Q2 2024 Stride Inc Earnings Call

Participants

Tim Casey; Vice President - Investor Relations; Stride Inc

Donna Blackman; Chief Financial Officer; Stride Inc

Presentation

Ladies and gentlemen, thank you for standing by, and welcome to the Stride, Inc. second-quarter fiscal 2024 earnings call. (Operator Instructions)

Tim Casey

Thank you, and good afternoon. Welcome to Stride's second quarter earnings call for fiscal year 2024. With me on today's call are James Rhyu, Chief Executive Officer, and Donna Blackman, Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a presentation that can be found on the Stride Investor Relations website.
Please be advised that today's 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 on our Investor Relations 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 will now turn the call over to James. James?

And we might see in year given the volatility over the past few years, we have been convinced that the market has moved in our direction and then we were not going to fall back to pre-pandemic levels, but there still remains a question of whether we could surpass those pandemic highs.
Well, we ended the second quarter with 196,500 enrollments for an all time record surpassing our pandemic level times. We saw enrollment growth in both our Career Learning and general education program and strength in both new enrollment and retention. We have the largest cohort of new enrollment that we've ever seen and Americans continue to believe that school choice is good for the education system. A recent poll by you guys released this fall showed 84% support giving every child in the U.S. The ability to tell the public school in their state that best meet their needs regardless of where they live. And the results are clear and it's what we've been hearing for years and one choice, they want to be able to choose a school that will meet the unique needs of their child. They want to be able to change their child's future. It also continues to imports and support our move into the Caribbean space. This fall freshmen enrollment in four year institutions for 18 to EUR20 decline by 5.2%. And the reason for this decline was at this age group is increasingly choosing to enroll in community college or certificate programs. Students are explicitly looking for short-term program that have a direct connection to the workforce. While we're still working on driving incremental demand to our current programs. Data like this supports our decision to focus on certificates and career pathways in fast growing in-demand careers series in our programs and graduate high school, knowing they've got the skills to go directly into the workforce for the two attendant post-secondary institutions.
There's also continuing support for our new products. In November, I outlined our K-12 tutoring product along with some of the demand drivers and support our entrance into the market study out of Texas showed that caters to students who received individual virtual tutoring during last school year, demonstrating higher reading test scores by year end and Virginia launched a statewide high dosage tutoring efforts, part of the $400 million investment in education to recover from academic clients. We know that our food offering, giving states certified teachers can be part of the solution to the nation's learning loss and help drive student success.
Taken together, I remain as excited about Strides ability to change the future for students as I ever have this, the market conditions are right for a new innovator like stride. We continue to drive success across multiple markets. This call marks the end of my 3rd year at CEOS. And as we continue to achieve new enrollment and financial records, I still see a long runway in pharma a couple of highlights I'd like to point out since I was appointed CEO, gross margins are on pace to expand 300 basis points plus or minus trailing 12 month reported EPS and reported operating income are both up three times the levels prior to my appointment as CEO. We've got the right team in place and are executing against the strategy that we've previously outlined.
Thank you, and I will now turn the call over to Donna.

Donna Blackman

Thanks, James, and good evening. I know James already discussed our enrollment numbers, but I think it's important to put it into perspective, is it two quarters ago that we were fielding questions about whether we could return to year-over-year enrollment growth following the pandemic. And now we're talking about exceeding pandemic times speaks to the resiliency of our offerings and the sustained demand for alternative educational options. We are proud to be able to give families a choice and we believe that the trends point to a long term growth in our business, all of them have resulted in the first quarter in our history that we achieved over half $1 billion in revenues as we updated our revenue guidance for the full year, such that now it exceeds 2 billion at the midpoint.
Turning to our quarterly results, we reported revenue of 504.9 million, an increase of 10% from the second quarter of fiscal year 2020. Adjusted operating income of 94.9 million, up from 76.3 million or 24% from the same period last year. Earnings per share of $1.54, up $0.35 from last year. And capital expenditure of 12.7 million, down slightly year over year. Career Learning, middle and high school revenue grew 7% to 165.1 million This performance was driven by enrollment growth of 9% year over year, somewhat offset by a slight decline in revenue per enrollment. During the quarter, enrollment grew over 3,000 continuing the in-year enrollment growth trends we saw last year and our general education program revenue was 313.9 billion, up 14% from last year. This strength was also driven by continued enrollment growth in the quarter with enrollment finishing the quarter up 5,400 from the end of September and average enrollment growth of 9% last year, revenue per enrollment for GeneDx increased 8%. So we continue to see strength in funding for education. And while we saw some timing impacts at our Career Learning revenue per enrollments. We still expect to finish the year with revenue per enrollment growth of between 4% and 6%, but both lines of business, our Delta business revenue declined 4 million to 25.9 million on the weakness in our tech business we discussed previously. Medsurg continues to perform well. Growth in that business did not fully offset the declines in RPK gross margin for the quarter was 39.8%. It's up 270 basis points from last year, but still seeing the effects of the efficiency efforts. We put into place last year and continue to implement given the timing of the impact last year, we don't expect gross margin increases to be a strong year over year in the second half, we still expect to see gross margins improve by 200 to 250 basis points for the full year. Selling, general and administrative expenses increased 15% $116.9 million. Stock-based compensation for the quarter was 7.6 million. We now expect to finish the year with stock-based compensation in the range of 29 to 33 million. Adjusted operating income for the quarter was 94.9 million, up 24% from last year. Adjusted EBITDA was $118.3 million. Interest expense for the quarter was $2 million. Our effective tax rate for the quarter was 24.9% and diluted earnings per share for the quarter was $1.64.
Yes, turning to our balance sheet and cash flow, capital expenditures for the quarter were $12.7 million, down slightly from last year's free cash flow, defined as cash from operations less CapEx was 160.6 million, up 13.2 million from the prior year period. As we finished the quarter with cash and cash equivalents of $354.4 million. Based on the strength of our enrollments, we are raising our full year revenue and profit guidance, and we now expect revenue in the range of 1.99 to 2.04 billion, adjusted operating income between 265 and $285 million, capital expenditures between 60 and 65 million and an effective tax rate between 25% and 27%. For the third quarter, we are forecasting revenue in the range of 500 to 520 million, adjusted operating income between 85 and $95 million and capital expenditures between 14 and 17.
Thank you for your time. And now I'll turn it over to the operator for Q&A. Operator?

Question and Answer Session

Operator

(Operator Instructions) Greg Parrish, Morgan Stanley.

Yes, thank you, and congrats on a strong quarter. I guess solid margin, really good expense management again, you unpack the margin beat. Is there anything to call out on the expense management side? Were you able to outperform your expectation going into the quarter? And then related if you continue on that trajectory, there's upside to the full year at least the way I look at it. So is there anything timing related or any reason why the back half margin won't be quite as strong as second quarter.

So on our gross margin, some of the things that we talked about last year, we are we are continuing to do this year. I think you heard me talk about last quarter just the timing of when we the teacher hiring had an impact on our margins, but a much better job with that hiring process and the material that we send out using more digital using innovation and technology, using our size and scale, all the things that we talked about, we continue to do that. And as you might recall, I spent a lot of time talking about gross margins last year and I said the changes we were making were structural changes and that still holds true in terms of the rest of the year, the year over year comparison won't be as favorable one because some of those efforts we put into place have put into place later in later in the year. So from a comparison perspective, you won't see that. And then also in Q4, we typically have more sort of a school level costs like state testing and some restricted funding that we have to spend in Q4. And so that's where you might see Q4 gross margin typically not as high as you might see in Q2 and Q3.

Okay, great. Thank you. That's helpful. And I guess it sounds like you ended at one 96, everything was trending positive throughout the quarter. So I think I know the answer, but I think we're asking this quarterly now. But so far at 23 days in January, they're seeing similar trends. So it sounds like and I think third quarter. It's harder to as during the second quarter by those things still trending upwards as seen through January here so far.

And I think we're not going to talk about the specifics of January today, but from January so far looks pretty good. I think what you said is right, meaning it's harder visits, less spot, even opening in Q three, a lot of the enrollment was actually shut down in the quarter. So the ability even had kids are sort of closes during the quarter, um, you know, but I think just from a funnel perspective, we continue to like what we see.
I'm going to burn off by then it adds about $1 and I know it's a small, it's five, 6% of revenue last quarter. I talked a little bit about macro headwinds, but seems like I don't know if there's something shipped in the quarter or was there sort of a big client loss or anything to call out there? And then and how long that's going to last for maybe just macro dependent on when you expect this to get back to how it's growing in the past.
Yes.
I think on the macro headwinds continue, I think you'll see that across the industry on. So I don't think we're immune to what's happening across the industry. And from a from a dollar perspective, I think that certainly through the rest of the year, I would expect the headwinds to continue on next year. I think we have to see Palm. We're excited. I think the difference with our business on the adult learning than the industry or sort of the broader industry fuel is on, is our or a little bit of a tale of two cities. We have the technology base stuff, the boot camp stuff, which again, macro headwinds. I think everybody is going to see that everybody is seeing that. But we have our health care side, which continues to perform well. And as that continues to grow and we think perform well at some point, it will offset I think any declines in the other side. So whether that's next year or not remains to be seen, but I don't think either way it won't. It won't be a material impact up or down and for next year.

Fair enough. Thank you very much. Congrats again.

Operator

Jeff Silber, BMO Capital Markets.

Thank you so much. I wanted to focus on the different segments. I'm going to start with general education from. I know you have not broken it out. This is a separate segment for too many years. But kind of looking back historically, I think this is the 1st year we've seen sequential enrollment growth in GeneDx between the first quarter and the second quarter. I know you cited some improvements in retention, but if we can get a little bit more color on what was actually a nice surprise there?

Yes, I think generally speaking, um, we did we did find a sequential improvement. That is I think you're right, generally speaking, Q1 to Q2 by almost every year. We'll see a decline. A lot of that happens just because some the September period, the end of Q one, we get on a little bit of actually a push of enrollments because a lot of families on sort of adjust, if you will, what they're trying to do in September. And many of those adjustments are sort of come to us. And then you sort of have this tail off in October and November and into December. Obviously, we had some we were able to on the reverse that for this year sequentially. And I think part of it. We had strong execution. I think it remains to be seen whether there's a macro trend here for future years or not, we definitely see improved execution. And so I think that helped contribute to come to a stronger second quarter. We see funnel metrics like conversion and things like that continuing to improve. So and I think that's really our execution which is improving. I think we still have a ways to go to continue improving. And Tom, but I just there's not enough data that we can see. I think that would suggest that the sequential trend is a macro sort of ongoing tailwind Q1 to Q2.

Okay. That's helpful. I appreciate it. If I could move on to Career Learning and let me focus on middle high school, although we did see growth on a year-over-year basis, the growth did slow. And again, we don't have a lot of historical data, but I think it's the first time that we've seen single digit year-over-year growth in that segment. And so it looks like it did slow. Can we talk about what was going on there?

Yes, I mean, I think from what we have is single digit, we're in the nine plus percent range. So like yes, I mean single digit, we've got I think our business is starting to scale. And we have a business that now in some respects you it's the same store comp because we're not adding a whole lot of new programs. And I think for the year will probably still be we'll still probably average out into a double-digit growth. And so I think that for us, I think that if we continue at that sort of low double digit growth. We're going to be pretty happy on. But yes, there's a little bit of mix, a little bit of yield. We're talking on the margin here and the difference between 9% and 10% is a few hundred. Kids is several hundred kids. So we're talking on the margins here a little bit.
Yes, I was actually referring to revenue. So I know you have revenue per student in other, let's say, Russia there.

Donna Blackman

So that's okay. No worries on.

But I guess I'm wondering from your answer that is valid as well.

Okay. I'll jump back in. Thanks so much.

Operator

(Operator Instructions) Stephen Sheldon, William Blair.

And thanks for taking my questions and really nice results here once again, wanted to start with something that that I've been getting asked about a lot more for investment, think I'm sure you guys have to. But what does the opportunity look like to take your career learning solutions into local school districts? I think you've piloted some programs like that before where students take their core classes in person locally and then take their elective online and your career learning programs. Do you think it's a larger opportunity for us to pursue in the next few years?
And what that means for your team?

Yes.
So I think the short answer is, is it a larger opportunity? Yes, I think part of the part of the issue is going to be just with the way that districts across the country will embrace change. And our strategy, I think does present an opportunity to get into those districts with our Career Learning Program. We will do it in a multipronged way. Meaning one is will offer them literally the same program that we give our virtual students from, which I think can be compelling for some districts will also take a little bit of a platform strategy and some offer. It's sort of bomb, but a little bit of a light solution, if you will, through our Tallo platform that will allow for some districts to do a little bit more self-serve. It'll be a little bit more teacher light. It'll be less on sort of instructor-led, et cetera. And but it will still offer them what we think will be a best-in-class platform solution for career learning at the high school level on. So that is I mean, we're probably in a beta phase of that upgrade to our platform. And I don't think just given the selling cycle, you'll see much traction for this coming fall just because the selling season for districts is sort of going to get behind us pretty are pretty quickly on, but I would expect us to be offering a little bit more robustly in the following fall off from a platform perspective. But I think the short answer to your original question, yes, it does offer it does offer a good longer term opportunity. I just don't think we're going to see it in the next 12 months.

Got it. Makes a lot of sense.
And then just quickly on the Career Learning, the revenue per enrollment, I'm positive, I missed this, but within mainly lower due to the mix of students by state, anything else to call out there in terms of that contract and a bit year over year?
I know that the comp there was also pretty difficult. And then Dan, I think you reaffirmed expectations for revenue per student or enrollment to be 4% to 6% and the total as we talked about last quarter, are trends that are kind of coming in as you would have expected so far this year.

And Tom, I'll answer part of the second first?
Yes, we expect our revenue per enrollment for gen ed and career to be up 46%. We see a decline in the career for this quarter.
Yes, partly due due to the mix. As you know, overall, our our revenue per enrollment with GeneDx and Korea combined was up over 5%. You may recall that last year at this quarter, we talked about some of the upside that we saw in the revenue per enrollment for Korea was due to timing. So this is just the offset of that that makes for a tougher comparison.

Got it. That makes sense.
And then just last one, maybe just when do you think you could start building a separate marketing funnel for the career learning programs I know this isn't something you've done historically and but you've talked about it more as an opportunity.
Has that started yet? And if not, when could that become a bigger initiative

Yes, I'll say in some respects, we've had some fits and starts with it already on. I think that this is an area where unfortunately we have not executed well, let's actually say, yes, we've executed poorly and I do think it's an opportunity. And I think we will make some investments for this coming fall season in incremental enrollments around career remains to be seen if we can be successful. But if we definitely think it's a very significant opportunity. We definitely believe that some part of our issue has been around execution, and we will definitely make some investments in that direction for this phone.

Got it. Well, thanks again for the time and congrats on the results.

Thank, too.

Operator

(Operator Instructions) Alex Paris, Barrington Research.
Hi, everyone.

Thanks for taking my questions and also add my congratulations on the beat and raise for the quarter on. I just had a couple of questions. First of all, I wanted to ask about the press release that you put out last week regarding metasearch looked like you did a big new contract with Virginia State University. Can you expand on that a little bit? And then just talk about the MedSurg business overall, what sort of growth rates are we experiencing without? I know you don't give granular detail on it, but the orders of magnitude, perhaps?

Yes.
I mean, I think, okay, so when we bought the MedSurge asset would have a three years ago, it was a predominantly PTC business and on and it still is, by the way today, predominantly a B-to-C business. I think what we see is that that B to C part of the business is it continues to be very attractive continues, I think, to have a lot of opportunity to grow. But I think the B2B side, it is on in some ways, it's just going to have more legs to it. It's I think a bigger market opportunity actually, I think better easier client from in a lot of respects to manage on a on a B2B basis and so on. We think that the B2B side is going to be long-term larger than the B2B and the B2C side of the business. So um, I think that means I think we could double the business over the next several years, just by growing the B2B side of the business, I think that would imply, you know, some double digit growth rate long-term growth rate on that business on even at that rate. It's not going to be a major contributor to the overall company anytime soon, but we are very bullish about the about our opportunities in that space.
And it is the Virginia state contracts, the biggest or the first and most B2B effort.
We're not probably not the biggest nor the first on I think it side University, I think, was University of New England or some of the university, but not the biggest nor the first. I think we don't have dozens yet, but I think we or we're making a lot of good progress with a lot of good conversations. So I think, you know, from a lot of good traction, a lot of good early traction.

Great.
That's good to hear.
And then the other related question is about tutoring. You talked about it in your prepared comments a little bit, James, on you said in the past a lot of your new products, these are this is one of the ones that you're most excited about. It addresses learning losses. It has a high components as well anything to report there in terms of wins and go to market?

Yes, I think on one is we have we had a couple of nice wins on you can go. There's a public sort of announcement or press release, there's a district called Pulaski. I think the strategic Virginia, and we didn't I don't know that I didn't know they were reduced. Maybe somebody my organization did, but are they really like a YouTube video or something out there on it? There's a press release. They made a big deal about how our platform helped and with their learning loss and you can use those kind of testimonials. It was expensive, particularly when we didn't even know were asked completely on unprompted by us, I think bodes well for the long-term prospects for that business cadre.

So just to be clear, you're in the market with this product right now?

Yes, we are in the market with this product we're also we think for next year, we're going to have a pretty good upgrade to the product, which was which is going to embed more AI elements into it. But yes, we are in market today.

Great.
Thank you that I'll do for now.
Thanks.

Operator

Thank you.
Ladies and gentlemen, as we have no further questions at this time, we will conclude today's conference call. We thank you for participating, and you may now disconnect.