Stride, Inc. (filed as K12 Inc.) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2019; comparative period is the three months ended September 30, 2018. The interim financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
K12 provided online and blended K-12 curriculum, software, instruction, and support through Managed Public School Programs, Institutional, and Private Pay Schools and Other. Managed Public School Programs represented about 88% of quarterly revenue. The company reported 122,300 managed-program enrollments, up 2.9%, and 15,600 non-managed enrollments, down 34.5%. It served 76 managed schools in 30 states and the District of Columbia.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $257.1 million | $251.3 million |
| Gross margin | $87.8 million; 34.1% | $92.3 million; 36.7% |
| Operating loss | $19.4 million; 7.5% of revenue | $13.8 million; 5.5% of revenue |
| Net loss | $9.7 million; $0.25 per share | $8.3 million; $0.22 per share |
| Cash used in operating activities | $86.8 million | $49.1 million |
| Cash used in investing activities | $18.2 million | $29.4 million |
| Cash used in financing activities | $12.1 million | $9.6 million |
At September 30, 2019, cash and cash equivalents were $165.9 million, down from $283.1 million at June 30, 2019. Current assets were $498.3 million and current liabilities were $139.7 million, yielding reported working capital of $358.6 million. Accounts receivable was $267.7 million. Finance lease liabilities totaled $25.5 million and operating lease liabilities $25.4 million; the company had no outstanding balance on its revolving credit facility. Total liabilities were $188.8 million.
Material changes versus the prior period
- Revenue increased $5.8 million, or 2.3%. Managed-program revenue grew 3.2% to $227.5 million, while Institutional revenue declined 7.0% to $20.9 million; Private Pay and Other rose 4.7% to $8.7 million.
- Instructional costs rose 6.5% to $169.4 million, faster than revenue, primarily due to personnel and benefit costs supporting higher enrollments. Gross margin declined by 2.6 percentage points.
- Operating loss increased by $5.6 million; net loss increased by $1.4 million. SG&A rose 1.0% to $107.2 million.
- Operating cash use worsened by $37.7 million, primarily due to changes in accounts receivable and accounts payable. Investing cash use fell from the prior-year period, largely because the prior period included the Tallo investment.
Outlook, risks, contingencies, and unusual items
- Management said working capital and expected operating cash generation should be adequate to fund ongoing operations for the foreseeable future. The filing provides no specific financial guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- The company recognized a $8.8 million income tax benefit; its effective tax rate was 47.5%, compared with 37.9%, with the increase attributed primarily to higher non-deductible compensation.
- A dispute with Georgia Cyber Academy (GCA) is in arbitration. GCA engaged other providers for the 2019–2020 school year despite K12’s asserted exclusive contract; K12 reported providing only limited services and receiving minimal revenue from GCA. The company could not predict the arbitration outcome. GCA averaged almost 10,000 students in the prior school year.
- Managed-school revenue depends in part on enrollment, state funding estimates, and school operating results. K12 may absorb operating deficits at certain managed schools through reduced management fees or revenue; reported revenue reductions for school operating losses were $16.3 million, versus $17.3 million a year earlier. One customer contract represented more than 10% of revenue in each period.
- The company adopted lease accounting standard ASC 842 on July 1, 2019, recognizing a $22.7 million operating lease liability and a $17.7 million right-of-use asset at adoption. It also early adopted guidance for implementation costs in hosting arrangements, capitalizing $1.4 million in the quarter.
- K12 corrected previously reported 2019 interim cash-flow information for accounts receivable and deferred revenue/other liabilities. The filing says the revisions did not affect reported statements of operations or the June 30, 2019 balance sheet. A securities class action settlement received final court approval in July 2019; insurers agreed to fund $3.5 million. The company reported no material change to its previously disclosed risk factors.
Important facts for investors to verify
- Whether the decline in gross margin and increased operating loss persist as enrollment, staffing, and instructional costs develop.
- Cash conversion and collections, given the $86.8 million quarterly operating cash outflow and elevated accounts receivable.
- The outcome and financial implications of the GCA arbitration, including any effect on managed-program enrollment and revenue.
- School funding estimates, operating-deficit guarantees, and the extent of revenue concentration in large customer contracts.
- Lease obligations, capitalized implementation costs, and the details and implications of the corrected prior-period cash-flow disclosures.