Stride, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended June 30, 2022. The request metadata says “2021 Q4,” but the supplied filing is Stride’s FY2022 annual report, not a Q4 2021 filing.
Business context
Stride provides virtual and blended education services, curriculum, technology, instruction and student support, primarily to public schools and districts. It reports General Education and Career Learning revenue within one operating segment. Most revenue comes from multi-year school-as-a-service contracts funded largely through public per-student funding. Career Learning also includes adult training businesses Galvanize, Tech Elevator and MedCerts.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $1,686.7 million | $1,536.8 million | +9.8% |
| Gross margin | $596.5 million; 35.4% | $534.9 million; 34.8% | +0.6 percentage points |
| Operating income | $156.6 million; 9.3% margin | $110.5 million; 7.2% margin | +41.7% |
| Net income | $107.1 million; 6.4% margin | $71.5 million; 4.6% margin | +49.9% |
| Diluted EPS | $2.52 | $1.71 | Increased |
| Operating cash flow | $206.9 million | $134.2 million | +$72.7 million |
Revenue by line: General Education was $1,273.8 million, down 0.5%; Career Learning was $412.9 million, up 60.9%. Career Learning growth reflected school-age enrollments, school mix and acquisitions. Total reported enrollments were 185,100, down 0.6%; General Education enrollments fell 8.6% while Career Learning enrollments rose 41.6%.
Instructional costs were 64.6% of revenue versus 65.2% in FY2021; SG&A was 26.1% versus 27.6%. Management attributed improved operating income to revenue growth, improved gross margin and lower SG&A as a share of revenue. Net interest expense fell to $8.3 million from $18.0 million, largely after adopting new convertible-debt accounting guidance.
Liquidity, debt and cash flow
At June 30, 2022, cash and cash equivalents were $389.4 million, working capital was $648.5 million, and accounts receivable was $418.6 million. The company also held $84.7 million of marketable securities. Cash provided by operations was $206.9 million; investing activities used $110.8 million and financing activities used $93.3 million.
Long-term debt was $411.4 million, comprising $420.0 million principal of 1.125% convertible senior notes due 2027, net of issuance costs. The $100 million revolving credit facility had no borrowings outstanding; Stride reported compliance with its covenants. Finance lease liabilities were $66.3 million. Management said operating cash generation, available borrowing capacity and working capital should fund operations for the foreseeable future.
Material changes, outlook and risks
- FY2022 revenue growth was much slower than FY2021’s 47.7%, when General Education enrollment rose sharply amid the pandemic. In FY2022, General Education revenue and enrollment declined, while Career Learning expanded.
- FY2022 SG&A included a $4.5 million impairment of the Tallo preferred-stock investment and $7.1 million of credit-loss expense on Tallo notes. The company also reported increased bad-debt expense, licensing fees, professional services and marketing costs.
- Stride early adopted ASU 2020-06 for convertible debt accounting. The adoption removed the debt discount and changed reported debt and equity balances; it also reduced reported interest expense. This was an accounting change, not an operating cash-flow improvement.
- No quantified FY2023 revenue or earnings guidance is provided in the supplied filing. Management expected school-as-a-service to remain the majority of revenue and described growth plans for Career Learning, adult training, Learning Solutions and private schools. It cautioned that post-pandemic demand and resulting financial trends are difficult to forecast.
- Key risks include changes to state funding or per-pupil formulas; student enrollment, retention and school contract renewals; charter authorization and regulatory compliance; academic outcomes; competition; and the cost of serving at-risk and special-needs students. Revenue estimates rely on enrollment and state funding assumptions, and the auditor identified funding-based contract revenue as a critical audit matter.
- Cybersecurity remains a risk. A December 2020 ransomware incident involved access to parts of corporate back-office systems, including some student and employee information. Stride said it did not believe the incident materially affected its business or financial results.
- A securities class-action dismissal was appealed, with the appeal decision pending at the filing date; related derivative litigation was stayed pending that appeal. Stride said existing or known threatened proceedings were not expected to have a material adverse effect, based on information then available. The Georgia Cyber Academy dispute was settled, with the remaining $8.64 million payment received in August 2021.
- Stride reported no cash dividends paid and no expectation of dividends for the foreseeable future. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether General Education enrollment and revenue declines continue, and whether Career Learning growth offsets them; assess segment economics and enrollment definitions.
- How much future revenue depends on public funding, school-level enrollment estimates, contract renewals and charter authorizations; monitor collection of the large receivables balance.
- The resolution and potential financial exposure of the securities appeal and related derivative action, as well as any material updates on Tallo’s recoverability.
- The terms, potential dilution and cash-settlement exposure of the $420 million convertible notes, and the timing of finance lease and other obligations.
- Post-pandemic demand, student retention, academic performance and cybersecurity developments; the filing provides no numerical forward guidance.