Stride, Inc. (LRN) on Q2 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Stride, Inc.'s Second Quarter Fiscal 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 session. . Please be advised that today's conference is being recorded. . I would now like to hand the conference over to your speaker today, the Vice President of Investor Relations, Mr. Mike Lawson. Thank you. Please go ahead, sir. Mike Lawson : Thank you, Jason, and good afternoon. Welcome to Stride's second quarter earnings call for fiscal year 2021. Before we begin, 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 cautionary statements contained in our earnings release and with the company's periodic filings with the SEC. Nate Davis : Thank you, Mike. Good morning, everyone. I should say afternoon, and thanks for joining our call today. There will be 3 of us speaking today, it may take a bit longer than normal, but we'll do our best to be direct and be concise. Starting with performance, as you saw in today's press release, revenue was $376.1 million in the second quarter of fiscal '21, an increase of 46% year-over-year. Tied to our revenue growth, adjusted operating income for the quarter was $50.1 million, a 34.5% increase year-over-year. Adjusted EBITDA for the quarter of $70.7 million improved 31.6% over the same period last year. Note also that adjusted operating income margins on a year-to-date basis increased from 4.7% to 9.8%. This demonstrates the tremendous leverage in our business as it grows, and we believe there's even more improvement to be had over the next few years. In each case, we've met or exceeded the guidance we provided last quarter. James Rhyu : Thank you, Nate. It's an honor to earn the trust of our Board, on behalf of the shareholders to step into the very large shoes Nate has left for me to fill. As Nate mentioned, I've worked alongside him here at Stride for the past 7 years plus as he set us upon our current strategic direction. I've been a vocal supporter of this strategy, and therefore, I do not intend to deviate course in any material way for the foreseeable future. Simply put, I see our strategy as follows: we are an outcomes-based company, focused on career learning. And what that means to me, we're trying to enable learners of all ages to gain the skills that will ultimately lead to a better job, and therefore, a better financial and economic future for themselves and their families. Now that can take many forms, from high school training to prepare a student for a job in the IT or healthcare field right out of school to a retired worker looking for a second career in programming and everything in between. We're putting our students on a trajectory. For some, that will require ongoing training, education, certifications and experiences to continue on that trajectory. And for others, they will leverage the skills we provide them into a well paying job immediately with the opportunity for continued upward mobility. Fundamentally, to me, that is who Stride is. Now how will we enable that? We will continue to develop our leading education services platform with the scale and expertise to support our growth objectives. Over the past 20 years, our platforms have enabled over 2 million learners and I believe we can enable millions more in the coming years. In just this past year, our portfolio has helped over 1 million users. So 20 years to get to 2 million, and over 1 million just the past year alone. I think that's tremendous progress, and I think we're just beginning. So why am I so optimistic? Well, driven by Nate's leadership, we spent the past few years putting the building blocks in place to drive this acceleration. We've launched Career Learning at high schools. We've invested in Adult Career Learning, the technology healthcare fields with the acquisitions of Galvanize, Tech Elevator and MedCerts. These acquisitions are not only giving us new capabilities, but their platforms upon which we will build scale business, serving the highest demand jobs in the country with the ability to continue to add additional competencies and skills. For example, through our Galvanize and Tech Elevator platforms that already have served -- that already serve the computer engineering and data science fields, we will build out verticals for other high demand jobs in cybersecurity, mobile application development and gaming, just to name a few. We've invested in a platform Tallo that connects these new college outers to employers. Since our investment in Tallo 18 months ago, they have grown their user base by about 400% to over 1.3 million users. We're investing in our own platform and capabilities to enable real-world experiences like project-based learning, job shadow, and connecting students to industry professionals. We've made some core investments in our data infrastructure, which I believe will enable us to serve our users even better in the future with data insights that will help guide, remediate, nurture and inspire their trajectory. And we will continue to innovate, as Nate said. More to come on innovation, but by way of example, we are enabling virtual job matches across the country to dozens of employers, who are looking to fill good paying jobs with applicants who don't necessarily need a college degree. We can still highlight their skills and qualifications in a proprietary app. And last year, 50,000 direct engagements were made, between this community of talent and companies on Tallo that we are looking to fill -- that we're looking to fill jobs in their company. I will look to continue investing in new technologies, products and services. Also, let me be clear, while we will aggressively look for investment opportunities to achieve our goals, we will be disciplined in the deployment of capital. While we continue to pursue our strategic imperative in Career Learning, we will also be driving long-term growth in our core general education business. And today, more than ever, our country needs educational alternatives to meet the diverse needs of families across the country. While a portion of current students may choose to return to brick-and-mortar schools after the pandemic has lifted, we believe we're experienced -- we're experiencing a permanent shift in how families, educators and legislators view remote learning. In fact, the recent survey by the RAND Corporation supports this view. 1 in 5 districts either already have or will likely adopt a virtual school or fully online option. That means over 10 million K-12 students need an online learning ecosystem like the one Stride provides. And parents agree that online education is the new normal. The recent poll conducted by Morning Consult showed 71% of parents felt that online education should be an ongoing option for students, and 85% agree that school districts should have an online backup plan even after students return to school. Now Nate, as he mentioned, has built a talented team that I'm very fortunate to inherit. I will look forward to build on the strength of this team. One key component of that strength is its diversity. To this end, before the end of the fiscal year, we plan to publish our first ever corporate sustainability report. ESG is a top priority. This year, we launched a program, We Stand Together. This initiative intends to foster stronger communities, bridge the differences at the bias and engage others who have different experiences than our own. We've committed $10 million in scholarships and investment into this program, and I believe not only is this the right thing to do, that our shareholders and stakeholders will benefit. Also, I briefly want to mention that on February 3, we are hosting the First National Forum on Equity and Education. This is a Stride-led forum focused on key conversations on diversity and education. I welcome each of you to join us for this event. Taken in total, our strategy and the progress we've made to-date have a much larger addressable market than ever in the history of the company. Just a few short years, we've increased our market opportunity by tenfold to over $100 billion. I believe this opportunity will support sustained growth across our business units with improved margin and the free cash flow. I would encourage you, if you have not already, to take a look at our recent investor presentation for additional color. I'm committed to those goals for our shareholders. In closing, I want to thank you again, Nate, for your support and your leadership. Nate already said, this is not necessarily goodbye. He will continue to serve our shareholders as Executive Chair. He will continue to be my friend and mentor, someone I can trust and rely on to give me direct and honest feedback and advice. Can't really express how fortunate I've been to be an accountant made as a confidant, to be able to learn from him for my professional and personal development over the past 15 years. Now I'm more fortunate in knowing that he doesn't go away today. Nate wants me to succeed in my new role, we want the company to succeed for our shareholders. Our shared goal is to continue to provide the best possible outcomes for our customers. The best possible services for our partners and the best possible returns for our shareholders. Thank you, and I look forward to meeting with many of you in my new capacity in the near future. Now I'll hand the call over to Tim. Tim? Tim Medina : Thank you, James, and good afternoon, everyone. We are pleased to report very strong second quarter results and raise our guidance for the third quarter and fiscal year ending in June. First, I want to draw your attention to the changes we made this past calendar year to make our business and strategy easier for investors to understand and follow. We included a supplemental slide deck to accompany selective financial topics covered in our quarterly earnings call scripts. We implemented new lines of revenue, aligned with the marketing -- markets we are addressing, including historical reporting data reconciling the old reporting with the new format. We believe this reporting helps our stakeholders better understand performance, better assess our future cash flows and make more informed judgments regarding the company. We created a senior management ESG task force and initiated ESG disclosures in our 10-Qs. And in November at Investor Day, we announced the new Stride brand, heard several hours of presentations from the executive management team, launched a new website and communicated long-term forecast targets. Making our business easier to understand and analyze will continue to be a priority in 2021. This quarter, for example, we are upgrading the supplemental presentation deck introduced last year with an earnings presentation, you can now find on our website to complement our earnings release and the live conference call scripts. Now let me turn to our financial results. Starting with the income statement. Revenue for the quarter was $376 million, an increase of 46% from the prior year. Revenue in the quarter for our General Education business totaled $314 million, a 35% improvement over the same period last year. This increase was driven primarily by a 51% increase in full-time K-12 student enrollment, partially offset by a 10% reduction in revenue per enrollment. Revenue for our Career Learning business increased nearly 150% compared with the prior year to $60 million -- $62 million. This increase was driven primarily by a 131% increase in full time, middle school and high school enrollments. Career Learning revenue also includes Adult Learning revenue, with more than $9 million of revenue from Galvanize acquired on January 27, 2020. Additionally, Adult Learning includes $1.6 million of revenue from Tech Elevator and MedCerts combined after the effects of purchase accounting. Both these businesses were acquired on November 30, 2020. Excluding the effects of purchase accounting, Tech Elevator and MedCerts generated $1 million and $2.5 million of revenue, respectively, in the month of December. And both our EBITDA are positive and generate free cash flow. This is the fifth consecutive year that Stride grew its K-12 student enrollments. This consistent performance reflects the long-term ongoing trend of greater acceptance of online learning and improving student retention rates. Certainly, COVID-19 has been a strong tailwind for top line growth and enrollments in fiscal 2021. However, without the effect of the pandemic, we believe general education, K-12 enrollment still would have grown in the mid single-digit range or higher, consistent with pre-pandemic levels of growth. Furthermore, before the effect of the pandemic, we were expecting enrollment in our middle and high school career learning programs to double or more this fiscal year, consistent with the growth rate for the past several years. On the topic of revenue per enrollment, the current results are largely due to state budgetary pressures in the wake of COVID-19, particularly in California. In addition, the impact of school mix was a significant factor as a substantial portion of our growth is occurring in lower funded states. Over the longer term, we believe revenue per enrollment will continue to rise 1% to 2%, in line with historical trends. Our enrollment metrics reflect very strong retention results. This includes reregistration of last year's enrollments as well as retention during the current school year. Retention rates have improved in both K-12, post grade general education and in the middle and high school career learning programs. Pre-pandemic and currently during the pandemic, the Career Learning program continues to have a retention rate that is significantly higher than general education. Gross margin for the quarter was 34%, 50 basis points lower than the prior year. Excluding the Galvanize co-working business, which has been the area of our business most negatively impacted by the pandemic, Stride's overall gross margin would be 60 basis points higher than last year or about 35.6%. Another factor impacting gross margin during the quarter is a higher level of student material and computer costs in Q2 than normal due to the higher levels of enrollment and the timing of those shipments to students. Now these timing issues are more smoothed out in the results for the 6 months ending in December. And in fact, gross profit margin for the 6 months period ending December 2020 of 34.7% is slightly higher than last year. And as I communicated in last quarter's conference call, we expect gross margins for the full year will be higher on a year-over-year basis than last year. Over the longer term, we see many opportunities for further gross margin expansion, including from growing our higher gross margin adult learning revenue, from capturing efficiencies from automation, we are driving into our operations and from efficiencies from a digital first strategy to replace a portion of the student physical materials footprint. Similar to my comments on gross margin, as we scale the career business, we expect to continue to see increased operating leverage and cost efficiencies in our SG&A cost structure. This operating leverage in our SG&A is demonstrated in our performance for the 6-month period ending December 2020 with SG&A as a percent of revenue of 28% compared to 32% for the same 6-month period 1 year ago, a 400 basis point improvement. In the 3-month period ending December, however, our SG&A of $91 million was 100 basis points higher as a percent of total revenue than the second quarter, 1 year ago. This was due primarily to the timing of the adult learning acquisitions and higher compensation expenses as a percent of revenue this quarter in FY '21 versus FY '20. Now for the full year of FY '21, we do expect SG&A expense to decline as a percent of revenue compared to last year. Adjusted EBITDA for the quarter was $71 million compared with $54 million for the prior year, driven by the higher gross profit. Adjusted operating income for the quarter was $50 million compared with $37 million in the second quarter of fiscal 2020. Adjusted operating income excludes stock-based compensation expense and amortization of acquisition intangibles. Stock-based compensation expense for the quarter totaled $9.1 million compared with $6.2 million for the same period last year. We have increased the midpoint of the stock-based compensation portion of our outlook by $7 million from $37 million to $44 million. This increase primarily is related to higher performance-based stock compensation that will now more likely be achieved given our strong performance. Free cash flow in the second quarter was $24 million compared to $56 million in the prior year. This year, the timing of outflows in the second quarter associated with the higher enrollments caused the positive free cash flow to be lower than in the prior year. Due to the seasonality of higher cash outflows in the first and second quarter for school launch activities, with timing of cash receipts later in the year, we expect to generate substantially more free cash flow in the second half of this fiscal year than during the same period last year. We expect our full year free cash flow to be in line with our AOI guidance. Cash and cash equivalents on December 31, 2020, totaled $258 million, compared with $212 million reported at June 30, 2020. The increase in the cash balance is largely the result of the $348 million in proceeds the company received from the issuance of convertible senior notes during the quarter, partially offset by the use of $100 million to pay down our revolving credit facility and $73 million used in cash used -- in cash used to acquire Tech Elevator and MedCerts. CapEx for the 6 months ended December 31, 2020, was $24 million, a decrease of $3 million from the same period 1 year ago. We are investing more in the second half of this year, consistent with our comments last quarter, when we raised our full year CapEx guidance to $50 million to $60 million, which continues to be our guidance. Our primary uses of investment capital are for capitalized software and curriculum development. We also are focused on integration initiatives to achieve synergies from our adult learning acquisitions. Turning to our updated and increased guidance. For the third quarter of fiscal 2021, the company is forecasting revenue in the range of $375 million to $385 million. Capital expenditures are expected to range between $12 million and $15 million. Adjusted operating income is anticipated to range between $47 million and $52 million. For the full year, the company is forecasting revenue in the range of $1.5 billion to $1.525 billion. Adjusted operating income is anticipated to range between $145 million and $155 million. Capital expenditures are expected to range between $50 million and $60 million as we guided previously. And the effective tax rate guidance for the full year also is unchanged. It is expected to range between 26% and 29% after discrete items. And that wraps up my prepared comments for the quarter. Before handing the call back to James and Nate, I want to say thanks to each of them for the trust and confidence they gave me last April with this opportunity. Nate, I've enjoyed working with you tremendously. And now, James, I'm equally excited about the next stage of Stride's growth in the future with you at the helm. Now I'll hand the call back to you, Nate. Nate Davis : Okay, operator, I don't have any closing remarks. We've talked long enough, probably. And we go straight to Q&A. Operator: Your first question comes from the line of Jeff Silber from BMO Capital Markets. Jeff Silber : Nate, I wanted to focus first on your retirement. Now while you and your Board may have been working on this for some time, the timing is a bit surprising, especially after your recent Investor Day, where you talked about the long-term goals. And basically some of the e-mails I've been getting from some of your shareholders, I think they're surprised as well. So if you can talk a little bit about why now and why you're not at least giving us some sort of transition period for this move? Nate Davis : Yes. We've thought about that. It actually was a transition period for the last 6 months. We have been -- many of the things I've been working on, I wanted to complete. James knew this was coming, and I've been giving him authority and responsibility. We hired Tim Medina knowing that James was a candidate, knowing that we needed to put him in a position where he could show what he could do, but also put ourselves in a position where we had a CFO. If I was leaving right now, and James was CFO, and we were promoting James right now, we wouldn't have a CFO behind us. So we did that to make sure that we had backup plans. On a personal level, the reason right now is, I'm going to be honest and candid with you, I reached a birthday and that birthday picks me to an age that I just said I can't continue to work this kind of hours this much longer. I'm still young enough to do it, but I'm old enough to know that this is not the right thing for me to be doing at this stage of my life. For personal reasons in my family, I want to spend more time with them. So we could have let this go on for another 6 months. But I thought it was time, and James was ready. The Board felt it was time and James was ready. I felt we’ve put all the steps in place. The management team is strong. The branding is redone, the acquisitions putting us on the stage of getting ready for Career Learning is done. And I know some shareholders will think that we did this by surprise. But in my script, I was very careful to make sure they understood we've been thinking about this for a while. We've been planning this for a while. We thought this through. The only thing we didn't do was I didn't tell everybody that I was leaving 3 months ago. But 3 months ago, I still had work to do. And so I wanted to make sure that work was getting done. Jeff Silber : All right. That's understandable. I really appreciate the candor. If I can move on just to the operating results, which were really great. Can you give us a little bit more color what drove the beat versus your guidance? Tim Medina : Sure. This is Tim. Primarily, it's the revenue expectation from higher retention of our current enrollments. Jeff Silber : I was going to ask, is that also the reason for the higher-than-expected outlook for the year? Tim Medina : Yes, exactly, both for the third quarter and for the beat and for the whole year, yes. Jeff Silber : Okay. That's great. I know it's a bit too early to talk about the fall, but I've been getting a lot of questions. What are you seeing -- again, I know it's early, what are your expectations for your general education enrollment and just as importantly, revenue per student? Nate Davis : Yes, that's a very tough question. You know that we can't give you guidance because we don't know. I don't think there's anybody in this country that knows exactly how many vaccines are going to get done, what the effect of the vaccine is, when the COVID rate will drop, when schools will open, how many people decide to go back to schools, and I can go on with all the unknowns that we're all dealing with. We still believe that we can grow and the reasons we believe we can grow is that the Career Learning business is growing not because of COVID. It was pre-COVID we were experiencing this growth and opening up new schools, adding new content, adding adult learning, that means that business is growing. So that's the number 1 reason we think we can grow next year. In the general -- overall. In the general education space, remember that we have a chance to -- an opportunity to meet all of these parents that we didn't meet before. I mean, we would be trying to convince them to look at -- look at the -- I'm sorry, at general Education and join our program. Now they're in the program. We can talk to them. We can show what the program is like. We can have teachers talk to them. So we have a chance to retain more of them where we'd be trying to sell them brand new. I think that's a winning opportunity for us to keep some of those. And we're going to keep more of those than the market thinks. So between the ability to retain some because we're talking to them now, the ability to grow outside of general education, we still think there's overall growth in this company going into FY '22. But I can't promise that. I can't give you guidance that says that's going to happen, because there's so many unknowns. So Jeff, I hope that's the best answer I can give at this point in time in January of 2021 as to what's going to happen in October of 2021. It's just too far away for us to know. Operator: Your next question comes from the line of Stephen Sheldon from William Blair. Stephen Sheldon : First, congrats, Nate, on your retirement, although it sounds like you'll still be somewhat active here and congrats to James, who is taking over the CEO role. I guess, first question, I just wanted to ask Nate, I'm hearing a lot about K-12 teacher turnover trending higher broadly in the U.S. I'm guessing some of that is related to burn out teaching in a remote setting with minimal resources. Curious what you've seen in terms of teacher satisfaction on your platform? And have you seen any notable changes in terms of hiring and retention trends within your teacher base? Nate Davis : Yes. We certainly have seen teachers more stressed than they have been in other times because we took on a lot of students and we had a lot of hiring that we did, but we didn't get all the hiring done and we wanted to because there's a teacher shortage in this country. So we are seeing teachers more stress. However, surprisingly, we're not seeing increased withdrawal of the teachers. We're not seeing turnover of teachers. And the reason I think we're not and at least what we're hearing from the teachers is they are more prepared in our environment than they would have been if they were in a brick-and-mortar environment. This whole going to online -- remember, when you come into our program doing that, we've been doing this for years. So the tools were available to the teachers. Yes, they have more students, but they have more tools available to them as well. Whether it be automated grade books or the automated rating or the things that track the student's performance, knowing what they're doing when they're an online curriculum, having an IT department that supports all their log-ons, having a single log on. All of those little things matter that the teacher is not doing that work. So we're seeing teacher stress by volume but not stressed by the tools. And so we're seeing better retention of teachers than we had in previous years. Stephen Sheldon : Very helpful. And then follow-up questions there. Just wanted to ask about the update on the potential for more states to open up to fully online schools. Seems like I think you guys gave some metrics on demand as you're seeing from school districts. Just curious what you're seeing from a conversation standpoint with what some of these states that have been, I guess, pushed back against allowing you to operate in their states previously? Nate Davis: Yes. You're absolutely right. We are seeing a greater opportunity. And James, you may expand on this a little bit. Greater opportunity in to see states open up. And one of the reasons we're seeing that is that there are new models. States are looking at not the traditional, let me open a charter school or don't open up a charter school. They're now saying, how can I add an online program to an existing school district. Both these schools are saying, how can I add the online capability to the other services that they offer. So we are seeing a number of states, and there's about 4 or 5 of them that we're in conversations with now who were in conversations with us just literally a year ago. They won't even consider it. Now they're considering different kinds of programs. Again, it's not the traditional open up a charter school law, it's more district partnerships that we're seeing begin to open up. James Rhyu : Yes. I would only add, Nathan I think the one thing for Stride that this pandemic is really, I think, helped us structurally long-term is, I think, the recognition that online remote learning is an important component of our educational system and our educational network. And I think, as Nate said, there's going to be different forms of how that manifests itself. But there is, I think, a structural shift in this country around how we view education. And that benefits all of our businesses. It benefits new opportunities for us, we're going to take -- we're going to have an opportunity to innovate around that. So I just -- I see not just in our general education business, not just in our Career Learning and not just in our K-12 side, in our adult side as well, we see tremendous adoption of online learning in our adult side businesses. It's just -- there's a shift in the way education is happening in this country, and I think we're well positioned to take advantage of that. Operator: Your next question comes from the line of Alex Paris from Barrington Research. Alex Paris : First, I want to offer my congratulations as well to both Nate and James. Nate, on your second shift to the role of Executive Chairman and James, I can't think of another person better suited to taking on the CEO role. And then furthermore, I'm happy to hear that no material changes in course are planned going forward. I'm too getting lots of questions from investors about fiscal '22. Your Investor Day did a great job in telling why revenues are going to continue to grow through 2025. But obviously, the short-term-ism of the stock market, we want to see what fiscal '22 looks like. And I think I heard your answer there. It's tough to make a call on general education. There's things you don't know at this point. But to a certain extent, Career Learning and potentially Learning Solutions, is going to help to offset that in fiscal '22. Are there anything -- did I get that right? Or are there other things to be considered for fiscal '22? Nate Davis: I think there is one other thing to be considered in fiscal '22. In addition to the retention I talked about as well, and that is revenue per student. Revenue per student this year dropped as states faced the very real budget prices. They were all short of money. The federal government’s CARES Act tried its best to bolster school districts but let's face it, there was less taxes coming in, less people working and states were -- even if they didn't run out of money, they were worried they were going to run out of money, and therefore, they didn't put rate increases in place. I don't think that continues into FY '22. As we -- as everybody wants schools to open back up, there is a strong push in this country to fund schools better, to give schools more capability to have more distance learning capabilities so they can open up to be better prepared in case they do have sicknesses to be able to open up. All of those things say it will be a positive environment for us because they put more money into schools. We are support of public schools. Therefore, we get better revenue per student. Number two, if they have models that have more online capabilities for a public school district, we're a provider of that. So again, we benefit from that. So I think that's the other factor to consider that we're in the best position to leverage both of those, increasing revenue per student and increase in online programs at schools. James Rhyu : Let me also just add that I do agree with Nate. There's uncertainty. I think we all know it's there for what's going to happen in the balance of this school year over the summer going into next school year. Irrespective of that, I think we do know that our various career-oriented businesses are running on all 6 cylinders. Enrollments in our middle school and high school programs, continues to grow. We should see no abatement in growth next year. The acquisitions that we've done around adult learning, they're all performing well. We continue to see great trajectory for all of them. They have outstanding management teams. They've been able to very quickly accelerate their growth through this pandemic. So we believe our shareholders long-term are going to have tremendous benefit from the career-related businesses that we've entered into in the past few years. The trajectory of all of those will continue into next year, I think, irrespective of what happens to the pandemic. Nate Davis: And I want you all to know that what you just heard was James, the CEO, because 2 years ago, James as CFO would have been more conservative. But now he's been running those businesses, he knows how to drive the businesses now. So I'm happy to see that. Alex Paris : That's great, and that's very helpful. And then I guess, one other big picture question. This is the other question that I get frequently besides growth in '22, is regulatory. Obviously, it's a different Stride, Inc. than it was 3 years ago, 5 years ago, with broader offering, not just charter schools, any longer. And I realize that this is more of a state regulatory situation than federal. But I'm wondering about your thoughts about the Biden Administration, about the nominee to the Secretary of Education, tone at the top counts? And then very specifically, in the 30-plus states that you operate in, were there any significant changes in governorships or state legislatures? Nate Davis: Let me answer both of those. So first, we'll start with the second question. At the state level, of course, there was turnover, but there was no material change. There's the mix between Democratic and Republican administration especially in the Houses and the Senate of the states. There were a couple of governors that changed over, but we had a couple of governors who were Republicans changeover. So there was a balance. And the balance has not really changed. So we don't see any material change at the state level. As a matter of fact, we think that many of the Republican organizations want to see something that they can win. They want to have a win. And one of the wins for them is to be able to say that school choice is still there. So I think that that's a positive for us because there's going to be more push to make sure that school choice is there. When you look at the minority communities, surprisingly, there's this push and pull between what's happening with unions and what's happening with the minority communities that want to have more choice. One of the things that came out of all of the demonstrations last year is we all know that education equality is something that we want to see more of. That means more choice. So more organizations at the state level are pushing for that kind of choice. In addition, we looked at the Secretary of Education from Connecticut and the Biden Administration. And we looked at the policies. And we don't see any hardened positions for school choice or against school choice. He's relatively neutral. And we look at the assistant sector of education as well from San Diego, who is more tied to unions, but again, does not have a vent against charter schools or against school choice. So we, again, don't see that at the federal level. We also think that the policy office of the federal government is also going to make an influence some of that. And so we don't know, but we certainly have not seen any signals. We've met with the transition teams, and there's -- we don't make their decisions. They don't tell us all the decisions. But clearly, we're not at the top of their list. They're not looking for us. The last point I would raise is to remember that we are not-for-profit colleges. It's hard because there are no other public K-12 general education companies out there. So we get lumped in with the for-profit colleges, but we're not-for-profit colleges. We don't provide the same kind of funding, we're not in the same kind of loan situations that they were in. So even if they were to come after some of the for-profits, we are not a -- we don't own schools. But we own private schools, but we don't own any of public schools. We provide a service to the public pool districts. And as such, for them to go after our business, they'd have to go after public school districts. Remember that today, almost 40% of our business is now tied to public school districts. They are who authorize these schools and want these schools. And they're going to resist the federal government telling them to close a certain kind of school. So we don't see the regulatory risk that maybe people are worried about. That's not to say that there won't be issues we face, there are always issues we face. But we have a strong policy regulatory team that is involved with the federal government listening to them, and we react when we have to. We've even changed business plans before when we have to, to continue to grow, and we will continue to do that. We'll be nimble enough to handle things that come our way, although we don't think there'll be very many changes -- negative changes that come our way. James Rhyu : I also think that you have to keep in mind that only a small single-digit proportion of our revenues come from federal dollars. So just in terms of concentration of risk, we have somewhat limited concentration of risk. I think more importantly, though, for me, is that what we're -- what our strategy really is all about and how we're going to create value for our shareholders, is really about enabling jobs and careers throughout the country. And I think that's a pretty bipartisan issue. And so from my perspective, at least, and I hope that this administration supports this, that putting people to work is important. And filling the millions of jobs that are unfilled right now in the highest demand areas like technology and healthcare is important. And I think our mission is to help this country fill those jobs. And it's just -- I just can't see any administration that would be politically against that. Alex Paris : Totally agree. Thank you both for your comments. I appreciate it. And Nate, good luck to you in retirement. I'm sure we'll still see you around as Executive Chairman and James, look forward to continuing to work closely with you. Nate Davis : Alex, can I go back to Jeff's question for a minute because you just raised what I think is part of the answer to Jeff and to shareholders who might be asking Jeff the question, why now and what does this mean? Part of the why now is that I'm not leaving. I'm moving -- changing my role from being a full-time CEO to being Executive Chairman, but I'm still here, as I mentioned in my comments, for James to help James in any way he needs it, wants it, when he asks for it. And having been my partner, the continuity, I think, is important. It was important to the Board. And it's important to me, and I think James is fully aligned with the Board. So I'm still here. I'm still involved. I was still help him when he needs it, he will make all the decisions that CEO makes. But when he needs my help, I'm still here. James Rhyu : I would also add that I think for a CEO like Nate, who's so involved in the business, and I think has led this company for so long, it's never going to be a good time. And I do think that Nate and the Board have really carefully considered this but Nate has spent a lot of time helping prepare me for this moment. And he's very committed to our shareholders and to our Board for the long-term. So I really don't see this as maybe as big a transition as maybe some people may be making out to be, because the strategy is not going to change. As Nate said earlier, we've put an executive team in place in both functional areas and business unit, leading different business units that is as strong as it's ever been. If there's any time for a leadership transition, actually, this is probably the time, we're at our strength right now. And I think it's good to have a transition when you're at your strength. So I actually think it's a good time. I'm happy for Nate's next phase of life, but I'm also confident that he will be standing next to me for a long time. Operator: Your final question today comes from the line of Greg Pendy from Sidoti. Greg Pendy : It just seems to me, you've now done 3 acquisitions, I guess, starting with Galvanize over about a 16-month period, and it seems to be one of the pushbacks is, you as a company right now are trading under one-time sales. And it looks like your acquisition targets in the private markets are roughly 3 time sales. So just kind of wondering how we should be thinking about that? Is that because these are career-oriented adult learners and they're worth, say, more than what you are trading at right now? And when you mentioned earlier on the call, being disciplined about targets going forward, is that the wrong metric to focus on? How should we be thinking about that? Nate Davis: Greg, I'm smiling because the number 1 answer to your question is we're undervalued. That's why the things we buy are higher because they're valued more fairly and we're not valued properly. I think it's our job to make sure that we continue to convey to shareholders the positive news in this company, the growth factors, the margin factors, the cash flow we generate, the strength of the balance sheet. But if you look at any of those metrics and compare them to anybody else who had these kinds of financial metrics, they will be valued much higher. And that's -- somehow, we've got to continue to explain to shareholders that the way you're looking at it is, I think, undervaluing this company. In terms of the acquisitions that we purchased, part of it, you're right, is that the industries that they're in. We always do comparable analysis. We do discounted cash flow. We do comps against previous sales. We look at forward-looking growth, we look at all the factors when we value someone. And all of those values say that we paid a fair price. So I think it is really a matter of, in the private market, those institutions are valued a little differently the way we're valued in the public market. And we talked about some of the issues here. There is a worry about are we going to grow next year? There is, well, what's going to happen with the regulatory environment? None of those things really are strongly affecting our current financials, but they affect the worry of the shareholder about the stock price, and I think they're holding us back a little bit. We will continue to demonstrate strong performance. And I think the market will eventually say, hey, that's a company I want to invest in. And it's our job as executives to deliver that kind of performance. But there's no doubt we believe we're undervalued. James Rhyu : I also think that if you look at what we laid out in our investor presentation, we've got, I think, a path with our acquisitions, by the way, helping us to the metrics that Tim laid out in November, $2 billion of revenue plus, improved gross margins. It implies, I think, a doubling of our free cash flow from where we'll be this year. And I think our shareholders will benefit over time. And I think we are playing a little bit of catch-up here on our share price. But we -- when we deliver those consistent returns over the quarters and years to come, I think our shareholders are going to benefit. Greg Pendy : All right. And then I guess just one final one, though, to -- not to jump on that. But your stock got all the way down to , like you said, you're generating free cash flow. How do you view -- and I know in the past, you've been vocal that free cash flow would be targeting acquisitions, but how would you view maybe a buyback potential at any point in time authorizing some share repurchase? Nate Davis : I think that if I look at capital allocation philosophically and how we would look at things, our first interest is always going to be investing in the business that we're in. So whether we're investing in greater amounts of content, we're investing in systems that make us more efficient and reduce our period costs. We'll be investing in the core business opportunities. We think there are more states we can go into to expand the business we're in, especially the Career Learning business. So I think investing in the core business is number one. Number two would be, we still think there might be some acquisitions to be done. We don't think there are any. At least I don't think there are any that we will do in the next 6 months, 12 months. We need to integrate what we've got. We need to prove that it works. But down the line, we still think there are going to be opportunities to grow inorganically as well. I would say that between share buybacks and dividends, I'm going to say this that latter will get me in trouble with some people, but I'm a candid guy, so I'm going to be candid. I would always favor dividends over share buybacks. Share buybacks tend to be very short-term benefits. It's a financial game you play. Dividends gives shareholder return on a long-term basis. You issue a dividend, we have new kinds of investors that can buy into the stock. We're showing them an ongoing return on investment, so I would always say that dividends over share buyback. Share buyback feels real good for a day or 2 or a month, and then it does nothing for you long-term. So we would probably find our Board not overly interested in share buyback, but much more interested in dividends over the long-term. So that's how we view capital allocation. I don't know if there's much more I could say. Operator: There are no further questions. I'll turn the call back to management for closing remarks. Nate Davis : Okay. We have talked long enough. We're almost still to close as we talked so long. So I don't think there's anything else to say. I do appreciate everybody joining the call today, I especially appreciate the shareholders who hung in there with us, who have some faith in us, and we are working hard to deliver for you. So with that, I wanted to one more time congratulate James Rhyu. I think James is going to do an excellent job for this shareholder base, and I will be right by his side helping him all the way. So with that, I thank everybody for your time. Take care. Operator: That concludes today's conference call. Thank you, everyone, for joining today. You may now disconnect.LRN Ratings Summary
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Stride Stock Surges 18% Following Q1 Beat and Strong Guidance
Following the announcement of its Q1 results, Stride (NYSE:LRN) saw its shares spike over 18% intra-day today. The company reported an EPS of $0.11, which exceeded the expected ($0.42) consensus.
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Stride forecasts its Q2/24 revenues to be between $490.0 million and $510.0 million, outperforming the projected $484.4 million consensus. For the entire fiscal year, the company projects its revenues to range from $1.96 billion to $2.03 billion, which is above the $1.94 billion Street estimate.
