Earnings Call: Q3 2021

Apr 20, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Stride Third Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I I would now like to hand the conference over to your speaker today, Mr. Tim Casey, Senior Director, Investor Relations. Please go ahead. Thank you, and good afternoon. Welcome to Stride's Q3 earnings call for fiscal year 2021. Before we begin, I I would like to remind you that in addition to historical information, certain comments made during this conference call may be considered forward looking statements. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. They should be considered in conjunction with Statements contained in our earnings release and the company's periodic filings with the SEC. Forward looking statements involve risks and uncertainties that may cause actual performance or results to differ materially from those expressed or implied by such statements. In addition, this conference call contains time sensitive information that reflects management's best analysis only as of the day of this live call. Stride does not undertake any obligation to publicly update or revise any forward looking statements. For further information concerning risks and uncertainties that could materially affect financial and operational performance and results, please refer to our reports filed with the SEC. These reports include, without limitation, cautionary statements made in Stride's 2020 Annual Report on Form 10 ks. These filings can be found on the Investor Relations section of our website atstridelearning.com. In addition to disclosing financial results In accordance with generally accepted accounting principles in the U. S. Or GAAP, we will discuss certain information that is considered non GAAP financial information. A reconciliation of this non GAAP financial information to most closely comparable GAAP information was included in our earnings release and is also posted on our website. This call is open to the public and is being webcast. The call will be available for replay for 30 days. With me on today's call are James Ryu, Chief Executive Officer and Tim Adena, Chief Financial Officer. Following our prepared remarks, we will answer any questions you may have. I would now like to turn the call over to James. James? Thank you. Good afternoon, everyone. Since I became CEO 3 months ago, I've heard one consistent question. What will happen with education after the pandemic is over? Well, we're soon approaching that point, it looks like, and I don't think any of us know. But many critical thought leaders seem to believe the shift to online learning is not temporary. In fact, a lot of the key trends we are seeing from recent research on Education, Careers and the Economy support this idea. A recent New York Times article carried the headline, Online Schools are here to stay even after the pandemic. The premise of the article was that the ongoing pandemic has changed the landscape of education permanent. One quote, A subset of families who have come to prefer online learning are pushing to keep it going. Additionally, a recent study by the Society For Industrial and Applied Mathematics found that 1 third of high school students would choose a fully online or hybrid education even after Things return to normal. These and other researchers like them support my long held belief that the momentum in digital transformation is difficult to 1st and that the trend for online and hybrid education will continue. And more students are recognizing that college is is not the only effective or most affordable path to a career. The ECMC Group released findings from a study it conducted that showed today's high school students are seeking lower cost, quicker paths to careers. In the study, 25% of Gen ZTEs said they were more likely to attend a career and technical education school due to their pandemic experience. This trend is playing out in college as well. Last fall, there was a 7% drop in enrollments in higher education. This means more students will In a recent article in New York Magazine, they make the following case, I quote, people under the age of 40 are fed up. They have less than half of the economic security than their parents did at the same age. For the first time in our nation's history, a 30 year old isn't doing as well as his or her parents at age 30. So the paradigm of offering opportunities needs to shift. In our adult learning business, we are seeing people moving toward nontraditional educational paths. Strata Education Network surveys have shown that adult learners who are looking for education or training options are focused on gaining And they prefer to get this training through online programs or directly from their employer. Importantly, companies are beginning to recognize that nontraditional educational paths can be Best Life's College Graduates. Large corporations like Facebook, Google and Amazon and others have begun programs to hire non college graduates And in many cases, students right out of high school into professional high paying technology jobs. And all indications suggest these professionals are excelling. As such, companies are expanding these programs. These trends support our strategy of providing career skills. The pandemic has accelerated the shift in modality to a more digital approach. As these markets are poised to grow at increasing rates, Stride is well positioned to benefit for many years to come. The immediate impact of these trends are evident in our results for this quarter and in our fiscal 2021 guidance. We've raised our guidance for the full year in each of the past two quarters. Year to date, Our STRIDE Career revenue enrollments are up over 120%. The ECMC study I mentioned above also found that 61 percent of Genvieve teams lead a skills based education makes sense in today's world, And our STRIDE career programs offer a clear solution for these students. The programs provide access to career ready skills and certifications. This allows students to develop skills that can lead directly to a career or better prepare them for post secondary education. Regardless of which path they choose, we want to provide them with an education that will prepare them for careers in high growth areas like healthcare, technology and business. Our adult acquisitions are doing well and growing at double digit rate even though some of them have traditionally focused on in classroom teaching. Their shift to online programs has gone smoothly and we feel good about their future growth prospects. Specifically, our 2 most recent acquisitions, Tech Elevator and Mid Concerts are performing against their acquisition plans, but more importantly, these companies serve mainstream markets, We have large scale future opportunities in front of us. As we begin to invest in our Stride brand, we believe we will be able to generate meaningful growth for these products incremental to what they would have been able to do as standalone businesses. As more employers start to take notice of these kinds of pathways, they to offer a registered apprenticeship opportunities to employers seeking employees in high demand fields. These types of programs demonstrate that Stride's offerings and address both learner and employer needs. Beyond that, we can help employers build recruitment pipelines with our Talend partnership. Talend now votes 1,500,000 users on their platform. This community of both users and employers will help ensure that we are developing the right training programs while giving them and others a path to employment. And as we said during our Investor Day in November, We expect this growth and the trends we are seeing in the market to lead to overall career learning revenues of 650 to $800,000,000 by fiscal 2025. As excited as we are about the prospects in our career and adult learning businesses, We are also focused on our general education business. Unfortunately for many students, the pandemic has caused a decline in academic achievement. A recent study by NWEA showed that the number of students who regress academically increased significantly nationwide during the last year. Fortunately, for students and families attending established virtual programs like ours, they have been able to attend school uninterrupted. Our partners have provided seamless education in a completely disrupted world. We owe our gratitude to them. The impact translated into academic outcomes as well. In a recent study we conducted, programs managed by STRIDE handily outpaced schools like the ones in the NWEA study. Not all online programs are created equal. We believe ours is the gold standard. Data backs that up. How does all of this translate into future trends? Just a little over a year ago, survey that validates the trends we've seen for many years, that approximately 2% to 3% of families were considering a fully online high school option. Just today received results of our most recent study that indicated that that 2% to 3% had jumped to over 10%. Similarly, consideration for online career programs jumped from 15% to 25%. The shift to online school from home means that more families are seeking out Stride's offering for digital solutions. And while online school might not be for everyone, many more families now recognize it as an option. In addition to the increase in awareness, the pandemic has brought about structural changes to other parts of our lives. It wasn't just students who were impacted, Parents, families, teachers and administrators, many of these individuals have come to appreciate the flexibility that comes from working and schooling from home. This shift gives more parents and families the opportunity to support their children's learning at home while they're also working at home. Or for teachers, they can teach at home. We hired and managed more teachers than ever this year. The flexibility for teachers to work out of their homes is another clear trend that provides great opportunities. Overall, this means that STR1VE offerings are more accessible to more families. Now I know many of you are focused on what will happen with our moments this coming fall as the rollout of the vaccine proceeds and most school districts announce Plans to get back into the classroom. First of all, let me be clear that we support the reopening of brick and mortar schools. In fact, we penned an open letter supporting President Biden's bipartisan push to get schools reopened. Additionally, it's far too early in our enrollment season to know how many new students will come to our programs in the fall. In fact, less than 10% of our normal Overall enrollment volume happens before the end of April. However, we do have Early indications of the rate at which existing founds are indicating their return for the fall. As of right now, the percentage of existing families that are responding to our outreach for returning in the fall is at an all time And the percentage that is indicated they are returning is at a multiyear high. So far, we are seeing the opposite of the mass exodus back to brick and mortar schools that some have predicted. This is some very early encouraging news. However, I want to stress this is still very early in our enrollment season. Finally, I want to highlight some exciting upcoming programs from Stride. Recently, a survey we conducted found that over 65% of parents agree that their children need additional educational curriculum over the summer to make up for lost time due to the pandemic. Given the significant need, this summer we are going to offer free summer career experiences for students in grades 7 through 12. These programs are an excellent opportunity for current and prospective students to gain exposure to career skills while engaging in exciting activities. For example, in our eSports experience, students will work on coding skills in the morning while We plan to offer programs in nursing, theater, esports and even a jam camp for musicians. We will also offer programs for recent Stride Career Prep graduates to further hone their career ready skills they learned in high school. All these programs will help make STRIDE more accessible to more students while teaching them valuable career skills. So I believe the trends in our business as well as the overall macro conditions in our addressable market continue to work in our favor and grow as Thank you for your time today. And I'll now turn the call over to Tim to discuss our quarterly results. Tim? Thank you, James, and good afternoon, everyone. Revenue for the quarter was $392,100,000 an increase of 52% from last year. Adjusted operating income was 54,900,000 an increase of 146 percent and capital expenditures were $11,300,000 an increase of 1 point as Q3 last year. In each case, these results met or beat the expectations we provided in our guidance last quarter. As James mentioned, our general education business continues to perform very well and career learning remains on a strong growth trajectory as it has been for this past several years. Given the strength in these businesses, We have raised our guidance again for the full fiscal year. Returning to our results for the quarter, Revenue from our general education business increased $89,200,000 or 38 percent to $322,300,000 This was due primarily to higher enrollments, partially offset by lower revenue per enrollment. General Ed enrollments rose 43% year over year, while revenue per enrollment declined 4%. For the full year, we expect revenue per enrollment to be down compared to last year due to Jerry pressures resulting from COVID-nineteen and a higher mix of lower funded states. We do not, however, We expect this decline to become a trend into next year. In fact, we are confident given what we know today about state policy Debt enrollment funding should improve next year. Career Learning revenue rose to 69,800,000 an increase of 191%. This was largely driven by significantly higher volumes in our Stride Career Prep Programs, formerly known as Destinations Career Academies, as well as growth in our adult learning businesses, including the effect of MedSerts and Tekelevator acquired in November 2020 and Galvanize acquired in late January 2020. Gross margins were 35.5 percent in the quarter, up approximately 500 points from the same period last year. For the full fiscal year, we expect gross margins to be approximately 34% plus or minus 50 basis points. We believe this improvement will continue into next year. Last November at Investor Day, I laid out a 2025 goal for gross margin percent of 36% to 39 percent and I expect us to get there much faster. Selling, general and administrative expenses in the quarter were $100,500,000 up 58% in the year ago period. The increase in SG and A was driven primarily by higher costs associated with the growth in enrollments and higher stock based compensation expense, as well as the expenses for our adult learning businesses. We expect SG and A for the full fiscal year 2021 to be in the range of $420,000,000 to $425,000,000 up from fiscal 2020 due to higher costs associated with the growth in enrollments, higher stock based comp expense, as well as the inclusion of the SG and A associated with Galvanize, at Surgentech Elevator. Our expectation for fiscal year 2021 interest expense is that it will be between $17,000,000 $18,000,000 including approximately $4,000,000 in cash interest and $12,000,000 in non cash amortization of the discount on our convertible senior notes and another $1,000,000 of non cash amortization of debt issuance costs. Our convertible notes are subject to new accounting guidance, which can be adopted in FY 2022 and no later than FY2023. Once the guidance is adopted, the debt discount will be eliminated from the balance sheet and the associated non cash amortization expenses are eliminated from the P and L on a going forward basis. EBITDA for the Q3 was $62,200,000 up 89% from the Q3 of fiscal 2020. Adjusted EBITDA was $75,000,000 up 92% from the same period a year ago. Operating income was $38,600,000 Adjusted operating income was $54,900,000 an increase of 146%. Additionally, we are raising our guidance for adjusted operating income to $156,000,000 to $159,000,000 for Full fiscal year 2021 and except from our previous guidance of $145,000,000 to 155,000,000 We ended the quarter with cash and cash equivalents of $329,000,000 an increase of $70,900,000 compared to the 2nd quarter. We expect working capital to be a significant source of cash in the Q4, primarily due to accounts receivable. So we expect our cash balance at the end of fiscal 2021 to increased significantly. We believe that our strong free cash flow generation and liquidity will continue to provide the financial flexibility to fund our existing operations and to pursue strategic acquisitions. Capital expenditures for the quarter totaled $11,300,000 below the range of $12,000,000 to $15,000,000 we guided to last quarter. We expect Full year CapEx to be in the range of $50,000,000 to $55,000,000 Our effective tax rate for the quarter was 30.2% and we expect our full year cap rate to be in the 27% to 29% range. We expect that free cash flow defined as cash from operations plus CapEx will trail our adjusted operating income. This timing difference is primarily due to working capital changes related to the timing of payments from certain states, some of which are associated with our growth in states that regularly pay in the following year and some of which is related to delayed payments due to COVID. Now returning to our updated guidance. To summarize, We expect the following for the full year fiscal 2021. Revenue in the range of $1,525,000,000 to $1,530,000,000 adjusted operating income between $156,000,000 $159,000,000 Capital expenditures of $50,000,000 to $55,000,000 and a tax rate of 27% to 29%. In Q3, we saw another successful quarter owing to the tremendous demand for our products and services, both in general education and career learning. We delivered double digit or better growth in revenue, adjusted operating and adjusted EBITDA. While significantly improving our gross margins and our robust cash and liquidity position, we remain very about the prospects for our business as a whole and we'll continue to execute on our high growth career learning strategy. And with that, I'll turn it over to the operator. Operator? And your first question comes from Jeff Goldstein from Morgan Stanley. Your line is open. Hey, guys. Can you hear me okay now? Yes. Hey, there. We can hear you. We've actually had to dial in from a mobile phone here. So I apologize if there's a little bit of The sound quality isn't good. We still have a little bit of technical difficulty on our end, but we can hear you now. Go ahead. Okay, perfect. So I just had a question on revenue per enrollment. That figure seemed to recover in the quarter within both general education and career learning when comparing it to last quarter. So So just hoping you could expand on drivers of that recovery. And is some of that recovery in the quarter what's giving you confidence for further improvement into next year? Let me just try to take maybe half of that question and then I'll hand it over to Tim. I think, First of all, a lot of factors happened in here. So I think it's probably better to focus on the full year number. But the confidence in next year actually doesn't really have much to do with this year. This year, we were negatively impacted by, you may recall, California didn't fund new enrollments and some other sort of mix issues. When we look at next year, really what we look at is, sort of, I'll say, the policy landscape across states in which we manage programs. And from that perspective, we think that our overall the overall environment looks pretty strong and pretty So it's really nothing to do with how this year is shaping up. It's really based on what we see across the landscape for next year policy wise. Tim, I don't know if you want to add anything. Yes. The only thing I would add in terms of sequential improvement is that as we get into the year, our revenue we've earned revenue In some cases, where we tread small amounts of enrollments, normal course, and that's really the driver overall of this modest sequential Stabilization in that metric. Okay, got it. And then I appreciate your comments in the prepared remarks around just optimism you have around returning students for I was curious though if the churn you saw in the quarter in general education like this past quarter was in line or was that more than you were anticipating given Students could potentially be returning to their traditional schools. I mean, were you seeing that in any particular age group Or is that not the case, and it was all just kind of normal course? I was just curious for your thoughts on churn in the quarter. Yes. So, I think there's if anything, churn continues to be better than previous years. I think In that respect, it was, I would say, somewhat better than we expected originally when we set out the year. But we are seeing, I think, just a tendency, and we've seen this over the years, the tendency for in the middle of a semester, Families do have some reticence. Even as schools are opening back up, I think We saw families have some medicines just to disrupt sort of the flow of the educational program that their child is in. So, But we were a little bit pleasantly surprised, I would say, and we have been pleasantly surprised throughout the course of the year on the sort of the trajectory that churn has taken for us. Your next question comes from the line of Jeff Silber from BMO Capital. Your line is open. Thanks so much. The results were much better than expected both on the top line and bottom line. Can you kind of focus what Was the reason for the beat or reasons for the beat? The reason for the beat is that it's really the point that James just made. It's better retention performance during the quarter really is the primary driver of that improvement on the top line and that really fell to Okay. So it's fairly similar to what we saw last quarter as well? Yes. That's great. I appreciate the color you gave us on the fall. I know it's still very early. Can you talk about at least Potential for either new states or new schools, how that pipeline is going? Yes. I think unlike probably previous years, our Approach to new states and new schools is actually evolving. And I think it's evolving in a positive way, meaning there are increasingly more opportunities for us to enter new programs, new states with partners. We're approaching it from the perspective that we don't always need a sort of new policy or law legislation to be passed. So we are continuing to work to open particularly career education programs. We expect to open a a handful this coming fall. We expect programs in general in a number of states to new states to open or expand. And so we're pretty bullish, West Virginia, Missouri, places like that, that we expect At least some type of expansion or new program to be open for the fall. Okay, great. In your prepared remarks, you also talked about I know it may be too early to get this kind of data, but I'm just curious, in the pandemic, have you seen your Increased relative to some of the traditional schools that went online. Is there any data that shows that? Yes, for sure. We have we definitely there is some data trickling in that's suggesting and obviously not surprising that most of the brick and mortar schools took a pretty significant step back on average in academic outcomes. And we did enforce in fact, our schools, our data suggests that we outperformed that significantly. So at least from our perspective and our data would suggest that based on what we see and what we can sort of I'd say the data that is available is that our performance has outperformed and outpaced most other quicker motor schools that did online learning over this past year. Okay. I Your next question comes from the line of Stephen Sheldon from William Blair. Your line is open. Hi, thanks. First, great to hear about the high review registration, I guess, indication. Is there any way to roughly frame or quantify how much higher the percentage of families undertaking the return compares to the normal trends that you see? Well, so I'm reluctant to start providing that type of guidance at this point. I will tell you that our response rates are have been materially higher. And I think that For me at least, the signs that point positively is the engagement, the engagement levels we're getting. And particularly, I'll give you one sort of, I'll say, tidbit of information. We did track, of a COVID related types of enrollments, meaning some families did very specifically indicate to us that they were coming to us this year specifically for COVID. Now, of A lot of families didn't indicate that and so that doesn't capture maybe the entire population. But a very significant proportion of those families who said that they came to us because of COVID have been engaged with us and had indicated that they expect to return in the fall. So again, in my prepared remarks, I indicated that we're not seeing sort of this, I'll say, mass exodus of families just riding it out with us until the brick and mortar schools came back online and then sort of all exiting back to their brick and mortar programs. So We see that as a pretty positive trend that families at least a significant number of families have appreciated the experience enough to indicate that they are sticking with it. Got it. Really helpful. And I know you guys can help students that have fallen behind academically try to catch up, especially With some of the personalized learning you're able to provide online, with some students at local options falling behind over the last year, I guess, have you seen that increased Demand at all for general education, especially as you think about indications heading into next fall? Yes. I think the slide that's happened, I was just actually before we came into this call, There was a Sal Khan from Khan Academy was on CNBC mentioning that 15% to 20%, I think it was the number that he said that he gave 15% or so of kids have gotten lost in the public school systems. And so not just a slide of the kids who have been in the system, you see a large number of students who have sort of gone missing in a way, right? And so we do think and we do see that there's a very large opportunity and good demand for not just our programs, our full time online programs and kids coming to those programs, but just in school districts more broadly looking for ways to meet that demand or to meet that gap. And I think you should remember that we're not just running full time programs, we offer a suite of solutions that also help districts with their problems. And I think that in some ways, that's going to be an ongoing opportunity for us because I really empathize with these school districts. They really need to make sure that they can reach a lot of these kids who have somehow gone missing in their systems, and they need to provide some alternatives for them as well. And I'm hopeful that they are looking at alternatives like online alternatives for those kids as well and we can certainly help there. Makes sense. Last one for me, just on the guidance. It seems The guidance implies a sequential step down in revenue in the Q4 relative to the Q3. I think the normal progression over the last few years has been for a sequential uptick. Anything notable to call out on what would drive a sequential decline this year in the fiscal Q4? Nothing notable to note there. It is Fair that if you squeeze out another quarter just like this one, we would be at the very tippy top of our guidance range. So there's nothing in particular to call out there. No particular concern or anything like Great. Thank you. Appreciate it. Your next question comes from the line of Greg Pendy from Sidoti. Your line is open. Thanks for taking my questions. Just real quick on the summer Courses that you'll be offering, is that going to create any notable shifts in expenses on a year over year basis, especially in the Instructure costs? Yes. No, the answer is no. We shouldn't have any material change in costs over the summer due to those programs. Those programs, they're not they do have some marginal cost to us. It's not significant. We think we won't change sort of the overall profit for gross margin trajectory that we're headed on. But we also think it's important. It's important to help with the summer Sort of gap, if you will, on bridge kids over the summer. We think it's an important offering to get kids to have awareness around some of these opportunities that we provide them. So I don't think it's going to be a material cost, but I think irrespective, it's just an important service that we need to provide And then just one final one, just on the revenue per student in terms of next year. Assuming Would it be a positive benefit if you had a higher mix of special needs students next year in your revenue? I'm not saying that you're foreseeing that, but Just given the trends of some students falling behind, is that typically a higher revenue per student? Not materially. So, I wouldn't pretend that our revenue pursuing trend next year is going to be impacted by that. In fact, in any given year, I think sort of falls out with a wash and our overall revenue per student trend get more impacted by things like mix or what happened in California this year and not by the mix Special Ed versus non special ed students. And there are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.