Stride, Inc. Form 10-Q Summary
Period clarification: The request labels this “2020 Q3,” but the supplied filing is for the quarter ended March 31, 2021 (Stride fiscal 2021 third quarter), with comparisons to the quarter and nine months ended March 31, 2020. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Stride, formerly K12 Inc., provides online and blended education services. It reports one operating segment and two revenue lines: General Education and Career Learning. In the nine months, reported enrollment rose 55.9% to 189,400; enrollment excludes adult learners at Galvanize, Tech Elevator, and MedCerts. The company changed its name in December 2020 and revised its revenue categories; comparative revenue data was recast.
Financial results and liquidity
| Metric | Quarter ended Mar. 31, 2021 | Prior-year quarter | Nine months ended Mar. 31, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $392.1 | $257.2 | $1,139.3 | $771.8 |
| Gross margin | $139.0; 35.5% | $78.2; 30.4% | $398.3; 35.0% | $256.0; 33.2% |
| Operating income | $38.6; 9.8% | $14.5; 5.6% | $89.1; 7.8% | $25.4; 3.3% |
| Net income | $23.8 | $8.8 | $61.0 | $19.6 |
| Diluted EPS | $0.57 | $0.22 | $1.46 | $0.48 |
- Quarter revenue increased 52.5% and net income increased $15.0 million. Nine-month revenue increased 47.6%, operating income 250.8%, and net income 211.2%.
- Quarter General Education revenue rose 38.2% to $322.3 million; Career Learning rose 190.9% to $69.8 million. Nine-month increases were 35.9% and 160.8%, respectively. Higher enrollment, school mix, and acquisitions contributed.
- For the nine months, operating cash flow was $11.1 million, versus $3.0 million a year earlier. Accounts receivable growth used $197.7 million of cash, limiting cash conversion despite higher earnings. Investing cash outflow was $106.5 million; financing cash inflow was $212.1 million.
- At March 31, cash and cash equivalents were $329.0 million; working capital was $575.4 million. Accounts receivable was $422.8 million, up from $236.1 million at June 30, 2020. The allowance for credit losses was $21.7 million.
- Debt included $420.0 million principal of 1.125% convertible notes due 2027, carried at $295.4 million net of discount and issuance costs. The $100 million revolving-credit balance was repaid; no revolver borrowings remained, and the company reported covenant compliance. Finance lease liabilities were $69.2 million.
Material changes and unusual items
- Revenue growth was accompanied by improved gross and operating margins. Instructional costs increased with enrollment, but as a share of revenue declined; SG&A rose in dollars and was 25.6% of quarterly revenue versus 24.8%.
- Stride acquired MedCerts and Tech Elevator on November 30, 2020, for stated consideration of $70.0 million plus contingent consideration for MedCerts, and $23.5 million plus working capital for Tech Elevator. Their purchase-price allocations remained preliminary. Galvanize, acquired in January 2020, contributed to the comparison and growth in adult Career Learning revenue.
- The convertible-note financing generated $408.6 million net proceeds; Stride spent $60.4 million on capped calls intended to reduce potential dilution. Interest expense increased, including non-cash amortization of debt discount and issuance costs.
- Adoption of the expected-credit-loss standard added an $8.5 million allowance at July 1, 2020, with a $6.2 million reduction to retained earnings and a $2.3 million reduction to deferred tax liabilities.
Outlook, commentary, and risks
- Management said demand for products and services was elevated during COVID-19 but could not predict how much would persist after the pandemic or its effect on the next school year. No numerical revenue or earnings guidance is provided in the supplied filing text.
- Management stated that operating cash generation, note proceeds, available credit, and working capital should fund operations for the foreseeable future, while noting it continues to consider acquisitions, strategic investments, and joint ventures.
- Two putative securities class actions alleging misleading disclosures related to technology capabilities, cybersecurity, and support during increased virtual-learning demand were consolidated; a related derivative case was stayed. The company said it would defend the matters and did not expect known proceedings to materially harm it based on information then available.
- A December 2020 ransomware incident affected parts of corporate back-office systems, including some student and employee information. The investigation was ongoing; Stride reported making a payment with its cyber insurer’s involvement and said it did not then expect a material business impact. The filing warns that scope, remediation costs, litigation, regulatory exposure, and insurance coverage remain uncertain.
- Stride guarantees certain managed schools’ operating deficits, which can reduce management fees; it also disclosed approximately $0.6 million in lease guarantees. COVID-related demand, school funding and enrollment estimates, receivable collectability, and acquisition integration are material areas of uncertainty.
Key facts investors should verify
- Whether elevated COVID-era enrollment and demand persist, and how school enrollment, funding, and school operating losses affect revenue and collections.
- Receivable aging, allowance adequacy, and cash conversion: receivables rose substantially while nine-month operating cash flow remained modest relative to net income.
- Final purchase-price allocations, contingent consideration, and the financial performance and integration of MedCerts, Tech Elevator, and Galvanize.
- Developments and potential exposure from the securities litigation and the ransomware incident, including any subsequent findings or costs.
- Convertible-note dilution and cash-settlement terms, lease obligations, and the company’s ability to maintain liquidity and covenant compliance.