Prepared remarks
Good day, everyone, and welcome to the Stride, Inc. Q1 FY 2025 Conference Call. At this time, I would like to hand the call over to Mr. Tim Casey. Please go ahead, sir.
Thank you, and good afternoon. Welcome to Stride's first quarter earnings call for fiscal year 2025. 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. Now, I will turn the call over to James. James?
Thanks, Tim. This year marks the 25th anniversary for K-12, Stride's preeminent brand. In those 25 years, we have served over 3 million families and students. It took us over 15 years to reach the first million, and it has taken us just over three years to reach the third. In that time, technologies have advanced, our footprint has grown, and the country has evolved, but one constant has remained, our focus on providing customers choice in education. Just as we have choice in most facets of our lives from shopping to entertainment to healthcare and financial services, so too should customers have choice in education. And all surveys and research I have seen, irrespective of political leaning, supports the customer preference for choice. Education should not be a political issue; it should be a customer-focused one. As we prepare for our next 25 years, we are positioning K-12 to continue to lead by delivering tomorrow's education today.
And that vision extends beyond the hundreds of thousands of students we currently serve each year. We believe we can deliver meaningful products and services to millions of students and customers each year with the range of initiatives that we are currently in development. A key element of our evolution is to ensure we stay focused on our customers. We see the families that have embraced our programs come from a broad range of backgrounds. Why? Because what we offer caters to the needs of families instead of forcing them to cater to the rigidity of the program. That's choice. Our programs are affordable and accessible. We embrace being career-forward and we are leaning into new technologies and investing in innovation like never before. Now, in our core business, which, as you can see, remains robust and more demand as indicated by our accelerating application volumes. The issues that we can address for families span a wide range, from safety to academics to mental health, to mobility, to flexibility, and everything in between.
It is that range of promise that we offer families that will be a cornerstone for our next 25 years. Now, as you saw in our press release, we announced record enrollments for our first quarter, an 18.5% year-over-year growth and an acceleration in demand from this time last year. Apart from the pandemic year, this is the highest recorded year of gross enrollment growth this company has seen since it became publicly traded over 15 years ago. We have seen continual and rising demand for the services we provide and the support for students this enables. In our 25th year, I feel confident saying that we continue to raise the bar for families looking for educational opportunities. We remain as committed as ever to offering tomorrow's education today. Our results for the first quarter demonstrate that more and more families are embracing what we have to offer, and our guidance suggests we are on pace for another record year. I'll now turn the call over to Donna. Donna?
Thanks, James, and good evening, everyone. As James mentioned, the demand we saw this quarter has set us up for another strong year. As with every year, I'm incredibly grateful to all the Stride employees who support the thousands of families who come to our programs. It's an incredible opportunity for us to impact the lives of so many students. The strength of our enrollments this year gives me confidence that we remain on track to achieve our fiscal 2028 targets. I think our compelling fiscal year 2025 guidance further demonstrates that we are well on pace and confirms the continued underlying demand for our offerings. Turning to our quarterly results. Revenue for the quarter was $551.1 million, up 15% from the first quarter of fiscal year 2024. Adjusted operating income was $58.4 million, an increase of $43.6 million or 295% from last year. Diluted earnings per share were $0.94, up $0.83 from last year.
Capital expenditures in the quarter were $14.8 million, down $1.3 million from last year. As we discussed last quarter, these results reflect the continued demand for our core offerings. Our total enrollments for the quarter exceeded 222,000, almost 100,000 more than we had prior to the pandemic in FY 2020. Families continue to seek out educational opportunities, and Stride is filling a need in the market for virtual options. Our execution around marketing, enrollment, and school operations demonstrates our ability to grow enrollments sustainably for the long term. Career Learning middle and high school revenue for the quarter was $198.9 million, up more than 30% from last year. Career Learning enrollments grew 30.4% to 91,700 General Education revenue grew 10% to $329.4 million on enrollment growth of 11.3% to 130,900 students. Total revenue for enrollment across both lines of revenue was $2,303, up slightly from last year.
As we mentioned in the fourth quarter, the loss of ESSER funding is a headwind to our revenue per enrollment this year. However, this is being offset by a positive funding environment. While we were up this quarter, we expect to see some impacts from the state mix and timing, and therefore believe we will finish the year flat to down slightly in revenue per enrollment. Adult Learning revenue continues to be impacted by the slowdown in our software development products, which we've outlined previously. Revenue for the quarter at $22.8 million was down from last year. Looking at the full year, we think this quarter's Adult Learning revenue is a good proxy for what we expect for revenue in the upcoming quarters. Gross margin for the quarter was 39.2%, up 320 basis points from last year. We continue to see improvements in gross margins as our business scales, and like last year, we managed our teacher hiring well.
Total fees contributed to our strong gross margins in the quarter. For the full year, we expect gross margins to improve by 100 to 200 basis points compared to FY 2024. Selling, general, and administrative expenses totaled $168.5 million, in line with last year. As I've mentioned before, I think we've done a good job of holding down our administrative costs even as we continue to grow. While we've managed these costs well, we do expect to see some SG&A increase for the full year. Even with this slight increase, we will still generate significant operating leverage out of the business. Stock-based compensation for the quarter was $8.4 million, in line with last year. We expect to see a modest increase in stock-based compensation due to the impact of some long-term performance grants, and therefore, full-year stock-based compensation will likely be in the range of $34 million to $39 million.
Adjusted operating income for the quarter was $58.4 million, up almost 300% compared to FY 2024. Adjusted EBITDA was $83.9 million, up 111%. Diluted earnings per share were $0.94, up $0.83 from last year. Our profitability strength was driven by growth and operating margin improvements as we continue to see the benefits of scale as we grow. For the full year, we expect depreciation and amortization to increase marginally from last year. Capital expenditures in the quarter were $14.8 million, down $1.3 million from last year. Free cash flow, defined as cash from operations less CapEx, was negative $156.8 million compared to negative $151.5 million in the prior year period. Cash flow in the first quarter followed our typical seasonality related to school launch and onboarding of the students. As with last year, we expect to see positive cash flow for the next three quarters. We finished the quarter with cash, cash equivalents, and marketable securities of $539.4 million.
Turning to our guidance. For the second quarter of fiscal year 2025, we are forecasting revenue in the range of $560 million to $580 million, adjusted operating income between $115 million and $125 million, and capital expenditures between $13 million and $15 million. For the full year, we expect revenue in the range of $2.225 billion to $2.3 billion, adjusted operating income between $395 million and $425 million, capital expenditures between $60 million and $65 million, and an effective tax rate between 24% and 26%. Thank you for your time today and for your continued support. Now I'll pass the call back to the operator for your questions.
Questions and answers
Thank you. We'll take the first question today from Jason Tilchen, Canaccord Genuity.
Good afternoon. Thanks for taking the question. I'm curious in terms of the really strong demand that drove the record enrollment in the quarter. If you could maybe shed a little more light on some of the drivers of this momentum? Were there certain use cases or certain states that saw really strong growth? Was some of this driven by some of the more effective marketing spend? Any color you could share would be greatly appreciated.
Yes, I believe the demand is quite broad-based. As mentioned earlier, our SG&A remained largely unchanged compared to last year, which suggests that, all else being equal, the increased demand indicates a lower cost of acquisition. From what we observe, this points to significant organic demand growth. The word-of-mouth promotion for our programs has been notably strong, and we have seen it continue to grow over the past couple of years. This growth is a positive sign that our customers' feedback on the product is robust and increasingly positive.
That's really helpful. I have a follow-up question. You mentioned in your prepared remarks that school choice has become a more bipartisan issue in recent years. As we approach the upcoming election, are there any specific states or national trends we should concentrate on regarding potential benefits or risks to the company, either in terms of school choice or funding?
Listen, I certainly don't want to project what's going to happen in a couple of weeks here with the election. I think that's a probably dangerous thing to do. What I would say is double down on my comment that I don't think education should be a political issue. I think that the customers have spoken this is a pretty bipartisan type of product. We see a lot of demand from people with all different kinds of backgrounds and I just think that our politicians should govern the country and focus on educating everybody and providing this kind of choice for people who really need it is an important part of the educational system. And so hopefully, we can get all of our politicians, irrespective of party, to focus on those things.
Great. Thank you very much.
The next question is from Jeff Silber, BMO Capital Markets.
Thank you so much. I wanted to focus on the comments about revenue pursuit and I know there's been some questioning in terms of the impact of the roll-off of ESSER funding. Can you talk about what the impact of ESSER funding was on your company last year from a revenue perspective, and if possible, from a profit perspective and how that's impacting your guidance this year?
I believe we previously mentioned that last year, the revenue impact was less than 3%. While we have not disclosed the exact profit impact, it is likely immaterial, even if it falls within our normal profitability range. Had the impact been significantly larger, you would have observed a different profile this year. Thus, it is clear that it remains within the profit margin we experienced for the company last year. Moving forward, I prefer that we focus on the future of the company. We have strong demand, and customers are increasingly attracted to our products and services. I believe we are well-positioned for a very strong year ahead.
Okay. And as long as we're looking forward, can we talk about the impact in the current fiscal year in terms of nuked schools or schools that were lost? And going forward, are there any major schools at risk that we should be aware of?
Yes, we've previously mentioned that over the long term, there's potential to add one or two schools here and there. We have not lost any major programs this year, and we are currently not aware of any significant programs that we would lose for the upcoming year or in the future. Therefore, we would consider the possibility of continuing to add new programs. Some of these additions might not be in new states; we appreciate the variety of having multiple programs catering to different customers within the same state, as this provides us with greater flexibility and helps us meet customer demand in those areas. Overall, we believe we are well positioned to address future customer demand.
Great. Appreciate the color. Thanks so much.
Gregory Parrish from Morgan Stanley has the next question.
Good evening. Thank you. Congratulations on the impressive results. Could you discuss enrollment from a different perspective this year? Specifically, what are the main factors driving retention, efforts to attract new students, your marketing messaging, and your conversion rates? What do you believe were the key contributors to your success this year? I assume it’s a combination of factors, so please elaborate on where you’ve seen improvement compared to last year.
Absolutely. To reiterate, the key factor driving our business this year has been strong customer demand. While we're continuously working on improving retention, conversion, and other aspects, I don't believe any of those elements were the main contributors to our performance. Clearly, customers have expressed a desire for our product, and the demand has remained robust. We are actively working on enhancing conversion and retention rates, among other metrics, but this year was predominantly influenced by the strong demand from customers.
Okay, helpful. And on the margin, I don't think guidance here is up nearly 400 basis points at the midpoint. You're guiding to 11% revenue growth so I think a lot of this is operating leverage. But Donna, I guess maybe if you could help sort of flesh out how much is operating leverage, how much is from efficiencies, if you could kind of contrast the two, if you could?
We are anticipating a 100 to 200 basis point increase in gross margins, primarily due to the strong demand we've experienced and the leverage in our business. We expect this trend to continue. I've previously emphasized the importance of maintaining our strong leverage. Regarding SG&A, we have been disciplined in our approach. This year, we have managed to grow the business without increasing our marketing spend, enrollment expenses, or adding additional headcount. This discipline contributes to both the gross margin improvements we're seeing and the overall profitability.
Okay. That's great. And then a follow-up, my last one, I think this could be helpful for a lot of investors. Maybe talk about why the public financials of some of the non-profit schools that you manage, why those don't necessarily line up with what flows to you, why there can be differences? And then maybe more specifically, why some of those nonprofits could take ESSER funding and why that wouldn't necessarily go to you and what those could be used for? I think that could be helpful here.
Yeah. I'm not going to speak on behalf of all of our clients. I think that's a very irresponsible thing for us to be doing. I'll speak for what we do and how we do it. And I have great respect for how our clients manage what they do and I'd let them speak for themselves. But I think that whatever our clients do, we want to be supportive of their mission and their goals, and indirectly, that means that we're supporting the students that want to be participating in these programs. And so the rest of that stuff, like what our clients are doing, first of all, we have no providence over that. And so it's not like we have an ability to even always have insight into how they make all those decisions. Those are proprietary to them, and I'd rather leave it to them to describe.
Okay. Fair enough. Thank you.
And next up is Alex Paris, Barrington Research.
Hi guys. Thanks for taking my questions. Congratulations on the super strong quarter. I'm wondering, in terms of your guidance, Donna, for fiscal 2025, have you embedded in that any expectations for new states or states in which you have caps that may be or will be lifted or raised?
We have not factored in any new states. We have some increases in some caps that are already factored in, into the results that we have in Q1 as well as for the full year. But the overriding factor that is driving our revenue is, as James said, the demand that we're seeing. And so we are able to meet the demand with our ability to execute via our marketing, via our enrollment, but it really is us being able to capture the demand that's in the marketplace.
Great. Thanks for that. And then looking at the two programs, General Education and Career Learning, I think last fall, you had 91 GE and 56 Career Learning. Do you anticipate opening up additional Career Learning programs in existing states in fiscal 2025?
We have the same number of programs this year that we did last year in terms of our Career Learning programs in total.
Okay. The idea and do you envision opening up additional Career Learning programs this year or next year?
Not for this fiscal year. I do think that there is a chance we might open a couple next year.
Got you. And then last question, and that's a follow-up on some of the other questions regarding ESSER. How do the ESSER funds come to Stride? It's my understanding that they've largely been used by school districts within your Learning Solutions business. Is that accurate?
Like I said, really it's tough for us to be able to answer how ESSER funds go to all of our partner clients because that's something that they manage, that they're responsible for. What we know is that during the time that ESSER was in place, certainly, there were some of our clients who made the decision to support programs that we provided that were eligible for those funds. But it's sort of – I don't know, I would say it's sort of beside the point at this time because for this fiscal year, ESSER is in the rearview mirror, and we've got tremendous demand for the business that we're running, and that's with ESSER in the rearview mirror. So I think we've set ourselves up well from here to grow. And that's with all of that in the review mirror. So I think I want this company to stay focused on this year, which doesn't really have the ESSER benefit in it and moving forward from there.
Got you. Not only does it not have the ESSER benefit, it has a little bit of a headwind on a year-over-year basis. You had previously said less than 1.5% of revenue would be the impact in fiscal 2025. Is that still a good thought?
Yeah. And so, yeah, year-over-year, it would be, as you're defining it, a headwind, correct.
Great. Thank you both. Congratulations again.
Thanks.
Next, you'll hear from Tom Singlehurst, Citi.
Yeah. Thank you for taking the question. Congrats on the results. Apologies to ask about ESSER as well, but I'm interested in any second-order impact from reduced ESSER funding. Actually, I'm thinking about this on the positive side. I mean, is there – are there other programs that would have been handled by school districts or schools internally that now might be outsourced? Any views on that would be very much appreciated. That's my first question.
I don't see any significant impact on our business this year from that. Additionally, I prefer not to speculate on how various clients are utilizing or planning to use any remaining ESSER funds in relation to us, so I don’t have much more to add on that topic.
Perfect. My second question is whether you've observed continued or expect ongoing intra-year enrollment growth. In recent years, we've seen that the first quarter enrollment figures aren't the peak, with higher numbers occurring later in the year. Do you think this trend might continue in 2025?
Yeah, it's a great question. As I said, we continue to see strong demand. I don't know if it's a new normal yet but it has been two years running, as you said. I can tell you that as of yesterday, I haven't looked yet today, but as of yesterday, we continue to see that strong demand come through. So, we are, as of yesterday, higher than we were as of September 30th, and if the trend continues, yes, I think we would expect that. But I don't think we're guiding to that and we're not indicating that right just yet. We want some more of this in-year period to mature for us to feel comfortable. We're only three weeks into this in-year period. So, I don't know that it's a complete set of information for us to be making those statements yet. But like I said, 21 days in, demand remains strong.
Perfect. But the guidance is not based on that.
The guidance takes into account what has occurred over the past two years, while also considering the longer history of the last 23 years. It is a balance between these perspectives. However, as James mentioned, there is potential for greater upside that might not yet be fully recognized. It's important to note that we are still in October, and that could influence the number. There may still be more upside, but we cannot predict the trend for the rest of the year yet. With only three years of data so far, we haven't established a definitive trend.
Perfect. And one very final one, I promise. Any change to the 2028 outlook and guidance on the back of today?
We're not providing any update to the 2028 today.
Other than say that we feel confident in our 2028 numbers, as I said in my prepared remarks, and we are reiterating our confidence in our 2028 guidance.
Got you. Thank you.
We'll go next to Stephen Sheldon from William Blair.
Hi team. You've got Pat McIlwee on for Sheldon's team today. Just a couple of quick ones here. So, you talked about the demand side a few times now, but can you just talk us through what supported the outsized growth in Career Learning this quarter and if you've made any progress in building out that kind of separate marketing funnel you've talked about in the past there?
That's a great question. I'll address the second part first and then get back to the first. Unfortunately, we haven't made much headway in creating a separate funnel yet. It's something we are continuing to work on. Despite all the excellent work from our marketing team over the past year, that's an area where we've still faced challenges and are looking for solutions. Regarding the first part of your question, it's important to note that most of our high school is effectively a career program at this point. The growth in Career Learning is, in many ways, indicative of growth in certain grade levels. We're observing strong demand in those grade levels that support Career Learning, and this trend has been consistent for some time. We'll continue to support all grade levels, but we are seeing particularly strong demand in those that align closely with our Career Learning programs.
Okay, makes sense. And then in tandem to the questions on the elections and Career Learning program expansion as well, you've previously talked about opening schools and hopefully a handful of new states in 2025, 2026. Can you just provide any updated thoughts on state expansion targets at this point in time?
Any state expansion is a long-term effort with many uncertainties. We aim to establish a presence in every state where we currently don't operate, provided it aligns with our business objectives. There are instances where entering certain states may not be feasible due to regulatory issues or local demand. However, for most of the states where we lack a presence, we are actively working on plans to expand into those markets. As we diversify our offerings, such as tutoring and other services, we see potential opportunities to enter states without solely relying on our core managed programs. We are also exploring ways to penetrate states that do not have comprehensive online programs. At this time, there are no new updates for this fiscal year. We remain cautiously optimistic that in the next few years, we will be able to achieve progress in expanding into new states.
That’s great. Thanks for the color, James.
And at this time, there are no further questions. That does conclude our conference for today. Thank you all for your participation. You may now disconnect.