Prepared remarks
Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stride, Incorporated Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And I would now like to turn the conference over to Tim Casey, Vice President of Investor Relations. You may begin.
Thank you and good afternoon. Welcome to Stride's third 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 also involves 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 earnings release and 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. Following our prepared remarks, we will answer any questions you may have. Now I'll turn the call over to James.
Thanks, Tim, and good afternoon, everyone. Well, another solid quarter as demand continues to outpace last year. I mentioned last quarter that the macro environment remains favorable and some recent polling supports our thesis. A survey of parents compiled by the National School Choice Awareness Foundation earlier this year found that more than 60% of parents considered sending at least one of their children through a different school last year. And of those, 27% considered sending their child to a full-time online program, meaning over 15% of all families are considering a full-time online program. That is at a much higher level than we saw just a few years ago. Also, a February Gallup poll indicated that less than one-fourth of Americans are satisfied with public education. Now that's the lowest level since the survey began in 2001, and nearly 90% of parents are interested in non-college degree pathways, meaning a focus on career education.
All of this bodes well for our future prospects. Now this is the time of year we are trying to both finish the year strong and gear up for the fall. If we continue to execute and given the macro trends we are seeing, that should position us for continued strong growth heading into next fall. We also need to look past this fall. While we celebrate our 25th anniversary this year, we need to ensure we build an enduring business for the next 25 years. I believe we can continue to change the future of education by leveraging our core capabilities to deliver innovative outcomes-driven solutions for the 50 million-plus students across the country. Parents remain dissatisfied with the current state of education, and we are in a position to give schools, administrators, teachers and students the tools to redefine the system and set ourselves up as leaders for the next 25 years. In the near term, the trends we see in market demand in-year enrollment and retention set us up for another strong start to the fall season.
For context, since January 1, demand as measured by in-year application volumes has grown in each of the past 4 years. This year, application volumes are almost twice what they were 2 years ago and 4 times what they were 4 years ago. This is during a time when we have some constraints on the number of new enrollments we can add as some schools have closed enrollment for the school year. I've been pleasantly surprised by this ongoing trend, and it supports our thesis that demand for our products and services continues to strengthen. So once again, we expect to finish the year with more enrollments than we started. We still have a lot of work to do before the next school year begins, but we feel confident in our ability to continue to grow enrollments in fiscal year '26. Thank you. And now I'll turn the call over to Donna.
Thanks, James, and good afternoon. As James mentioned, we continue to see strong year-over-year demand in Q3. We finished the quarter with enrollment up over 21% from last year, and we believe this has set us up to once again finish the fiscal year with more enrollments than we started for the third year in a row. Market conditions, including demand for full-time online programs, coupled with our continued strong execution, give us confidence to again raise our FY '25 revenue and adjusted operating income guidance. For the full year, the implied growth rates, both revenue and profitability exceed the 2028 CAGR targets we outlined during our Investor Day in November 2023. Our AOI guidance for this year suggests we will be well ahead of the low end of our FY '28 AOI target 3 years early. For our Q3 results, total revenue was $630.4 million, up 17.8%. Revenue from our career learning middle and high school programs grew to $223.9 million, up 33%.
This strength was driven by enrollment growth of 34% to approximately 98,700 enrollments. General Education revenue was $370.8 million, up 13% from last year, which was also driven by continued enrollment growth in the quarter. Average enrollments were up 14% from last year to approximately 141,500. Total revenue per enrollment across both lines of revenue was $2,415 compared to $2,420 last year. And as we've discussed over the last 2 quarters, part of a slight decline is the impact of state mix from year-end enrollment; otherwise, we have seen a largely positive funding environment. Given the results this quarter, we now expect to finish the year down less than 1% in revenue per enrollment. While I know this is the quarter, we received a lot of questions about next year, and we remind you that it's very early in the season, I do want to give a little insight into what we are seeing with the funding environment for FY '26.
Recognizing it's still very early in the process of states setting their budgets, we are seeing a generally favorable funding environment going into next year. And as they finalize their budgets over the next few months, I'll be able to give more color during our fourth quarter earnings call. Additionally, I know there's lots of discussion about federal funding and the impact that could have on Stride. I want to reiterate what we've said last quarter: well less than 5% of our overall revenues come from federal resources. Now to wrap up the remaining highlights for the third quarter. Gross margins were 40.6%, up 190 basis points from last year. Given the strength through the first 3 quarters, we expect to see gross margin improve around 200 basis points for the full year. Selling, general and administrative expenses increased 5% to $118.5 million. As I've mentioned previously, we expected some increase in the back half of the year; we still expect to finish the year up slightly compared to FY '24.
Stock-based compensation was $8.5 million. We expect to finish the year with stock-based compensation in the range of $34 million to $37 million. Adjusted operating income was $141.7 million, up 47%. Adjusted EBITDA was $168.3 million, up 40%. Both metrics set records for the company. Diluted earnings per share for the quarter were $2.02. Our EPS calculation now includes incremental shares related to our convertible notes on an as-if-converted basis for GAAP reporting purposes. Our quarterly investor presentation includes a slide that shows the potential dilution from our convertible note at various share prices as well as the offset from the cap call transaction we completed at the time of issuance. Starting next quarter, in addition to the investor presentation, we plan to introduce an adjusted earnings per share calculation in our earnings material to give investors a picture of the underlying EPS growth in the business.
Capital expenditures for the quarter were $15.8 million, down slightly from $16.3 million. Free cash flow, defined as cash from operations less CapEx, was $37.3 million, down from $52.2 million due to the timing of cash received. As of last year, we expect fourth quarter free cash flow to be up significantly, driven by the continued strength of in-year enrollment and margin improvement. We are raising our full year revenue and AOI guidance and we now expect revenue in the range of $2.370 billion to $2.385 billion, up from $2.320 billion to $2.355 billion last quarter. Adjusted operating income is expected to be between $455 million and $465 million, up from $430 million to $450 million last quarter. Capital expenditures between $60 million and $65 million, unchanged from last quarter, and an effective tax rate between 24% and 26%, also unchanged from last quarter. Thank you so much for your time this afternoon. And now I will turn it over to the operator for Q&A.
Questions and answers
And we will now begin the question-and-answer session. And our first question comes from the line of Jason Tilchen with Canaccord Genuity. Your line is open.
Great. Good afternoon. Thanks for taking my question. I guess the first thing I'm curious about, you continue to see really strong enrollment growth in the career learning program. And I think you talked about last quarter that's largely coming from the same application funnel as general education, but that over time you're going to work towards opening up that sort of second funnel directly related to career learning. I'm wondering if you could talk a bit more about some of the steps you're taking in that area, some of the progress that's being made and sort of what the timeline we could realistically expect to start to see that standalone funnel really start to contribute to overall enrollment growth?
Yes. So I think, Jason, the unfortunate truth is that, and I’ve been saying this now for a number of years, not quarters, is that we just haven’t cracked the code on it yet. We keep running a bunch of tests around it. I think this year, we ran a number of tests where we saw maybe a little bit more promise, but everything outside of the test we're running points to this being an attractive market for us and a good opportunity for us. If you look more broadly at the market and see the activity that, whether it's corporate enterprises or having around direct hiring out of high school, focused on skills as opposed to degrees and things like that, we know that this is an evolving market in the direction of career education for high school. So probably a long way of saying that I don't think that we have yet cracked it. I don’t know if there's a timing yet. I think we're making incremental progress. It's not as good as I would have hoped, and that's on us.
Okay. Great. Really helpful overview there. And then one other question. I'm curious about some of the efforts you guys are making to improve socialization opportunities for students that are in full-time online programs. Anything you can share there about some of the steps you've taken to help create a more similar experience to the sort of traditional in-person socialization opportunities?
Yes. I mean I think we all recognize that socialization is a significant aspect of the school experience. We also recognize, whether you like it or not, that school-aged kids these days socialize predominantly online. This is a factual statement that we are leaning into a number of platforms that enable that type of socialization. One of them is what we call our K-12 zone. It's a virtual school structure, if you will; it has a playground and a library and things like that. We've seen record usage rollout; I guess, formally a year ago, but we had been testing before that. And we're just seeing record numbers out of that. So we think that's a very powerful element. The other thing that we're doing, and we just started testing this calendar year, is we're rolling out geographic pods, meaning we are rolling out the ability for families that live geographically close to each other and have similar school-age kids in the program to do meet-ups and things like that with the kids. I recently spoke to a family that was unbelievably grateful that they were going to get the opportunity to do both of those activities, the online and in-person. A family mentioned that the in-person meet-ups are one of the most exciting things their kids do. We're just exploring different angles to improve our ability to enable socialization; we think it's really important for the families and for the kids.
Great. Thanks a lot for taking my questions.
Your next question comes from the line of Greg Parrish with Morgan Stanley. Your line is open.
Hi, thanks. Good evening. Congrats on the quarter. Strong result. On your marketing strategy, thinking maybe ahead for the summer, I imagine the strategy may have limited changes. I don't know if there's anything to talk through. And on the marketing spend, it's been pretty consistent over the last couple of years. Do you anticipate that number changing at all? Or maybe a similar spot is the right way to think about it? Thanks.
Yes. I think the approach from a marketing perspective is going to be pretty similar. Of course, we're always evolving. One of the things we've been doing a good job of in the past year or two is testing a lot of different things. I think our testing velocity has increased. Therefore, we plan to continue to lean into that—the ability to test a lot of different approaches, methodologies, and creatives—and I think that will continue to improve. There are a lot of different angles of our marketing approach that we can pursue that also ties back to previous questions about career. We’re testing various strategies around creative, approach, and social media. I think there are still plenty of opportunities to keep consistency in our approach through the summer.
With respect to spend, as you know, we grew enrollment significantly this year without increasing our marketing spend. Our priority is to do some more testing, optimize media placement and messaging, and improve our overall marketing effectiveness. The plan is not to spend significantly more on marketing but to be smart about it and look for ways to be more efficient with our marketing spend.
Okay. That's all very helpful. Then I want to talk a little bit about the changes going on at the federal level and the shakeup of the DOE, not the funding side, that's been well covered over the last year or so. They have a very pro-choice stance, right? What are the impacts as they sort of filter down to the states through this administration? Any other impacts really from the DOE and their stances?
Yes. I think we have observed. We have a lot of confidence that this administration and the Department of Education is going to keep kids and families in focus, and we continue to believe that's the case. Some of the more tactical things they're doing might have a little more impact at the postsecondary level right now. But generally speaking, their overall stance of empowering the states, which we're a state-level business, reducing overhead administration, we believe tends to be good. It sends a message of more choice; I think this administration believes strongly in the power of choice for families. Outside of that, we continue to monitor the things they're advocating for and remain aligned with their goals, which we think is also very optimistic for us.
Great. I’ll pass on, thank you.
And your next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is open.
Thank you so much. I wanted to go back to career learning, specifically the middle and high school area. Just really another strong quarter with growth accelerating. Can we get a little bit more color on what's driving this strong growth?
Yes. I might actually say the opposite way, Jeff, and I know this might sound odd, but I think we are missing some opportunities in the lower grades. The robust strength in middle and high school has been there for a while. Our programs directly address a lot of the needs we're seeing in those grade levels. Parent satisfaction surveys indicate this across these grade levels, which has opened up a lot of parental desire to look at alternatives. But we haven't been as effective in communicating our message in the lower grade levels. Reading scores, specifically third-grade reading scores, are lacking across the country. To address this challenge, we plan to promote high dosage tutoring in the lowest grades, focusing on reading. We're going to make significant investments in that area. We've launched a tutoring platform that has been running well and we believe we can use this to improve learning in the lower grades.
Okay, fair enough. Shifting gears a bit, I think in your prepared remarks you talked about some constraints—some schools that have pulled enrollment or some states that have closed enrollment. Is that in both general education and career learning? Any specific color would be great. Thank you.
Yes. Yes, it's a great question. And yes, it is in both. As I mentioned in my remarks, the demand side of this equation has really continued to grow in ways that I think are unexpected, especially in a time of year that usually isn't the strongest part of the year. We have some constraints on new enrollments because, by the nature of policy, school, or partner decisions, sometimes the enrollment windows close during this quarter. This has always been a phenomenon. We haven't really had to deal with it as much in previous years because we haven't seen such a spike in demand. So it has been a demand-side issue rather than a change in enrollment windows or caps.
And your next question comes from Stephen Sheldon with William Blair. Your line is open.
Hi, team. You have Pat McIlwee on today. So James, you've talked about this a bit, but in the past, you've said that uncertainty and chaos have historically benefited Stride. I understand that K-12 isn't necessarily within the crosshairs of recent trade policies or geopolitical tensions. But do you get the sense any of the traction you've been seeing has been supported by these uncertain times? Or do you think this demand is more a factor of you reaching scale and word-of-mouth referrals beginning to create a flywheel?
Yes, it's a great question. I think it's actually both. I do think that uncertainty, particularly broad macro uncertainty, has less of an issue. We've seen that uncertainty and volatility—whether it's gun violence—has precipitated interest in our programs. On the other hand, we have seen uncertainty at the district level and volatility in how certain districts administer programs has benefited us. Some larger geopolitical issues like tariffs haven't led to direct correlations with demand, and the data shows that we have not seen spikes in demand tied to tariffs. But the uncertainty around district levels and school safety tends to have a positive impact. Regarding the flywheel, we see more scale and high satisfaction scores generating referrals, and directionally, those referrals are strong.
Right. Okay. All very helpful. And Donna, on the gross margins once again above 40% this quarter, you're already pacing ahead of your margin targets for the year. So my question really is just how much more room for expansion do you think you have in that line over time? What are the primary levers as you think about driving that expansion over the next few years?
Yes. Look, I think we will continue to see good flow-through in the business. The efficiency efforts that I started to talk about two years ago are bearing out well for us. We'll maintain those efficiency efforts into the future. I wouldn't expect gross margins to be significantly higher than they are. Now while we are at the high end of our targets for 2028, I'm not changing our overall targets for gross margins. However, we will continue to see strong flow-through as the business grows and we maintain these efficiency efforts.
I also want to add that as much as those efforts are ongoing, we continue to look at ways to reinvest in our programs. I mentioned earlier the investment we'll make in tutoring. So there is a balance we try to strike; not all investments impact gross margin, but aggregate investment is critical. Currently, we are investing more in new tools and in our teachers than ever before. Therefore, there is a need to balance that investment in fulfilling our business's longevity as market dynamics and technology evolve.
And some of these investments are to help our teachers and ease their administrative burdens, allowing them to focus on what they love to do, which is to teach kids.
And your next question comes from the line of Alex Paris with Barrington Research. Your line is open.
Hi, guys. Thanks for taking my questions. I essentially have two. First one for James. Would you mind repeating your comments about finishing the year with more enrollment than you started? And while early, your comments for next year, I think you said that you would expect a growth fee or just kind of going fast for my pencil. So can we get that recapped?
Yes. We're on a trajectory. We feel confident that we'll end the year with a higher enrollment level than we began the year. You can see that we've just reported numbers significantly higher than we started the year. Ending the year at a higher level gives us a higher starting point for fall enrollment because many of those students will return. Interestingly, many students who join right at the end of the year have a high propensity to return in the fall. Therefore, ending the year strong sets us up for strength in the fall. Early indications suggest we're on track to end the year strong, which will bode well for the re-registration cohort for the fall. The strong demand we saw in Q3, from January through March, if that continues, it sets us up for a very strong demand season for the fall, contributing to our growth.
And then along those lines, is it too early to talk about applications for the fall? When do those start rolling in?
Yes, the fall application season has just begun. So it's too early to provide indicators of how that's shaping up. However, if the past couple of years are indicators, strength in the back half of the year has led to strong fall applications. While we do not have any data yet, the strong application volume we saw in the last quarter is a good indicator for the fall.
That's great. And then, Donna, I think you said in terms of revenue per enrollment—for the full year, you're saying down less than 1%. I think you said down 1% to 2% as recently as the Q2 report. Do I have that right?
That is correct. Now that we're sort of three quarters in, I'm comfortable saying that it will be down less than 1%.
Great. That's helpful. Finally, I have a technical question on slide 17. It's just to understand how to use it a bit better because I was off. I was using 47.6 million shares on a diluted basis, and it came in at 49.2 million. You talked about the illustrative average quarterly stock price. I'm looking at Q3 and you started the year at about $104 and finished the quarter at $126. Is this just a simple average or is it a VWAP? How do we calculate that?
So it's the average stock price for the quarter. If you look on Page 17, the average stock price was roughly $1.27. So use the $1.25 as the example, you would have added about 4.6 million shares that would otherwise not have been included without the convertible for accounting purposes.
And what am I adding that to? The basic share is my assumption for basic shares. Basic shares plus whatever stock option that is there plus the 4.6 million shares?
Correct.
Okay. Wanted to have a more accurate share count.
Yes. We can certainly walk you through it offline if you'd like.
Okay, for sure. Your numbers were spot on mine, but you were slightly below the consensus EPS estimate. I suspect it's just because of the share count that the analysts were using. Thank you very much. That does it for me.
And ladies and gentlemen, that concludes our question-and-answer session and today's conference call. We thank you for your participation, and you may now disconnect.