Stride, Inc. quarterly report, Q1 FY2018

Business context and reporting period

K12 Inc. (the registrant in this filing; identified in the request as Stride, Inc.) filed this unaudited Form 10-Q for the quarter ended September 30, 2017, the first quarter of fiscal 2018. K12 provided online curriculum, technology, instructional and management services to public, institutional and private-pay education customers. Managed Public School Programs represented approximately 82% of quarterly revenue.

Financial performance and liquidity

Operating margin improved to negative 7.8% from negative 9.9%; net loss attributable to common stockholders was 3.5% of revenue versus 6.0%. Instructional costs rose to $147.4 million, or 64.4% of revenue, from $144.1 million, or 62.9%. Selling, administrative and other operating expenses declined to $96.3 million, or 42.1% of revenue, from $104.6 million, or 45.7%. The income tax benefit was $9.4 million; the effective rate was 53.4%, versus 38.9%.

At September 30, 2017, cash was $147.3 million, accounts receivable was $282.8 million and working capital was $358.5 million. Cash fell $83.5 million from June 30, with operating cash use driven substantially by receivables and prepaid expenses, partly offset by deferred revenue. Capital lease obligations totaled $29.3 million; there were no borrowings under the $100 million bank credit line, and the company reported compliance with its covenants. Availability under its student-computer lease line was $24.2 million.

Material changes versus the prior comparable period

• Revenue was nearly flat, down approximately 0.2% based on the reported amounts. Managed Public School revenue rose 2.1% to $188.5 million, while Institutional revenue declined 10.6% to $30.6 million and Private Pay Schools and Other declined 6.6% to $9.7 million.
• Managed-program enrollment increased 2.4% to 111,100; non-managed public-school enrollment fell 13.7% to 24,000.
• Operating and common-stockholder losses narrowed, mainly alongside lower selling, administrative and other operating expenses. Instructional costs increased with personnel and enrollment-related costs.
• Cash used in operations was similar year over year despite the smaller net loss. Investing cash use increased, particularly due to higher property and equipment spending.

Outlook, commentary, risks and unusual items

• Management said it expected operating cash generation, working capital and access to the credit line to be adequate for foreseeable operating needs. It anticipated continued demand for virtual education and potential growth in non-managed and institutional offerings, while noting that education policy and funding may change with elections. No quantified financial guidance was provided.
• Revenue and school operating-loss estimates depend on student counts, state funding formulas, attendance and other assumptions. School operating-loss reductions to revenue were $17.8 million, compared with $15.7 million a year earlier; actual funding and costs may differ materially from estimates.
• One contract represented approximately 10% of quarterly revenue; approximately 7% of receivables was attributable to one contract. First-quarter receivables typically rise with school-year billings.
• A current-quarter out-of-period adjustment increased capitalized software and curriculum costs by $2.3 million and $0.6 million, respectively, and reduced net loss by $1.4 million. Management concluded prior-period financial statements were not materially misstated.
• The filing discusses a securities class action concerning, among other matters, Agora Cyber Charter School and company statements. Some claims were dismissed, while claims concerning Agora disclosures remained; the company said it would continue to defend the case. Management did not expect known proceedings to materially adversely affect the company, but could not assure outcomes.
• Other exposures include contractual guarantees against operating deficits at certain managed schools and approximately $2.4 million of school-building lease guarantees. The company reported no material change to annual-report risk factors and no material impairment charges in the quarter.

Important facts for investors to verify

• Whether managed-school enrollment growth and the steep decline in non-managed enrollment continue, and how enrollment mix affects revenue.
• Receivables collection, school funding estimates and potential operating-deficit adjustments, including concentration in a major contract.
• Cash use, capital spending and lease obligations as the school-year cycle progresses; the first-quarter results are not necessarily indicative of full-year results.
• The effect of the software and curriculum capitalization adjustment, and the remaining securities litigation and school guarantees.
• Whether institutional sales recover and whether the company’s stated liquidity expectations and demand outlook are borne out.