
From fiscal 2021.
Capital expenditures for fiscal 'twenty, two totaled $67 million up $15 $3 million from.
From last fiscal year.
We continue to invest behind organic growth as we position ourselves for incremental long term growth and large addressable market.
Free cash flow defined as cash from operations less capex totaled $139 $3 million.
This is an increase of $57 4 million from last year.
Reflecting the strength of our core business.
Finally, we ended the year with cash and cash equivalents of $389 4 million.
We believe that our strong free cash generation.
And cash position provides financial flexibility to both reinvest organically in our businesses and to pursue strategic disciplined acquisition.
Now I want to turn to fiscal year 2023 to provide some high level commentary on the upcoming year.
Investors are eager to get more information on our fall enrollment however.
However, it is much too early to predict.
Our fiscal year 2023 enrollment.
Therefore.
As is the case each year, we will refrain from providing guidance until we report our first quarter fiscal 2023 results in October .
Nevertheless.
We do have some insight into the year.
As James said, we believe we will continue to grow in fiscal 2020.
This growth will be driven by continued strength in our career learning enrollment and revenue per pupil increases.
However, there are headwinds.
As inflationary pressures, a tight labor market and ongoing supply chain issues continue to impact our business.
We expect some inflationary impact to book instructional costs and SG&A in fiscal year 'twenty three.
While some of the pressure will be offset by increased funding and continuing efficiency efforts. We made the decision to fully fund salary increases for teachers and employees to ensure consistency and remain competitive in the labor market.
This will result in a tightening of our margins in the short term. However, we believe this is the right decision for our students and employees and will benefit us over the longer term.
We strongly believe in the long term growth and demand for online education options.
We're a full time program in general education and career learning.
And the other new products, we have been investing behind.
We talk about these investments over the past year and fiscal 2023 will be the first here. These products are introduced into the market.
It's important to note that many of these first deals will be pilot programs.
And a few select district.
Therefore, we expect revenues will be minimal as we are taking a deliberate approach at launch to ensure long term success.
However, we will incur additional marketing and sales costs, but these products and we anticipate these investments will be largely mitigated by our ongoing efficiency efforts.
We want to make these investments now to ensure the long term success.
All of these new products and we're confident these opportunities will expand our mission impact and addressable market.
To summarize fiscal 2022 was another strong financial year for stride and we anticipate continuing to build off the momentum in Korea, and adult learning and beginning to execute on our new product and services.
Fiscal 2023.
This is an exciting time for stride and I could not be more proud of the stride employees, who contribute so much to the success of the company.
Thank you all for your time I look forward to speaking with you more in the future now I'll turn it over to the operator for Q&A operator.
Yeah.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and we will pause for just a moment to compile the Q&A roster.
Yeah.
And we will take our first question from Jeff Silber with BMO capital markets. Your line is open.
Thank you so much I just wanted to clarify a few things you said in your prepared remarks, and forgive me if I misheard you James.
James I think you said something about the overhaul cohort being larger than ever.
Are you talking about the total cohort, which would be general in education and career learning or was it just specifically just career learning and what time period are we talking about we're talking about currently fiscal 'twenty three.
Yes.
Thank you.
Total overall cohort, meaning both G&A and career.
And that cohort was the ending fiscal 'twenty two cohort.
Eligible to re register for fiscal 'twenty.
Okay. I appreciate you clarifying that thank you.
I think you also used the terms.
Tightening of margins in.
The short term.
What does that mean exactly should we expect the margin percentage to go down should we just expect it to be flattish or just not as up as we've previously seen again, if you can just tell us what you meant by that.
Yes, I think we're probably not ready to give specific guidance on margin.
Think the comment is that.
And we're seeing this obviously across all industries.
Pricing is still impacting us.
Uncertainty agreed impact and at the same time I think as Don indicated we are doing things to offset the impact of inflation I E really.
Drive.
And so.
I think in the short term, we do think that we could see some marginal impact of inflation not ready to quantify right now, but clearly inflation when two thirds of our cost base is compensation related and in a tight labor market and everything everybody else is going on in the country.
Obviously, it's going to have some.
Okay fair enough if I could just sneak in one more.
In slide 10 of your presentation you show your fiscal 'twenty five financial outlook and you compare it to the results that you just incurred for fiscal 'twenty two.
If I look at the General Education revenue line, you're already above the low end of your long term target which is great.
But I'm just curious why do you think youre going to be flattish would it be down over the next three years, if not why not increase the low end of that target. Thanks.
Yes, so it's a great point, Jeff and I think we put these out whatever to November two.
And we sort of want to keep them, where they are for now given just a lot of uncertainty that we see in the marketplace.
Clearly our objective is to continue growing in both general education and career learning and on our current trajectory, we think that we're going to clearly be within the range.
Indicated here the fact that we're already in the range and I think we are going to trend better over time.
That will continue to be in the range and at the appropriate moment.
We will obviously update that.
But I think for now just given all the uncertainty in the market today, we just want to be extra cautious.
Okay, I understand I'll get back in the queue. Thanks, so much.
Okay.
We will take our next question from Stephen Sheldon with William Blair. Your line is open.
Yeah.
Hey, Thanks, Congrats on the results and on the new role Donna.
Wanted to ask about the teacher hiring commentary and I think you said that you're kind of hiring earlier than normal to meet anticipated demand any rough sense, how much your teacher capacity at this point is that relative to last year and maybe.
In some more detail on where you are having some success on the recruiting side or are you. So recruiting and the same channels as you have historically or are you kind of widening.
Reading from.
Yes.
I think so.
Sure.
What I'd say is is that the way that we.
Onboard and hire teachers.
It has multiple facets to the first.
Most important is at.
At the end of each year full year, we're looking to re contract with.
Our existing teachers now.
That in the previous few years because of I think greater uncertainty around how our enrollments were going to play out that created.
Some real stress on our system, particularly in the first year Covid. When we saw the spike happen in a spike happens at a time that was fairly for an update late in equivalent hiring season, and we had a lot of catching up to do the second year still some level of uncertainty and.
The teacher shortage.
They help exacerbate some of the difficulty this year, we had a strong I'd say future base to make offers to and we started earlier in toward in terms of our hiring practices digital channels that we use are still largely the same.
Mr. Donald channel that we use around.
But they are largely the same obviously, we use third parties and things like that to help us.
<unk>.
But we've been much more successful.
Season than we have in the past.
Yes.
Great credit to the team, but it's also I think.
A credit to the overall culture and we're trying to build a dissatisfaction that we're trying to drive with them not just the students in customer that we serve with this overall teacher community that we serve.
Thank you.
We have ongoing opportunity with as you're here.
The teacher is sort of more broadly across the U S. They want more options and.
And I think that and this is no way shape or form.
Be disparaging any other opportunities that <unk> had but I think we do offer some different in opportunity for teachers, who may want a different type of environment, a different type of flexibility than where they're currently can offer them and so I think for the long term frame for us while the teacher shortage may still continue to be acute over the next.
Several years.
Is that in our position I think we have some really nice opportunity to take advantage of the marketplace and teacher hiring.
Got it that's helpful.
And then just as a follow up on the adult learning side really nice sequential step up in revenue there So would love to get some more detail on what's driving that growth and the puts and takes between the different assets in there and then I guess how are you thinking about the potential growth in that business as we think about the next few years.
Yes, I mean listen I mean, generically speaking we have to.
Two pillars of our adult learning, we have sort of the technology skill side.
And then we have the allied healthcare skill side and both experienced.
Growth.
Heading into the end of this past year and I know you have to do a bit careful because the accounting method of the first half of the year. So our actual reported growth is much higher than actual organic growth just because of the way the year on year accounting work, but I think in the back half of the year, where you saw through organic growth.
I think John had mentioned you sold at 30%.
Our growth trajectory and we're seeing strength in both the technology skills training as well as the Allied healthcare Gulfstream, we see.
In every cycle.
This is normally does happen you see other providers, who will talk about this.
In periods of recession people tend to want to get re skill I think we are seeing some nice demand because that's the county with an economy and I think we're going to continue to see strong demand for both of those verticals and.
We saw earlier this year when unemployment was north of $8 million.
25% of those were in those two areas healthcare technology. So I think we're well positioned with these areas of the marketplace to add ongoing strong demand and people want to be skilled in those areas and they see career trajectories in those areas I think we're pretty well positioned and we're actually looking to expand we're looking for we're going to try to expand our foot.
Sprint in terms of the types of offerings like health care. For example, we have about 30 certificates the allied healthcare sphere, Theres about 60 certificate that could be offered and so youll see us extending our footprint a little bit over time.
Don mentioned, we're all.
Always on the hunt for good acquisition.
The balance sheet to do that if they present themselves.
Great. Thank you.
Yeah.
As a reminder, it is star one if you would like to ask a question.
We will take our next question from Greg Parish with Morgan Stanley . Your line is open.
Hey, good evening, Thanks for taking my question and congrats on the very strong result.
I just wanted to unpack the revenue per enrollment and you both talked about a little bit, but I guess, we're going to be up but not at the same magnitude as inflation I guess does that roll forward to 2024, then I mean is the right way to think about it is maybe we will have two years sort of above the sort of long term framework that you have built.
Low current inflation.
Yes.
This is a little bit tricky for a number of reasons that I'll try to unpack alluded 40 here, but.
Revenue per enrollment obviously, you had a number of factors that play into one of which is the overall funding environment, which is obviously mix.
There's a third element for our business.
<unk> is essentially a yield or capture element, meaning of every 100 students that you educate ensuring that we capture the high yield across those 100 that has to do with the way different state forget theyre reporting for funding and so there is also the sort of yield.
And we focus on improving across all three meaning that we're obviously.
Out there trying to convince policymakers to ensure that the funding in our program keeps pace with at least inflation and certainly with other funding mechanisms.
We're always optimizing our mix, but we're looking to help us take advantage of growth long term growth trajectory that may ensue in the short term for a mix obviously.
Within the yield components component, we're doing everything to improve engagement, which generally leads to higher yield.
Lending environment, particularly we've consistently seen over many many years.
Funding for our programs on average.
To increase at a couple of percent a year.
Again mix and other things will change that dynamic in the actual reported per people revenue.
Mt.
What we see for this coming fiscal year.
Fiscal year 'twenty three.
Is that the overall funding.
The environment continues to be strong consistent with prior year I a couple of percent.
Which does lag obviously inflation.
Yes.
It's our belief that over time, it will catch up however, the big caveat to that which is it.
Is at the discretion of each state and subject to the funding in each state.
Sort of state tax base.
And so and if we enter into a prolonged recession.
And if those a tax basis become under pressure.
Still believe that legislators will allocate disproportionate amount of funding to education.
But it could put some pressure on the funding environment going into 2024. So that's why it's hard to tell really without understanding with tax revenues will come in for the coming year.
To enter into a prolonged recession.
But absent sort of those negative pressures, we do believe that there will be some lag, but a catch up.
Because our program that is just like any other than we should I think rightfully as.
Funding for education generally decline.
With.
We will also be a beneficiary of that and we hope that the legislators will see it that way and obviously the appointment of Debra.
Yeah.
Okay, Great that's very helpful color.
Just sort of sticking with sort of macro and recession, so just talking about it.
Could you talk about the career learning businesses, I guess both of them and.
I mean, we haven't really.
Newer assets to you we haven't really seen how these perform and it's a little bit different funding dynamics. How do you. How would you expect them to perform in a recession do you think they hold up as well as Gen. Ed sort of what are the differences what are the puts and takes there.
Yes, so so I think I'm actually just about three things I know you mentioned sort of the two correct.
And I referenced earlier on the adult side, the Allied healthcare and the technology career at pillars, and and I do think that particularly in the verticals in which we operate they will hold up well in a recession I think in previous recessions, we sort of see particularly health care and technology hold up pretty well.
So certainly speak for other providers, but I think just sort of generally in the market the CPUC.
<unk> people talk about getting re skilled in recessionary times and I think that that holds up if we head into another recession prolongs that here.
Expect that to hold up I'll talk about also a third pillar, which is our high school career program and in fact I may be the most bullish.
About our high school career program because.
Long term recession are not high school.
Kids need to get scale, while in high school and we I think have actually seen a tipping point, where we see employers increasingly over the past year or so get on the bandwagon.
Opening their doors to high school graduates.
Increasingly looking for high school graduates with skill set and also increasingly looking to allow for skilled to be.
But train and ladder up wall.
Unemployment.
And I think that bodes really well for the trajectory of our high School program, which is really looking to enable those kid be able to get on that first drilling that lateral with employer and I think it's really going to be an employer driven.
Shift if you will.
In the marketplace and.
I think that combination of factors.
But the tight labor market over the past couple of years.
Really opened the eyes and everybody agrees that the student debt crisis is unsustainable.
You had this confluence of factors.
And I think that we play really well into that complement the factor then I think youre going to see that not just in the career programs that we've had over the past few years has been very successful is that we will be launching additional programs and platforms. I mentioned in my comments, we've got a new career platform that we're going to quality here.
Paul with very large school district, one of the top 10 for the country and and I think we're going to get great traction with that as well over the coming years or so so I think all three of those elements. If you will.
Those are our clear strategy.
<unk> wealth, if you will if there is a prolonged recession.
Hi.
Great.
And I'll just sneak one more here in here if I can just wanted to ask about M&A.
Sort of a bit of a war chest built up and you're investing internally pretty aggressively here I guess from the external.
Aspect I guess asking two ways sort of what are you seeing in terms of valuations have they come down enough is there still sort of a disconnect.
And then sort of the the second aspect is sort of what's your plan are you still sort of digesting the acquisitions that you've made over the last couple of years or are you ready and able to attack the market when you see an opportunity.
Yes so.
Ill address the second piece of that first and come back with valuations, but.
I think we are ready and able right now to do a deal if we see attractive in the marketplace I think that.
We're always on the hunt.
I think we.
One of retain a level of discipline and diligence around how we use them I think the past couple of the metrics.
It actually performed very well in.
In that model.
We will continue to look for deals of that ilk.
<unk>.
And we're always looking.
But.
Those into the first part of the pressure on valuation clearly at least from what we see valuation expectations have come down however.
And we were looking at cognizant.
Third party cut.
A couple of weeks ago about.
That would be in the market. It was actually accrued related asset evaluation expectations oriented around 10 times revenue.
They were.
Marginally profitable.
The margin profitable asset and the process busted and their valuation expectations have come down there that knows somebody over there.
But they've come down to about five to 700.
Frankly is not a price point that I think that Don and I are.
Are willing to pay so while I do think they started to come down I am not sure that in the types of assets that we've seen they've come down far enough for them to make financial sense to us.
<unk>.
So there would have to be an overwhelming strategic opportunity overcome what I think are still some elevated.
Our price in the marketplace today, but we will still continue to look at it I wont be careful.
We'll be continue to be very disciplined about how we look.
But we will still be active in our search.
Great Thanks, and congrats again.
Thank you.
Yes.
As a reminder, it is star one if you would like to ask a question.
Okay.
<unk>.
And there are no further questions at this time, ladies and gentlemen. This concludes today's conference call and we thank you for your participation you may now disconnect.