Prepared remarks
Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stride Third Quarter Fiscal Year 2026 Earnings Call. The operator provided instructions. I would now like to turn the call over to Eliza Henson, Manager of Investor Relations. Eliza, please go ahead.
Thank you, and good afternoon. Welcome to Stride's Third Quarter Earnings Call for Fiscal Year 2026. 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 will 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 earnings release and latest SEC filings, including our most recent annual report on Form 10-K and subsequent 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 questions you may have. Now I'll turn the call over to James.
Thanks, Eliza, and good afternoon, everyone. I'd like to start off with an update on the platform issues we experienced earlier this year. As I mentioned last quarter, we continue to execute on the road map for stability and improvements. As we close out this school year and preparations have already begun for the coming fall, we are heads down making sure our customers get the best experience possible. I'm comfortable with our progress and believe we are on the right track as we prepare for the fall season. As we have discussed previously, the demand for our products and services, as indicated by application volumes, continues to be strong relative to historic levels. While our focus is on finishing this year executing against our road map, we believe the demand environment sets us up well for the future. Although we experienced a marginally higher level of attrition since I gave an update on our last call, this was not unexpected. We continue to monitor the situation, and we are confident it won't harm our long-term prospects. I believe the macro environment for school alternatives like ours continues to be a long-term trend that will serve as a tailwind to our business. Our job right now is to maintain focus and execute through the rest of this year and into the fall so that students and their families can continue to choose the options, including our programs, that they deserve. Thank you, and I will now turn the call over to Donna.
Thank you, James, and good afternoon. As James mentioned, we are seeing strong demand for the fall as measured by application volume, and we remain confident in the long-term growth in the business. This quarter's results reflect continued demand and solid execution across the business, and I'll start by reviewing those results. Total enrollments grew 1.8% to 244,500 and total revenue for the quarter was $629.9 million, up 2.7% compared to last year. Revenue in our career learning, middle and high school programs grew nearly 16% to $259.5 million, driven by strong enrollment growth of 11.6%. General Education revenue was $357.5 million, down 3.6% compared to last year, driven by an enrollment decline of 5%, which was more than offset by the growth in our Career Learning business. As we think about next quarter, it's important to remember that we anticipate enrollment decline as most of our programs no longer accept enrollments during the fourth quarter. We are focused on converting these leads into new enrollments for the upcoming school year, and we expect a sequential decline next quarter like we typically do every year from Q3 to Q4. Total revenue per enrollment across both Career Learning and General Education was $2,485, up 2.9% from $2,415 last year. As a reminder, revenue per enrollment can vary between General Ed and Career due to program and state mix as well as timing. We encourage investors to focus on total revenue per enrollment, which we believe is the most representative measure of underlying performance. Given this quarter's results, we expect total revenue per enrollment for the full year to be up roughly 2% from last year. We've received a lot of questions about next year's enrollment expectations, and I want to reiterate that it is still very early in the enrollment season. We should have a better picture of the enrollment landscape during the fourth quarter call as well as more color on the funding environment as states finalize their budgets in the coming months. Turning back to the results from the third quarter, gross margins at 36.8% for the quarter were down 380 basis points. We expect to finish the year with gross margins in the range of 37% to 37.4%. The year-over-year decline is primarily driven by continued investments in the business, including those related to our platform rollout as we support the transition. We would expect a portion of these costs to moderate as we move into FY 2027. Selling, general and administrative expenses totaled $102.5 million, down $16 million or 13.5% from last year. We expect to finish the year with SG&A down 6% to 8% compared to last year. Stock-based compensation for the quarter was $9.6 million. We now expect to finish the year with stock-based compensation in the range of $40 million to $42 million. Adjusted operating income was $140.4 million, down 1%. Adjusted EBITDA was $171.3 million, up 1.8%. And adjusted earnings per share for the quarter was $2.30, down $0.03 from last year. As in years past, we expect fourth quarter profitability to be less than the third quarter as we ramp up marketing and other spend for the upcoming school year. Now moving to our balance sheet. Capital expenditures for the quarter were $18.5 million, up from $15.8 million last year. Free cash flow, defined as cash from operations less CapEx, was $202.4 million, up from $37.3 million last year. For the year, we expect free cash flow to be flattish to last year. We finished the quarter with cash, cash equivalents and marketable securities of $856 million. Turning to our guidance. For the full year, we are narrowing our revenue, AOI and CapEx guidance ranges and affirming our effective tax rate guidance. For the balance of the year, we expect revenue in the range of $2.490 billion to $2.520 billion, narrowed from $2.480 billion to $2.555 billion last quarter. Adjusted operating income between $490 million and $500 million narrowed from $485 million and $505 million last quarter. Capital expenditures between $75 million and $80 million, narrowed from $70 million and $80 million last quarter and an effective tax rate between 24% and 25%, unchanged from last quarter. As you'll note, the range of revenue implies fourth quarter revenue below the fourth quarter of last year, driven by marginally higher attrition rates and tough comparisons associated with the timing of funding true-ups. We do not, however, believe this is indicative of any change in underlying demand trends. We continue to see positive trends in demand and customer experience, and we remain optimistic about the coming school year. We believe that our investments in the business are setting us up for long-term success and the ability to meet the demand of families seeking alternative education options. Thank you for your time today. Now I'll turn the call back over to the operator for Q&A.
Questions and answers
The operator provided instructions. Your first question comes from the line of Jeff Silber with BMO Capital Markets.
I appreciate the timing in terms of trying to gauge enrollment for next year. But I was wondering if you can comment on the contract renewal pipeline or new business. I'm just wondering how that's going, if you're seeing any pushback from some of the issues that you incurred last summer.
Yes. Jeff, I think there are two separate questions, and they have similar answers, though one may be more positive than the other. With our existing clients, we're very thankful that they remain positive about our programs. They understand the value we deliver together and the value we can bring to those programs. We still think we have very good relationships with our partners. Clearly, some partners aren't happy about things that have happened over this past year, but in general they're working collaboratively with us, and they're understanding. On the new business development side, we have seen no negative impact in terms of doors opening for us or conversations we've been able to have. In fact, our pipeline of new business activity is probably as strong or stronger than it's been in the five years I've been CEO. The platform issues we've experienced have not been a focus for almost any potential partners. They are focused on the success we can deliver for families across the country and the belief that the options and choices we provide are important. We're getting really positive feedback. We proactively discuss the issues we've had this past year, and most customers are understanding. Many have been through difficult platform issues themselves during COVID, so they have recent experience with negative platform issues. Overall, conversations have been pretty positive, and the pipeline is as strong as we've seen in five years.
Okay. That's great to hear. I know you're not commenting on the funding environment for next year, but I know there's been some changes in certain states. Pennsylvania has been one that's been in the press. Do you see other states changing how they're funding virtual schools? Is that a trend we might see continue?
I think it's hard to call a broader trend. Pennsylvania has had legislation on the books for almost 20 years to cut virtual funding. They have one of the longest-standing virtual programs and some of the highest penetrations in the state with a robust marketplace of providers. Politics have played into it for many years, and this was the year that legislation moved. Our business remains robust in Pennsylvania, and the market there remains robust. Situations like this can present opportunities for stronger players like us, and we'll look at ways to take advantage of any such situation. More broadly across the country, I don't see a materially different trend than we've seen in the past 10 to 15 years. There are always proposed pieces of legislation both for and against virtual programs, but I don't see a new, different trend now compared to the last decade or more.
Your next question comes from the line of Alex Paris with Barrington Research.
My first question relates to enrollment and the enrollment windows. It was my understanding that some of the enrollment windows at some of the programs might have closed earlier this year than last year and previous years in general, given the challenges of last fall. And then obviously, we expect windows to be closed for the full fourth quarter. Is that an accurate statement? Did windows close earlier in the third quarter than last year? And what impact, if any, can you quantify on enrollment in the third quarter?
Yes, the short answer is yes. More profoundly, not only did windows close earlier, but we have been proactively choosing to backfill rather than grow where possible. This year we've generally taken the stance of trying to backfill instead of pushing for growth in programs where backfilling is possible. When programs are backfilled and not grown, and other programs have windows closing earlier, you get downward pressure on enrollment. We've been transparent about this dynamic all year. Through the fourth quarter, that will continue, since we don't have windows open through the balance of this year; it's primarily a story of attrition. This does not change our perspective on overall demand, which continues to be strong and positive for the fall.
It looked like you backfilled well in the third quarter with enrollment coming in where it did. We expected a sequential decline; we got a little sequential decline, but it was still up 1.8% year-over-year. Part of that's due to windows being closed earlier, part of it's due to the fact that you're not pushing hard and want to get it right. Is there any way to quantify how many students you left on the table in the third quarter because of early windows being closed?
It's difficult to quantify precisely because conversion rates and related factors are variable. But it's clearly in the thousands. If you look at prior years' trends and assume similar demand, we likely left on the table a similar amount that we could have grown this year, which would be in the low thousands.
So sequentially, it grew from Q2 to Q3 last year. This year, it did not, in part due to the closed windows.
Yes, exactly.
Given the demand continues to be so strong as measured by application volumes, does that mean that these students get added to waitlists? And does that bode well for the fall term?
In some cases, yes, they are added to waitlists. In other cases, we've started opening enrollment for the fall, so some applicants are in a provisional state because applications are being accepted now even though their official start would be the fall. That gives us a head start on the pipeline for next year. There are also a notable number of families who need an immediate solution, and when we can't provide that immediate solution, they often look elsewhere. So some of the pipeline can't be translated into next-year enrollment because those families sought immediate placement elsewhere.
Anything to read into the fact that General Education enrollment was down 5% and Career Learning enrollment was up 12%? I know it doesn't really matter economically, but any color on that?
I don't think there's anything specific to read into those relative movements. We look at the full business overall and segment it into those buckets, but I wouldn't infer a particular trend from the quarter-to-quarter difference between General Education and Career Learning.
Your next question comes from the line of Stephen Sheldon with William Blair.
James and Donna, you have Matt Filek on for Stephen Sheldon. Given you seem to be making good progress on mitigating the platform issues, how are you thinking about marketing spend from here? Is that something you plan to push the pedal on? How should we think about SG&A spend over the next year or so?
We're on a trajectory toward essentially business as usual from here. We're executing our road map for stability and improvements, and we expect a robust and successful fall. I don't see anything that would hold us back from ramping up. We'll be in the market and expect to be fairly aggressive. One data point we've observed is that customer use of AI tools may be improving conversion because people can research programs better. That could ultimately improve conversion and reduce cost of acquisition. There are things that look positive in the funnel mechanics of our business heading into the fall.
That's helpful color. Can you provide a little more detail on the Adult Learning segment and what it might take to get that segment to return to growth? In the past you've been more positive on MedCerts with Tech Elevator and Galvanize lagging. Any update on what's going on within that segment and the path to get things back to growth would be helpful.
These businesses are relatively small in the context of our overall company financials, so changes there won't meaningfully move the needle for shareholders. The boot camp businesses, like Tech Elevator and Galvanize, are facing a secular decline, and it's very difficult for that part of the market to recover meaningfully. My industry checks suggest others see the same. The MedCerts business remains an attractive market segment and the opportunity still exists. We have not executed as well as we should in MedCerts and have had leadership changes this past year. We're investing there and expect to continue to invest. While these investments won't change anything material to our overall financials, we do believe there is opportunity, and we'll look to take advantage of that. Our execution has not yet been where we expect it to be.
That concludes our question-and-answer session. Ladies and gentlemen, this concludes the Stride Third Quarter Fiscal Year 2026 Earnings Call. Thank you all for joining. You may now disconnect.