Q4 2023 Stride Inc Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to the strike, Inc, fourth quarter fiscal 2023 earnings call.
Bonds have 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. Please press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again pet Starwood. Thank you Kim.
Tim Casey Vice President of Investor Relations you May begin your conference.
Thank you and good afternoon, welcome to <unk> fourth quarter earnings call for fiscal year 2023 with me on today's call are <unk>, Chief Executive Officer, and Donald Blackman, Chief Financial Officer.
As a reminder, today's conference call and webcast are accompanied by a presentation that can be found on the <unk> 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. It can also be found on our Investor Relations website.
In addition to historical information. This call May also involve forward looking statements 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 <unk>.
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 will now turn the call over to James James.
Thanks, Tim and good afternoon, everyone.
The past few years have brought change and disruption to help people live work entertain and learn among other things.
There is no doubt to me however, as these challenges and opportunities present themselves core primary education will remain key to our society.
The latest disruption seems to be generative AI and how it will change every aspect of our lives in all facets of the economy, including education.
But we must also recognize that change is a constant and I believe I believe the best organizations embrace change.
I believe that this iteration of change will have a massive impact on our industry.
First and foremost I think we need to appreciate that K through 12 education as we know it today will not be going away anytime soon.
In fact, I think AI has the ability to transform K 12 education in a very positive way.
We will enable our students to accelerate at personalize their learning in ways, we have dreamed about.
But not really achieved previously.
For example.
We considered the training and education required to become a computer engineer well.
Maybe we should be teaching some of those skills in high school, but not in terms of computer programming, but instead in terms of navigating the functional output of the code that AI will provide for them.
Since <unk> was founded over 20 years ago. It has been at the forefront of personalized learning for students.
And AI has the ability to personalize student feedback assessments.
In content at the individual level like nothing before.
AI powered content can provide customized lessens the students based on their learning style and free up teachers to spend more time with students and less time on administrative tasks.
And giving teachers more time to actually teach will allow them to spend individual time of students and provide a human connection.
The relationships with teachers build the students are incredibly important for student outcomes.
The AI powered learning will allow those to flourish.
Ultimately I believe that giving teachers and incredible AI tool kit will be beneficial for both students and teachers.
So how to strike fit into the developing AI landscape.
For starters, we are embracing AI.
Both for internal efficiency gains as well as for external customer facing products.
We don't have any announcements to make today the landscape of AI is quickly evolving and we want to be sure to take a measured and long term approach and not just hop on the bandwagon for headline sake.
We will provide a more in depth view on how we are approaching AI at an upcoming investor day.
We do need to recognize a couple of things in our approach.
First is that students and teachers will be adopting generative AI, regardless of what the establishment stances.
Recent surveys already confronts.
Our job will be to ensure that we provide interactive learning experiences.
Build up the durable skills students will need to adapt to the evolving demands of the marketplace.
Ensuring we prepare students with the skills they can take with them through their entire careers is incredibly important.
We've already been applying AI internally to supplement many of the ongoing efficiency efforts, we've talked about before.
We believe we can continue to increase productivity and automate many of the routine administrative tasks for both teachers and corporate employees.
We will also continue to improve the user experience with AI powered chatbot, while removing friction in our admissions and enrollment funnel.
It should also allow us to generate content from assessments to practice materials to full courses much faster than previously.
Okay.
We will begin to rollout additional personalized learning tools to further strike of student outcomes.
We can use AI powered programs to track progress and intervene earlier when a student is struggling.
This will allow us to provide personalized learning at greater scale and real time, resulting in stronger student outcomes.
Teachers will remain core to our offerings.
Well, it's good at following instructions and completing tasks you need teachers foster creativity and develop critical thinking skills.
Teachers can encourage students to explore new ideas solve problems use data create models and provide mentorship and ways AI cannot.
No.
I also want to talk about our improved operations and execution from this year and the results that demonstrate the success we've had.
It was a record year for us on a number of fronts we.
We had record revenue adjusted operating income and adjusted EBITDA.
We topped $700 million in career learning revenue, including more than $100 million in our adult learning business both records.
We had our best in year retention ever.
We saw more demand in year than ever before finishing the year with more enrollments than we started with for the first time in our over 20 year history.
Our earnings per share was also a record at almost $3 per share.
While we rarely talk about EPS, we trade at a p/e ratio.
In the low teens for.
For a company that is growing double digits for multiple years is a very attractive future growth profile and tab. We believe that is a fairly low multiple and represents a great value.
These results reinforce our belief that families view us as an option when they feel like their current schools not delivering what they need and increasingly families now recognize that they have a choice when it comes to their child's education.
And they are choosing us.
And when families come to us they remain incredibly satisfied I've mentioned, our net promoter score previously and this year, we achieved a net promoter score of 68 for our schools.
Of all of our achievements, our net promoter score might be the one I'm most impressed with.
It shows that our efforts are translating to a more satisfied customer.
And all of these metrics indicate we are delivering for our customers.
And they have led to improving in your retention, which is at its highest level ever.
We also won some incredible awards for our business and content this year.
We won the Ed Tech Breakthrough award for online education solution provider of the year.
We captured a bronze Stevie award from the American business Awards for our Minecraft world's education product.
Gold Stevie for Med searches human anatomy of course.
We're also shortlist for Ed Tech company of the year by Global Business Tech Awards.
And the list goes on and on top of all the accolades. We received we continue to launch innovative partnerships and programs across our schools.
Net search and Coursera launched a partnership to bring in demand health care courses to Coursera is global Lars we deepened our relationship with southern New Hampshire University to lower the cost of tuition for graduates of eligible stride powered programs.
And we announced a new initiative at our career program in Colorado to offer a free and reduced lunch program to all eligible students.
This will allow these students to get access to nutritious meals, while still learning from home on strike.
These are just to name a few.
All of the incredible work that the team has put in to improve our curriculum continue to offer innovative and engaging partnerships is paying off.
Yes, I realize everybody's also wanted to hear about Howard fall enrollment season is shaping up and as I mentioned earlier. This initial data comes with the caveat that it is still very early on enrollment season.
We've made some good progress and even though it's early we've seen some positive indications.
A couple of examples.
We launched in U K 12 Dot Com website.
Which is our consumer site for enrollments and we're seeing some initial positive conversion trends from that site.
We've also improved our messaging and incorporated some generative AI to enable us to more rapidly deploy and test different messaging.
Additionally, our strong in your enrollment and retention in fiscal year 'twenty three means that we finished the year in a good position to retain students for the upcoming school year.
Given this data we are well positioned to return to enrollment growth for the first time since the pandemic.
I became CEO I said my number one goal is to ensure we grow every year and I believe we are currently on track to do so.
Before I conclude I want to reiterate our singular position.
We are here to embrace change and innovation, we want to disrupt the status quo.
Stride can change the future.
Thank you so much for your time today, and I'll turn the call over to Donna Donna.
Thank you James and good afternoon, everyone.
I'll start with a recap of our reported results for the full fiscal year.
Revenue for the year was $1.837 billion.
An increase of 9% over the prior fiscal year.
Adjusted operating income was $201 million.
7% and.
Capital expenditures were $66 5 million.
A slight decrease from last year.
Once again, we were able to beat the expectations, we provided in our guidance last quarter for revenue and profitability.
I'm incredibly proud of our results.
We were able to deliver revenue and profitability growth, even while facing inflationary headwinds.
More importantly, we did this while continuing to deliver strong academic results for the students we serve.
Let me provide more detail on our results for the year.
Korea learning remains a strong growth driver for increasing more than 70% this year to $706 million.
In our middle and high school business revenue totaled $586 $8 million on enrollments for the year of 65 9000.
Enrollments were up 57% from last year.
Revenue per enrollment finished the year up 16, 3%.
$8885.
Adult learning revenue came in at $119 2 million up over 30% from last year.
General Education revenues finished the year with revenue of $1 billion $131 million down.
Down 11% from last year.
Janet enrollments for the year were $112 3000.
Revenue per enrollment increased two 9200 with a $70 up 14, 4% from last year.
We finished the year with gross margins at 35, 2% just slightly down from last year.
We were able to significantly mitigate inflationary pressures this year and believe there are still opportunities for additional margin improvement in the coming years.
We are still confident we can achieve our long term gross margin targets of 36% to 39% by 2025.
For the year, selling general and administrative expenses were $481 6 million.
Nine 5% from last year.
This increase was largely driven by our growth in adult <unk> as well as investments in new product and additional marketing.
Stock based compensation expense was $23 million.
Expense totaled $8 $4 million.
Our full year tax rate was 26, 3%.
Adjusted operating income for the year with $201 million up $12 9 million from last year.
Adjusted EBITDA for the year with $296 $2 million.
Up $23 1 million.
Profitability increases were driven by increases in revenue per enrollment.
She is the efforts and growth in adult learning.
Diluted earnings per share totaled $2 97 up 45%.
2022.
Capital expenditures for the year totaled $66 5 million.
Free cash flow defined as cash from operations less capex totaled $136 6 million.
This is a slight decrease from last year, mostly attributable to timing.
Ended the year with cash and cash equivalents of $410 $8 million.
Overall fiscal year 2023 was a strong year for strikes in the face of strong inflationary headwinds and a challenging enrollment comparison to the pandemic driven years of 2022 and 2021, we were still able to grow both revenue and profitability.
All while continuing to deliver strong student outcomes and finishing the year with more enrollments than we began with.
First in the company's history.
As you know each year at this time, we get asked about current enrollment trends and we always say, it's too early to predict our overall enrollments for the current year.
James provided some early indicators, we're looking at.
But I think it's incredibly important to understand that historically August and September are our busiest month.
This means it's an incredibly busy time for stride and back there remains some uncertainty around enrollment for the upcoming school year.
So while the current trends lead us to believe we will increase overall enrollment from last year.
There's still a lot of work to be done.
With that in mind as we typically do we will wait to provide formal guidance. When we report our first quarter results in October .
However, I do want to provide some initial thoughts.
With the current early enrollment and revenue per enrollment trends. We believe we are well positioned to continue to grow both revenue and profitability for the full year.
Revenue per enrollment will continue to be favorable but not at the rate we saw last year.
We think it will be more aligned with the historical trend of between one and 3%.
Revenue and profit seasonality should be in line with historical trends, excluding the pandemic years of 2022 and 2021.
We think that gross margin should improve next year.
Driven by the amortization of some of the efficiencies we put in place this year.
SG&A expenses and Capex spend will increase slightly as we continued to invest in growth drivers.
Our interest expense tax rate and stock based compensation should be similar to fiscal year 'twenty three.
Taken together, we anticipate another year of improving profitability keeping us on track to achieve our fiscal year 2025 target.
I look forward to providing further additional information on our long term trajectory during our fall Investor day.
Thank you all for your time today now I'll turn it over to the operator for Q&A operator.
At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from the line of Jeff Silber with BMO capital markets. Your line is open.
Thank you so much I just wanted to clarify something I think you said that.
Again, I know it's early but.
That youll be returning overall enrollment growth in fiscal 'twenty four that was not necessarily a comment by the different segments Gen. Ed versus career learning. We're just talking about the total pie is that correct.
That's correct.
Okay, great. Thank you for clarifying that.
So again, I know youre, not giving specific numbers, but I think on prior calls in August you've talked a little bit more about some of the early enrollment indicators tracking in terms of inquiries et cetera, I don't know if theres any more color you can give like you've done in prior years.
Yeah, So I think.
Generally speaking we.
We consider demand.
As really a function of our application volumes.
Year over year, so far through this enrollment season.
Our application volumes are stronger than last year.
That's one indicator that make us believe that our enrollments are going to grow.
If you actually parse the commentary from last August a little bit.
I was I think pretty careful about saying I thought we were going to grow this fiscal year.
I actually didn't refer to enrollment growth for this fiscal year.
I am referring to enrollment growth for this fiscal year. So I think that is a little bit different than last year.
We continue to see.
Within the demand.
We continue to see strong conversion, which I think indicates that we're able to generate demand that is.
I think the higher quality demand.
And so we continue to see improvements there.
And I think overall, we're feeling as we sit here today, we feel we feel pretty good about enrollment growth for the fall.
The one thing I'd add.
One thing to that.
Still and as James mentioned, we're still like very early in the process.
Enrollment season.
But one thing.
I talked about I've been talking about all year is that we had strong in year enrollment growth. This year and so we ended the year with a strong.
Retention in year enrollment and so we're starting from a stronger place again still very early but that's something else that gives us a little bit.
Get into why we think we'll grow enrollment next year.
Alright, Thats really helpful. If I can just sneak one more in I'm James I really appreciate your initial discussion about the.
The impact on gender of generated.
And again I know, it's way too early but if you can give us some insight in terms of things that we might be seeing being rolled out over the next year or two whether it's internally or externally I think that'll be helpful.
Yeah, So listen I think.
Yes.
Theres a company out there that you cover that isn't.
Thinking about how generative AI can impact their business either from efficiency internal standpoint, or from an external product standpoint.
I think we.
We believe that it's going to impact us positively on both fronts, meaning internal efficiency as well as.
Sort of external product facing stuff.
I think we're big believers in.
The positive impact generative AI can have on the K 12 online school experience.
And.
Sort of give you a couple of examples of how we're thinking that these aren't products necessary that we're going to be rolling out next year or two but how we're thinking about it.
Our teachers.
I think.
I believe are going to continue to be at the core of our product at good teaching.
I don't think in any near term.
Going to get.
Displaced by gender to AI.
The connections that teachers can build with students I don't think we are at the point, where Jennifer IC generative AI being able to replace what I do see is generative AI being able to replace a lot of the administrative work that teachers do and therefore will allow them to spend more.
Direct time with students.
Whether thats grading papers.
Whether that's administrative.
Tasks around.
Uh huh.
Taking attendance and things like that process.
But but theres certainly a lot of efficiency that we can rollout for our teachers that will directly impact the customer experience Aida students.
And so I think we're focusing on a lot of those.
But I think we're also I think we're very clear in our commitment to delivering a T shirt focused experience as well so.
I think where we stand today, we're committed to our teachers, we believe a teacher a teacher led experience is important.
And I think we can make that that job easier for the teachers and therefore the experience for the students better on the backend.
I mean, I think we're already starting to see them in ways that most people won't see.
Huge benefits in content creation, whether thats.
Curriculum content creation of marketing content creation, but content creation in general we're starting to see huge efficiencies I think.
The whole customer journey of getting enrolled.
I think we start to see already some nice benefits in that experience and so.
We have a.
Well I say, we I have sort of an internal.
Our approach to this I call. It modern day Haq, which just gets everybody involved in.
If you are familiar with like sort of hackathons in the technology space.
AI gives us the ability for basically every employee to participate in generative AI and where did they get hacked through solutions for problems that we have in the company and so.
We've introduced a sort of modern day half concept. So we're crowd sourcing within our own company and ability to really find ways to solve problems.
Using generative AI. So I think we're only at the very very beginning stages and like I said I don't think any big announcements today to make but we're very excited about the prospect of what it can do for our business in positive ways that are and help us grow.
Your next question comes from the line of Greg Paris with Morgan Stanley . Your line is open.
Hey, good evening, Thanks for taking my question.
I'll spare you the enrollment question I think you covered.
Covered it well.
I was wondering about marketing this year versus prior years. Thank.
Thank you talked on a few calls about being a little bit more aggressive than you have in the past also maybe some missteps last summer.
And you highlighted a few in your prepared remarks, utilizing AI, if you could unpack that a little bit and talk about what youre doing different this summer.
Some of the early successes you might be seeing.
Yeah, I think so last year.
We had some operational missteps in our marketing program.
And and that's on me.
I think some of some of our marketing missteps were actually around discipline.
And.
And being disciplined about where we invest how we invest which channels we invest in.
I think when we see volumes softening, having the discipline to hold the course on making good investments as opposed to just trying to sort of train spray in house, who we get higher volumes.
I think that.
This year.
You've done a lot of credit I think she's really instilled in this company an incredible amount of discipline.
And we're seeing that we get better returns when we're more disciplined around how we spent operationally and so I think thats a big improvement we made over last year.
As dawn I keep saying, we still have a long way to go in the season.
And I think we have to continue to stay focused and disciplined.
All marketing is to us actually our investments.
And their investments for return.
And so we're trying to get the right customers.
We're trying to send the right messages.
I think the creative side of it we've been able to use generative AI for some of our creative messaging I think thats been.
Great learning experience for us it happens to also I think have been pretty productive for us.
So I think we'll continue to get better at it I think we definitely this year operationally have taken an incremental step forward in our marketing programs.
But I also think we have a long way to go. So I think we can continue to get better, but we definitely I think where we've got more discipline and we're investing for better return.
There's got to me I think that are creative out there I think our fundamental platform for AB testing.
It's gotten better so a lot of a lot of sort of incremental improvements that we're seeing greater discipline.
And I think it's going to translate like sort of over time incrementally better over the next couple of years as well.
Great that's helpful.
I wanted to ask.
I know, it's tough to answer, but a competitor of yours connections loss launched career pathways, which I think is a.
Of flattery, given the success that you've had in that business, but how does that change if at all the competitive dynamic and then how do you sort of maintain differentiation in the market to districts that you serve.
Yes, I think listen at least for as long as I've been with the company I don't think it's any I don't think its any secret I hope, it's not a secret that connection this has been.
A very I think a strong player.
In the marketplace I think they tend to be sort of a fast follower.
That strategy is really actually played well for them.
They've been able to avoid maybe some of the mistakes that we make is as a little bit more of the pioneer.
I have a tremendous amount of respect for what they're doing in the marketplace and I think.
This marketplace has opportunity for both of us.
I think it's a growing marketplace.
I think then being in the market with us.
Helps us be better, but I think theres a lot of other players besides connections as well. So I think that just the marketplace really has grown and blossomed and evolved.
But I think connections is good for the marketplace and as well as all the other competitors out there and I think there's a lot of them.
And so.
So we're excited for what connections is doing we're excited for the fact that connections. This following us and taking are following our lead in many aspects. It validates what we're doing I think in many aspects and I think the market is big enough and rich enough for all of us.
Great. Thanks for that and then I'll just slip one more in maybe if you can give us an update on staffing capacity heading into the year and.
And then last year, you sort of gave us some color on wages. There I don't know if its too early to do that as well. Thanks.
No I think.
Staffing has been.
I think in the industry a struggle I think you'll continue to hear about staffing shortages.
Teacher shortages school districts are still struggling.
With that I think we're a little bit better positioned I think we have over the past couple of years continued to be a little bit better positioned.
To find that we are now increasingly an alternative for teachers, who may want to stay in the profession, but may be a little frustrated with westar.
The dynamics of where they are.
So I think it can it can be a competitive long term advantage for us.
And I think that what we offer teachers.
I think is.
Compelling.
They get to have.
A degree of.
Opportunity.
Innovation they.
They get to participate in a lot of things. We have teachers also that has incredible career trajectories with us.
Teachers that are allowed to focus on the things that are meaningful to them and not get distracted.
With other issues with us.
So I think we offer a real competitive advantage in the tissue marketplace and I think it's a sustained advantage that we're going to have as we introduce more tools generative AI tools for teachers I think it will continue we see a lot of variability in the market around <unk>.
Districts are embracing generative AI and I think that variability plays to our advantage because we will embrace it for our teachers.
So I'm pretty bullish about the tissue marketplace for us and where we sit with with teachers and to answer your question about the wages and so.
As you know we saw a big increase in outrageous.
Last year in line with inflation.
Once we were largely able to mitigate some efficiency efforts that we put forth. We think we'll still see some increases in wages. This year certainly not to the extent that we did last year and will continue to.
To deploy efficiency efforts to mitigate the impact of those increases.
Okay very helpful. Thank you.
Yes.
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.
Your next question comes from the line of Stephen Sheldon with William Blair. Your line is open.
Hey, Thanks, Nice work to end the year and I appreciate the early enrollment commentary it's very helpful.
Yes, more qualitatively what have you seen in terms of enrollment demand heading into the fall specifically for career learning programs and I'd also be curious if you've seen anything notable over the last year or so about the verticals that students are pursuing within those programs.
For example, our some past like <unk> or health care way more frequently being pursued than others, just curious what youre seeing there.
Yes, so I think qualitatively, we continue to see great demand for our current programs Theres a lot of interest I think I think that.
The the theme.
Yes.
I think being a south by a lot of corporates now that college degrees are not necessarily required skills are what's required for a lot of jobs a lot of high paying jobs a lot of what formerly I think we thought we thought it was more white collar jobs.
I think that theme is resonating and increasingly.
We do continue to see.
Lot of strength in the health care field.
<unk>, particularly within our adult businesses I do think that.
The technology fields are seeing some softening I think if you look.
Sort of that traffic.
<unk> and things like that and Google analytics stuff around search terms.
You're starting to see softening in some of the sort of.
Technology related.
<unk> I think that's industry wide I think that we are holding up probably better than many in the space, but I think we are seeing some softening I don't think that really.
So small to our overall business that I don't think it really will impact as much long term.
But we certainly I think the industry as a whole and on the particularly on the adult certification bootcamp type side is probably seeing a little bit of softness, but we've got two of the premier assets. There. They continue to perform well, we're still bullish about our ability to to performing I would say bullish to outperform deals.
Paul market.
Got it that's very helpful. And then James I think you've been optimistic about more states potentially open up to allow virtual upturn. It at the choice in K through 12, so it'd be great to get an update on that front and if you still think there could be more states that open up too.
Alright solutions over over the next few years as we look out.
Yes for sure.
And I think the way that our thinking has evolved on the state question.
I think it's very positive for us, meaning it used to be that our ability to interstate was.
Somewhat.
One or two dimensional.
And I think that now the ability for us to look at states in a more multi dimensional way.
Over the next couple of years going to bear some fruit.
It could be in a unique district partnership.
That we haven't deployed before.
Definitely we see a lot more state demand that state demand is materializing in sort of some different ways, though and so I think we're going to have to take advantage of that so I am bullish that over the next few years, we will open up more states.
Great and then Don I just wanted to ask one question on the initial fiscal 2024 comments I think you said, you expect SG&A and Capex to increase slightly.
So I just want to clarify on that comment is that more about absolute dollars, increasing slightly or more about looking at those as a percentage of revenue.
Absolute dollars.
Great. Thank you.
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.
Pause for just a moment to compile any remaining questions.
Okay.
Okay.
There are no further questions. This does conclude today's conference call. Thank you very much for joining you may now disconnect.
Okay.
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Yes.
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