Stride, Inc. (formerly K12 Inc.) — Form 10-Q summary
Reporting period: Fiscal first quarter ended September 30, 2020; year-over-year comparisons are with the three months ended September 30, 2019. The filing registrant was K12 Inc., which later became Stride, Inc. Financial statements are unaudited. Unless noted otherwise, amounts below are in U.S. dollars.
Business context
K12 provided online and blended education services through General Education and Career Learning. It reported as one operating segment. The company revised its revenue categories in fiscal 2021; prior-period revenue and enrollment figures were recast for comparison. The quarter included Galvanize, acquired in January 2020, which provides adult and enterprise technology training.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2020 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $371.0 million | $257.1 million | Up 44.3% |
| Gross margin | $129.9 million; 35.0% | $87.8 million; 34.1% | Margin up 0.9 percentage points |
| Operating income (loss) | $12.1 million | $(19.4) million | Turned profitable |
| Net income (loss) | $12.7 million | $(9.7) million | Basic EPS $0.32; diluted EPS $0.30 |
| Net interest expense | $2.1 million | Net interest income of $0.9 million | Reflects new convertible notes |
| Cash from operating activities | $(114.5) million | $(86.8) million | Greater cash use, principally from receivables |
| Cash from investing activities | $(15.7) million | $(18.2) million | |
| Cash from financing activities | $226.7 million | $(12.1) million | Includes note issuance and credit-facility repayment |
General Education revenue rose 34.4% to $313.8 million. Career Learning revenue rose 142.5% to $57.1 million, including $8.3 million from Galvanize. Enrollment in the reported programs increased 57.1% to 195,400 students: General Education enrollment rose 48.6% and Career Learning enrollment rose 126.5%.
At September 30, 2020, cash and cash equivalents were $308.8 million, accounts receivable were $419.6 million, and current assets were $805.5 million against current liabilities of $236.0 million. Working capital was $569.5 million. The receivables balance typically peaks in the first fiscal quarter, according to management. The allowance for credit losses was $18.5 million, versus $6.8 million at June 30, 2020.
The company issued $420.0 million principal amount of 1.125% convertible senior notes due 2027, receiving approximately $408.5 million net proceeds before the separate capped-call cost. It spent $60.4 million on capped calls and repaid the $100.0 million drawn under its revolving credit facility. Reported long-term debt was $287.8 million, net of unamortized discount and issuance costs; the facility had no outstanding borrowings at quarter-end. Finance lease liabilities were $32.8 million and operating lease liabilities were $112.3 million.
Material changes and unusual items
- Revenue growth was attributed primarily to higher enrollment, school mix and, for Career Learning, the Galvanize acquisition. Instructional costs increased 42.3%, less than revenue growth; SG&A increased 9.9%. SG&A declined to 31.8% of revenue from 41.7%.
- The company adopted the expected-credit-loss standard on July 1, 2020. Adoption increased the allowance for credit losses by $8.5 million and reduced retained earnings by $6.2 million, with a $2.3 million decrease to deferred tax liabilities.
- Galvanize contributed $8.3 million in revenue and a $9.7 million operating loss for the quarter. Its acquisition purchase-price allocation remained preliminary.
- Funding-based school contracts make revenue and collectability dependent on enrollment, state funding formulas and estimates of school operating losses. Estimated school operating losses reduced revenue by $19.9 million, compared with $16.3 million a year earlier.
- Operating cash use increased despite the return to net income. The cash-flow statement identifies a $197.0 million increase in accounts receivable as the largest working-capital use.
- The quarter included an income tax benefit of $2.4 million. Management attributed the effective tax rate partly to excess tax benefits from stock-based compensation.
Outlook, commentary and risks
Management reported increased demand for its products and services amid COVID-19, but said the pandemic’s longer-term impact and effects on results for the remainder of fiscal 2021 could not be determined. The filing gives no numerical revenue, earnings or cash-flow guidance. Management stated that operating cash generation, note proceeds, potential revolver availability and working capital should fund operations for the foreseeable future, while also noting that it continues to consider acquisitions, investments and joint ventures.
Key risks include uncertainty in public-school enrollment and funding estimates, possible school operating deficits that can reduce revenue and management fees, receivable collection and credit losses, and the uncertain effects of COVID-19 on customers and operations. The company also disclosed routine legal proceedings, approximately $0.9 million of school lease guarantees and guarantees against operating deficits at certain managed schools. It said no material changes had occurred to the risk factors in its latest Form 10-K. Disclosure controls were deemed effective; integration of Galvanize into internal financial controls was ongoing.
Important facts for investors to verify
- Whether enrollment growth translates into sustainable revenue and margins, and how school mix and funding adjustments affect results.
- Receivable aging, collections and adequacy of the credit-loss allowance, given the large first-quarter receivables increase and operating cash outflow.
- Galvanize’s path to profitability, integration costs, and final purchase-price allocation.
- The convertible notes’ effective interest cost, conversion and dilution exposure, and the net economic effect of the capped-call transactions.
- Exposure to school operating-loss guarantees and the sensitivity of reported revenue to state funding, enrollment counts and school audits.
- COVID-19 demand durability and any subsequent changes to financial outlook or operating conditions.