Stride, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2020; comparable periods are ended December 31, 2019. Stride, formerly K12 Inc., provides online and blended education, including General Education and Career Learning programs. The company changed its name on December 16, 2020.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Year-over-year change | Six months ended Dec. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $376.1 million | +46.0% | $747.1 million | +45.2% |
| Gross margin | $129.4 million; 34.4% | 35.0% a year earlier | $259.3 million; 34.7% | 34.6% a year earlier |
| Operating income | $38.5 million; 10.2% of revenue | $30.3 million; 11.8% | $50.5 million; 6.8% | $10.9 million; 2.1% |
| Net income | $24.5 million | +$3.9 million | $37.2 million | +$26.3 million |
| Diluted EPS | $0.60 | $0.52 | $0.89 | $0.27 |
- Second-quarter General Education revenue was $314.0 million, up 35.0%; Career Learning revenue was $62.2 million, up 149.2%. Six-month increases were 34.7% and 145.9%, respectively. Career Learning growth reflected higher middle/high-school enrollment and acquired adult-learning businesses.
- Reported enrollment in the General Education and Career Learning programs increased 59.7% and 131.3%, respectively, for the quarter. These enrollment figures exclude Galvanize, Tech Elevator and MedCerts.
- For the quarter, instructional costs rose 47.3% and SG&A rose 52.0%, both faster than revenue; gross margin and operating margin consequently declined year over year. For the six-month period, SG&A fell to 27.9% of revenue from 32.4%, supporting improved operating income.
Cash flow, balance sheet and financing
- Cash and cash equivalents were $258.1 million at December 31, 2020, versus $212.3 million at June 30, 2020. Working capital was $539.9 million.
- Six-month operating cash flow was negative $80.0 million, compared with negative $21.3 million a year earlier. The increase in cash used was primarily due to a $208.9 million increase in accounts receivable; management notes receivables fluctuate with billing and collection timing. Investing cash flow was negative $94.3 million, including acquisitions; financing cash flow was positive $220.1 million.
- Accounts receivable rose to $435.3 million from $236.1 million; the allowance for credit losses was $20.9 million, versus $6.8 million at June 30. Adoption of the new credit-loss standard increased the allowance by $8.5 million and reduced opening retained earnings by $6.2 million, net of a $2.3 million deferred-tax-liability decrease.
- Stride issued $420.0 million of 1.125% convertible senior notes due 2027, receiving net proceeds of approximately $408.6 million, and used proceeds in part to repay the $100.0 million revolver balance. The notes’ balance-sheet carrying amount was $291.6 million after accounting for the conversion component and issuance costs; the filing reports a $345.975 million fair value at December 31. The company also paid $60.4 million for capped calls intended to reduce potential dilution. No revolver borrowings were outstanding at quarter-end, and the company reported covenant compliance.
- Finance lease liabilities were $59.3 million; operating lease liabilities were $108.2 million. Management said available working capital, operating cash generation, note proceeds and revolver capacity should fund operations for the foreseeable future.
Developments, outlook and risks
- Stride acquired MedCerts and Tech Elevator on November 30, 2020, expanding healthcare and technology career training. Purchase-price allocations remained preliminary. Galvanize, acquired in January 2020, contributed revenue but reported an operating loss for the six-month period. The filing provides no specific financial guidance; management said the long-term effects of COVID-19 and effects on the remainder of fiscal 2021 were uncertain.
- Management reported increased demand associated with COVID-19. It also described continued monitoring of the situation and possible operational changes. Six-month revenue growth was driven primarily by increased enrollment, school mix and acquisitions.
- A December 2020 ransomware incident involved access to portions of corporate back-office systems, including some student and employee information. The company made a payment through its cyber-insurance provider, but said the investigation was ongoing and the full scope was not yet known; it did not then expect a material financial impact. Future costs, litigation, regulatory action or reputational effects could be significant and may exceed insurance coverage.
- Two putative securities class actions and a related shareholder derivative action were filed, alleging issues including statements about technology capabilities, cybersecurity and support during increased virtual-learning demand. The company intends to defend the claims and stated it did not expect known proceedings to materially affect its business or financial condition.
- School operating-loss guarantees can reduce management fees and revenue. Recognized revenue reductions for school operating losses were $24.2 million in the quarter and $44.2 million for six months, up from $11.2 million and $27.5 million, respectively, in the prior-year periods. A $14.1 million CARES Act payroll-tax deferral is payable in installments in 2021 and 2022.
Key facts for investors to verify
- Whether the sharp increase in enrollment and COVID-related demand persists, and how it affects revenue, costs and margins.
- Collection and credit quality of the $435.3 million receivables balance, including school funding estimates and loss allowances.
- Cash conversion and the sustainability of operating cash flow given its negative $80.0 million result for the first half.
- Integration, profitability and final purchase-price allocations for Galvanize, MedCerts and Tech Elevator, including contingent consideration.
- Ransomware investigation findings, potential exposure of personal information, remediation costs and litigation developments.
- Convertible-note dilution and settlement implications, lease obligations, revolver covenant compliance and future financing needs.