Stride, Inc. — Q1 FY2023 10-Q
Reporting period: Three months ended September 30, 2022; comparisons are with the three months ended September 30, 2021 unless noted. Stride provides virtual and blended education, career-learning programs, and adult career training.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $425.2 million | $400.2 million | +6.2% |
| Gross margin | $129.6 million; 30.5% | $126.4 million; 31.6% | Margin down 1.1 percentage points |
| Operating loss | $28.7 million | $7.0 million | Loss widened |
| Net loss | $22.7 million; $0.54 per diluted share | $5.9 million; $0.15 per diluted share | Loss widened |
| Cash used in operating activities | $143.1 million | $131.5 million | Use increased $11.6 million |
| Cash used in investing activities | $26.5 million | $23.2 million | Use increased $3.3 million |
| Cash used in financing activities | $25.2 million | $12.8 million | Use increased $12.4 million |
- Revenue mix: General Education revenue fell 11.3% to $271.7 million. Career Learning revenue rose 63.5% to $153.5 million, including middle/high school revenue of $125.5 million (+75.8%) and adult revenue of $28.0 million (+24.4%).
- Enrollments: Total full-service program enrollment declined 8.3% to 173,900. General Education enrollment fell 23.9% to 112,300; Career Learning enrollment increased 46.7% to 61,600.
- Costs and margins: Instructional costs rose 7.9% to $295.5 million, faster than revenue, and increased to 69.5% of revenue from 68.4%. Selling, general and administrative expense rose 18.7% to $158.4 million, or 37.2% of revenue versus 33.3%.
- Cash and liquidity: Cash and cash equivalents were $194.5 million at September 30, down from $389.4 million at June 30. Current assets were $931.1 million and current liabilities $289.2 million, producing reported working capital of $641.9 million. Accounts receivable was $543.7 million.
- Debt and leases: Long-term debt carrying value was $411.8 million, representing $420.0 million principal of 1.125% convertible notes due 2027. No amount was drawn on the $100 million revolving credit facility; the company reported covenant compliance. Finance and operating lease liabilities totaled approximately $160.5 million.
Changes, outlook and risks
- Management attributed General Education revenue weakness primarily to lower enrollment, school mix and other factors; Career Learning gains reflected enrollment growth and mix. Total revenue grew despite lower overall enrollment.
- Management attributed higher instructional costs mainly to hiring timing and salary increases. Higher SG&A reflected increased professional services and marketing, personnel and benefits, and licensing fees. A $4.3 million gain from settling MedCerts contingent consideration reduced SG&A expense.
- Operating cash use reflected working-capital movements, including a $126.5 million increase in accounts receivable cash-flow use and higher prepaid expenses. Management said receivables typically peak in the first fiscal quarter because of school-year billing timing.
- Management stated that cash on hand, expected operating cash generation and borrowing availability are expected to support operations for the foreseeable future. The filing provides no specific revenue or earnings guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Risks include uncertainty in state and school funding and enrollment estimates, school operating deficits that Stride may have to absorb, and collection risk. The company recorded $10.1 million of revenue reductions for estimated school operating losses, versus $12.9 million a year earlier. Management also cited inflation-related pressure on personnel, marketing and supply costs and uncertainty over the continuing or ending effects of COVID-19.
- A securities class-action dismissal was appealed, with oral argument scheduled for October 27, 2022; related derivative litigation was stayed pending that appeal. The company said it intended to defend the matters and did not expect currently known proceedings to have a material adverse effect, while noting outcomes cannot be assured.
- Stride acquired Tallo assets in July 2022 for a preliminary purchase price of $6.8 million, including $5.2 million of goodwill and $1.3 million of intangible assets. The purchase-price allocation remained preliminary. The filing reported no goodwill impairment indicators in the quarter.
Investor facts to verify
- Whether the sharp General Education enrollment decline continues and whether Career Learning growth can offset it.
- Whether gross-margin pressure and elevated SG&A spending moderate, including the contribution of marketing and professional-services costs.
- Accounts-receivable collections, school funding estimates and the adequacy of the allowance for doubtful accounts.
- Cash use and liquidity through the remainder of the school-year billing and collection cycle.
- Developments in the securities-litigation appeal and final valuation of the Tallo acquisition.