[LRN stock] Stride Q3 2021 Earnings Call (4/20/21)

Thank you. Good afternoon everybody. Since I became CEO three months ago, I've heard one consistent question: what will happen with education after the pandemic is over? Well, we're soon approaching that point, it looks like, and I don't think any of us know. But many credible thought leaders seem to believe the shift to online learning is not temporary. In fact, a lot of the key trends we are seeing from recent research on education, careers, and the economy support this idea. A recent New York Times article carried the headline 'Online Schools Are Here to Stay Even After the Pandemic.' The premise of the article was that the ongoing pandemic has changed the landscape of education permanently. One quote: 'A subset of families who have come to prefer online learning are pushing to keep it going.' Additionally, a recent study by the Society for Industrial and Applied Mathematics found that one-third of high school students would choose a fully online or hybrid education even after things returned to normal. These and other researchers like them support my long-held belief that the momentum in digital transformation is difficult to reverse, and that the trend toward online and hybrid education will continue. And more students are recognizing that college is not the only effective or most affordable path to a career. The ECMC Group released findings from a study it conducted that showed today's high school students are seeking lower cost, quicker paths to careers. In the study, 25 percent of Gen Z teens said they were more likely to attend a career and technical education school due to their pandemic experience. This trend is playing out in college as well; last fall there was a seven percent drop in enrollments in higher education. This means more students will seek out other educational paths. In a recent article in New York Magazine, they make the following case: 'People under the age of 40 are fed up. They have less than half of the economic security than their parents did at the same age. For the first time in our nation's history, a 30 year old isn't doing as well as his or her parents at age 30.' So the paradigm of offering opportunities needs to shift. In our adult learning business, we are seeing people moving toward non-traditional educational paths. Stride Education Network surveys have shown that adult learners who are looking for education or training options are focused on gaining certification and licensure rather than traditional degrees, and they prefer to get this training through online programs or directly from their employer. Importantly, companies are beginning to recognize that non-traditional educational paths can be as successful as college graduates. Large corporations like Facebook, Google, and Amazon, and others, have begun programs to hire non-college graduates, and in many cases students right out of high school into professional, high-paying technology jobs, and all indications suggest these professionals are excelling as such. Companies are expanding these programs. These trends support our strategy of providing career skills. The pandemic has accelerated the shift in modality to a more digital approach. As these markets are poised to grow at increasing rates, Stride is well positioned to benefit for many years to come. The immediate impact of these trends are evident in our results for this quarter and in our fiscal 2021 guidance. We've raised our guidance for the full year in each of the past two quarters. Year to date, our Stride career revenue enrollments are up over 120 percent. The ECMC study I mentioned above also found that 61 percent of Gen Z teens believe a skill-based education makes sense in today's world, and our Stride career programs offer a clear solution for these students. The programs provide access to career-ready skills and certifications. This allows students to develop skills that can lead directly to a career, or better prepare them for post-secondary education. Regardless of which path they choose, we want to provide them with an education that will prepare them for careers in high-growth areas like healthcare, technology, and business. Our adult acquisitions are doing well and growing at double-digit rates, even though some of them have traditionally focused on in-classroom teaching. Their shifts to online programs has gone smoothly, and we feel good about their future growth prospects. Specifically, our two most recent acquisitions, Tech Elevator and MedCerts, are performing against their acquisition plans, but more importantly, these companies serve mainstream markets, have large-scale future opportunities and funding. As we begin to invest in our Stride brand, we believe we will be able to generate meaningful growth for these products incremental to what they would have been able to do as standalone businesses. As more employers start to take notice of these kinds of pathways, they are looking to partner with training providers to ensure they are hiring the right skilled workers. For instance, MedCerts recently announced a partnership with Equis Workforce Solutions to offer registered apprenticeship opportunities to employers seeking employees in high-demand fields. These types of programs demonstrate that Stride's offerings can address both learner and employer needs. Beyond that, we can help employers build recruitment pipelines with our talent partnership, Talon. Talon now boasts one and a half million users on their platform. This community of both users and employers will help ensure that we are developing the right training programs while giving them and others a path to employment. And as we said during our Investor Day in November, we expect this growth and the trends we are seeing in the market to lead to overall career learning revenues of $650 to $800 million by fiscal 2025. As excited as we are about the prospects in our career and adult learning businesses, we are also focused on our general education business. Unfortunately for many students, the pandemic has caused a decline in academic achievement. A recent study by NWEA showed that the number of students who regressed academically increased significantly nationwide during the last year. Fortunately for students and families attending established virtual programs like ours, they have been able to attend school uninterrupted. Our partners have provided seamless education in a completely disruptive world. We owe our gratitude to them. The impact translated into academic outcomes as well; in a recent study we conducted, programs managed by Stride handily outpaced schools like the ones in the NWEA study. Not all online programs are created equal, we believe. Ours is the gold standard. The data backs that up. How does all of this translate into future trends? Just a little over a year ago, we conducted a survey that validated the trends we've seen for many years, that approximately two to three percent of families were considering a fully online high school option. It just today received results of our most recent study that indicated that that two to three percent had jumped to over ten percent. Similarly, consideration for online career programs jumped from 15 to 25 percent. The shift to online school from home means that more families are seeking out Stride offerings and digital solutions. And while online school might not be for everyone, many more families now recognize it as an option. In addition to the increase in awareness the pandemic has brought about, there have been structural changes to other parts of our lives. It wasn't just students who were impacted; it was parents, families, teachers, and administrators. Many of these individuals have come to appreciate the flexibility that comes from working and schooling from home. This shift gives more parents and families the opportunity to support their children's learning at home while they're also working, or for teachers, they can teach at home. We hired and managed more teachers than ever this year. The flexibility for teachers to work out of their homes is another clear trend that provides great opportunities. Overall, this means that Stride's offerings are more accessible to more families. Now I know many of you are focused on what will happen with our enrollments this coming fall, as the rollout of the vaccine proceeds and most school districts announce plans to get back into the classroom. First of all, let me be clear that we support the reopening of brick-and-mortar schools. In fact, we penned an open letter supporting President Biden's bipartisan push to get schools reopened. Additionally, it's far too early in our enrollment season to know how many new students will come to our programs in the fall. In fact, less than 10 percent of our normal overall enrollment volume happens before the end of April. However, we do have some early indications of the rate at which existing families are indicating their return for the fall. As of right now, the percentage of existing families that are responding to our outreach for returning in the fall is at an all-time high, and the percentage that has indicated they are returning is at a multi-year high. So far, we are seeing the opposite of the mass exodus back to brick-and-mortar schools that some have predicted. This is some very early encouraging news, but I want to stress this is still very early. Finally, I want to highlight some exciting upcoming programs from Stride. Recently, a survey we conducted found that over 65 percent of parents agree that their children need additional educational curriculum over the summer to make up for lost time due to the pandemic. Given the significant need this summer, we are going to offer free summer career experiences for students in grades 7 through 12. These programs are an excellent opportunity for current and prospective students to gain exposure to career skills while engaging in exciting activities. For example, in our esports experience, students will work on coding skills in the morning while spending the afternoon gaming with their friends. We plan to offer programs in nursing, theater, esports, and even a jam camp for musicians. We will also offer programs for recent Stride career prep graduates to further hone the career writing skills they learned in high school. All these programs will help make Stride more accessible to more students while teaching them valuable career skills. So I believe the trends in our business, as well as the overall macro conditions and our addressable market, continue to work in our favor and grow. As time passes, thanks for your time today. I'll now turn the call over to Tim to discuss our quarterly results.

Let me just try to take maybe half of that question and then I'll hand it over to Tim. I think, first of all, a lot of factors happen in a year, so I think it's probably better to focus on the full year number. But the confidence in next year actually doesn't have much to do with this year. This year we were negatively impacted by, you may recall, California didn't fund new enrollments and some other mix issues. When we look at next year, really what we look at is what I'll call the policy landscape across states in which we manage programs. From that perspective, we think that our overall environment looks pretty strong and pretty stable. So it's really nothing to do with how this year is shaping up; it's really based on what we see across the landscape for next year policy wise. Tim, I don't know if you want to add.

Yeah, so I think if anything, churn continues to be better than previous years. In that respect, it was somewhat better than we expected originally when we set out the year. But we are seeing, and we've seen this over the years, the tendency in the middle of the semester for families to have some reticence. Even as schools are opening back up, we saw families have some reticence just to disrupt the flow of the educational program that their child is in. So we were a little bit surprised, and we have been pleasantly surprised throughout the course of the year on the trajectory that churn has taken for us.

Yeah, I think unlike probably previous years, our approach to new states and new schools is actually evolving, and I think it's evolving in a positive way, meaning there are increasingly more opportunities for us to enter new programs in new states with partners. We're approaching it from a perspective that we don't always need a new policy or law or legislation to be passed. So we are continuing to work to open particularly career education programs. We expect to open a small handful this coming fall. We expect programs in general in a number of states, new states, to open or expand. So we're pretty bullish. West Virginia, Missouri, places like that we expect at least some type of expansion or new program to be open for the fall.

Yes, for sure we have. There is some data trickling in that suggests, and obviously not surprising, that most of the brick-and-mortar schools took a pretty significant step back on average in academic outcomes. And we, in fact, our schools, our data suggests that we outperformed that significantly. So from our perspective, based on what we see and the data that is available, our performance has outperformed and outpaced most other brick-and-mortar schools that did online learning over this past year.

Thank you.

Well, I'm reluctant to start providing that type of guidance at this point. I will tell you that our response rates have been materially higher. And I think that for me, at least, the signs that point positively is the engagement levels we're getting. And particularly, I'll give you one tidbit of information. We did track COVID-related types of enrollments, meaning some families very specifically indicated to us that they were coming to us this year specifically for COVID. Now, of course, a lot of families didn't indicate that, so that doesn't capture maybe the entire population. But a very significant proportion of those families who said that they came to us because of COVID have been engaged with us and have indicated that they expect to return in the fall. So again, in our prepared remarks, I indicated that we're not seeing this mass exodus of families just riding it out with us until their brick-and-mortar schools came back and then all exiting back to their brick-and-mortar programs. We see that as a pretty positive trend, that a significant number of families have appreciated the experience enough to indicate that they are sticking with it.

Yeah, I think the slide that has happened - I was just actually before we came into this call, Sal from Khan Academy was on CNBC mentioning that 15 to 20 percent, I think that was the number he gave, of kids have 'gotten lost' in the public school systems. So not just a slide of the kids who have been in the system, you see a large number of students who have sort of gone missing in a way. So we do think and we do see that there is a very large opportunity and good demand for not just our full-time online programs for kids to come into those programs, but just in school districts more broadly looking for ways to meet that demand or to meet that gap. And so I think you should remember that we're not just running full-time programs; we offer a suite of solutions that also help districts with their problems. And I think in some ways, that's going to be an ongoing opportunity for us because I really empathize with these school districts. They really need to make sure that they can reach a lot of these kids who have somehow gone missing in their systems, and they need to provide some alternatives for them as well. And I'm hopeful that they are looking at alternatives like online alternatives for those kids, and we can certainly help there.

Yes and no. The answer is no; we shouldn't have any material change in costs over the summer due to those programs. They do have some marginal cost to us; it's not significant. We think it won't change sort of the overall profit or gross margin trajectory that we're headed on, but we also think it's important to help with the summer gap to bridge kids over the summer. We think it's an important offering to get kids to have awareness around some of these opportunities that we can provide them. So I don't think it's going to be a material cost, but irrespective, it's just an important service that we need to provide the country right now.

No, not materially. So I wouldn't pretend that our revenue per student trend next year is going to be impacted by that. In any given year, I think sort of all falls out with the washing, and our overall revenue per student trend gets more impacted by things like mix or what happened in California this year, and not by the mix of special ed versus non-special ed students.

Thank you.