Stride, Inc. (NYSE:LRN) Q3 2024 Earnings Call Transcript April 23, 2024
Stride, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to the Stride Third Quarter Fiscal 2024 Earnings Call. Today’s call is being recorded. I would now like to turn the conference over to Timothy Casey, Vice President of Investor Relations. Please go ahead.
Timothy Casey: Thank you, and good afternoon. Welcome to Stride’s third quarter earnings call for fiscal year 2024. With me on today’s call are James Rhyu, Chief Executive Officer; and Don 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?
James Rhyu: Thanks, Tim, and good afternoon. The state of education in the United States continues to evolve, but more importantly, the way parents and students view that education is evolving. Every survey and research I have seen this year confirms that customers want choice. A recent survey by the National School Choice Awareness Foundation strongly supports this. Of those survey, almost 3/4 indicated that they’d at least considered a new school for their child over the past year and that is up from just over half last year. Almost two-thirds looked for a new school for their child and over half said they were likely to consider a different school over the coming year and the paradigm on college as a default option for students is beginning to show real cracks.
In a recent survey of high school students, more students sell that on-the-job training courses, leading to licensure and courses leading to professional certifications were a better value than 2- or 4-year college degrees. That value equation between college and skills training is swinging in favor of skills training. The Wall Street Journal also recently published a number of articles on this trend. They reported that 52% of college graduates are in jobs that they don’t make use of their skills or credentials. They also reported on the growing trend of Gen Z students entering skilled trades, leaving the traditional college path behind to pursue high-paying skilled jobs. The article cited the survey that showed the growing rise of generative AI has changed the equation when it comes to college with the majority of the respondents saying they saw blue-collar jobs offered better security than white collar jobs, given the growth of AI.
One of the most compelling findings was that the most critical factors for college graduates defining success are the things that Stride can offer at the high school level, a choice of major, internships and getting the right first job. We, at Stride, are delivering tomorrow’s education today. Artificial intelligence also continues to dominate the new cycle in education as well as other industries. We are building a foundation to support our AI efforts and are developing and testing ways to improve the customer experience for the teachers and students we serve. Initial feedback is very encouraging. We remain committed to incorporating AI and other technologies into our programs, but we will do so by putting the right tools into the hands of teachers and students to supplement their work and empower all parties.
Now we just finished another incredible quarter. We reported record quarterly revenue and our enrollment hit a new all-time high of 198,4000 students, sequentially higher than last quarter and higher than the pandemic levels of fiscal year ’21. Our in-year enrollment growth now for 2 years running indicates that the landscape of education of choice is expanding and more fluid and that the fall is just one indicator of customer sentiment. Many of you are already wondering about the upcoming fall season, while we are focused on delivering for our customers this year and ending the year strong. If the trends we are seeing in enrollment during this year continue, we’ve set ourselves up for a strong fall season. Application volumes as a proxy for demand continue to trend strongly and conversion rate indicators are positive.
As of today, we have the largest cohort of reregistering students in Stride’s history. There’s still a lot of work to be done before next school year, but we feel we are well positioned to continue to grow enrollment. Given the landscape of education today, I believe Stride represents one of the many emerging trends on the future of education by delivering on tomorrow’s education today that is accessible technology-driven, flexible, career-focused and proven. With that, I’ll pass the call to Donna. Donna?
Donna Blackman: Thanks, James, and good evening, everyone. As James talked about, we continue to see strong in-year enrollment trends in the third quarter. Coupled with our strong retention numbers, we feel comfortable increasing both our revenue and profitability guidance for the full year. We now anticipate revenue growth between 10% and 11% and adjusted operating income growth between 39% and 44%. These growth rates achieved the annual growth rates we outlined in our 2028 target in November. Turning to our quarterly results. We reported revenue of $520.8 million, an increase of 11% from the third quarter of fiscal year 2023. Adjusted operating income of $96.4 million, up 20% from the same period last year. Earnings per share of $1.60, up $0.30 from last year and capital expenditures of $16.3 million, an increase of $1.1 million from last year.
Career Learning, middle and high school revenue grew 11% to $167.9 million. This performance was driven by enrollment growth of 10% year-over-year and revenue per enrollment growth of 2%. We continue to see enrollment growth in the quarter, up over 1,000 from the second quarter. This is a continuation of in-year enrollment trends we’ve seen in the second quarter and third quarters over the last two years. In our General Education business, revenue was $328.9 million, up 14% from last year. This strength was also driven by continued enrollment growth in the quarter with average enrollment finishing the quarter up almost 4,000 from last quarter. Revenue per enrollment in the quarter was up 7.5% from last year. As we think about the fourth quarter, it’s important to remember, that we anticipate enrollment declines from the third quarter high as most of our programs no longer accept new enrollments during the quarter.
There is always the opportunity for us to convert these leads and to enrollment for the upcoming school year, but we still expect a sequential decline in Q4. Per pupil revenue continued to be impacted by timing. And particularly for Career Learning, we are going against a strong comp from last year when we finished the year up 16%. We continue to see good funding increases across General and Career. However, in any given quarter, these can be impacted by a number of things, including mix, yield and timing impacts from prior year catch-up that we’ve previously discussed. While it’s still very early in the process of next year’s funding, as of right now, we see an overall positive funding environment at the state level for fiscal year 2025, so not as strong as we’ve seen over the past two years.
States are also grappling with the loss of extra funding in the coming school year, which could impact how they decide to allocate funds across all schools. Our adult learning business continues to see impact from the slowdown in our quoting programs. Revenue for the quarter declined $5.9 million to $24 million. Next, our Allied Health programming continues to see strong growth, but not enough to fully offset the declines in our bootcamps. MedCerts should finish the year with revenue growth of more than 20%. Gross margin for the quarter was 38.7%, up 140 basis points from last year. We’re still seeing benefits from the efficiency efforts we’ve put in place last year, but not as strong on a year-over-year basis as some of these efficiencies took hold in the back half of last year.
Importantly, we’re not content with those efforts, and we continue to drive improvement in gross margin while supporting strong academic outcomes. For the full year, we still expect to see gross margins improve by 200 to 250 basis points. Selling, general and administrative expenses for the quarter were $113 million, up 10% from last year. Stock-based compensation for the quarter was $5.3 million. We now expect to finish the year with stock-based comp in the range of $28 million to $31 million. Adjusted operating income for the quarter was $96.4 million, up 20% from last year, and our strongest quarter ever. Adjusted EBITDA was $120.5 million. As with every year, we expect fourth quarter profitability to be less than the third quarter as we begin to ramp up marketing and other spend in anticipation of the upcoming school year.
Interest expense for the quarter was $2.4 million. Our effective tax rate for the quarter was 26.1%. Diluted earnings per share for the quarter was $1.60. Capital expenditures in the quarter were $16.3 million, $1.1 million above our spend last year. Free cash flow, defined as cash from operations less CapEx, was $52.2 million, down from the prior year period, mostly due to timing of cash receipts. We expect fourth quarter free cash flow to be up significantly from last year as a result. We finished the third quarter with cash and cash equivalents of $376.6 million and marketable securities of $194.1 million. Based on the continued in-year enrollment and retention trends, we are raising the low end of our full year revenue guidance and bringing up our profit guidance.
We now expect revenue in the range of $2.025 billion to $2.04 billion, adjusted operating income between $280 million and $290 million. Capital expenditures between $60 million and $65 million and an effective tax rate between 24% and 26%. Thank you for your time. Now I’ll turn it over to our operator for Q&A. Operator?
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