Stride, Inc. (NYSE: LRN) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2023. Results are unaudited; amounts below are in U.S. dollars unless stated otherwise.
Business context
Stride provides virtual and blended education, curriculum, technology, instruction, and support services. Its revenue lines are General Education and Career Learning, including middle- and high-school programs and adult learning. The company operates as one reportable segment. School-as-a-service contracts are a significant revenue source and are generally funding- and enrollment-sensitive.
Financial performance
| Metric | Three months ended Dec. 31, 2023 | Year-over-year change | Six months ended Dec. 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $504.9 million | +10.1% | $985.0 million | +11.5% |
| Gross margin | $201.2 million; 39.8% | 37.1% margin in prior year | $374.1 million; 38.0% | 33.9% margin in prior year |
| Operating income | $84.3 million; 16.7% of revenue | $68.1 million; 14.8% in prior year | $87.6 million; 8.9% of revenue | $39.4 million; 4.5% in prior year |
| Net income | $66.8 million | $50.7 million in prior year | $71.7 million | $28.0 million in prior year |
| Diluted EPS | $1.54 | $1.19 in prior year | $1.66 | $0.66 in prior year |
Quarterly General Education revenue rose 14.2% to $313.9 million; Career Learning revenue rose 4.0% to $191.0 million. For the six-month period, General Education revenue increased 12.2% to $613.2 million and Career Learning increased 10.3% to $371.8 million. Adult Career Learning revenue declined 13.4% in the quarter and 3.6% for six months, while middle- and high-school Career Learning revenue grew.
Total enrollment was 193,100 for the quarter, up 8.8%, and 191,800 for the six-month period, up 8.6%. Management attributed revenue growth primarily to enrollment growth, school mix, and other factors. Six-month instructional costs fell to 62.0% of revenue from 66.1%; SG&A was 29.1% of revenue versus 29.5%.
Cash flow, liquidity, and debt
- Operating cash flow: $38.0 million for the six months, versus $21.2 million in the prior-year period. Management cited higher net income and certain working-capital effects; increased receivables and lower deferred revenue were offsets.
- Investing cash flow: $68.8 million used, mainly reflecting net purchases of marketable securities. Financing cash flow: $25.7 million used, primarily finance-lease repayments and restricted-stock tax withholding.
- Cash and cash equivalents: $354.4 million at December 31, down from $410.8 million at June 30, 2023. The company also held $176.6 million of marketable securities.
- Working capital: $848.0 million. Current assets were $1.089 billion and current liabilities were $240.9 million, including accounts receivable of $509.6 million.
- Debt: $413.9 million net carrying value of $420.0 million principal of 1.125% convertible senior notes due 2027. The company had no borrowings on its $100 million revolving credit facility and reported compliance with its financial covenants.
- Lease liabilities: $63.7 million finance leases and $64.4 million operating leases at period-end.
Management stated that operating cash generation, availability under the credit facility, and working capital are expected to fund operations in the short and long term. The filing provides no specific revenue, earnings, or enrollment guidance.
Material changes, commentary, and risks
- Six-month operating income more than doubled year over year, alongside revenue growth and improved gross margin. Net income growth also benefited from higher other income, primarily returns on marketable securities.
- Bad-debt expense increased: SG&A rose by $14.9 million in the quarter, including a $5.3 million increase in bad-debt expense; for six months SG&A rose by $26.1 million, including a $13.2 million increase in bad-debt expense. The allowance for credit losses increased to $35.9 million from $30.0 million at June 30, 2023.
- Revenue estimates depend on school enrollment, state funding formulas, attendance and other factors. Stride generally absorbs operating deficits for certain managed schools; estimated school operating-loss revenue reductions were $8.3 million for six months, compared with $16.6 million a year earlier. Actual funding, audits, and school losses may differ from estimates.
- Management reported that disclosure controls and procedures were not effective as of December 31, 2023 because of a previously disclosed material weakness in IT general controls over user access, program changes, and data processing used in financial reporting. The weakness had not been fully remediated; management said the financial statements nevertheless fairly present the company’s results and position.
- The company noted inflation-related pressure on personnel, marketing, and supply-chain costs. It reported no material change to the risk factors in its latest Form 10-K. Management believes known litigation is not expected to have a material adverse effect, while noting outcomes cannot be assured.
- In January 2024, the company determined that Tech Elevator’s 2023 performance metrics for two incentive-award tranches were not met; those awards were forfeited.
Investor verification priorities
- Track receivable collections, credit-loss provisions, write-offs, and the allowance for credit losses, given the higher bad-debt expense and large receivables balance.
- Review enrollment, school mix, state funding estimates, district audit adjustments, and managed-school operating deficits for effects on revenue and margins.
- Monitor operating cash flow against net income and the movement in receivables and deferred revenue; assess liquidity alongside lease payments and the 2027 convertible notes.
- Follow remediation and testing of the IT-control material weakness and any resulting changes to disclosure-control effectiveness.
- Confirm whether adult-learning revenue stabilizes and whether growth in middle- and high-school Career Learning continues.