Ladies and gentlemen, thank you for standing by and welcome to Stride, Inc. First Quarter Fiscal 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Tim Casey, Vice President of Investor Relations, you may begin your conference.

Thank you and good afternoon. Welcome to Stride's first quarter earnings call for fiscal year 2023. With me on today's call are James Rhyu, Chief Executive Officer; and Donna Blackman, Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a presentation that can be found on the Stride Investor Relations website. Please be advised that today's discussion of our financial results may include certain non-GAAP financial measures. A reconciliation of these measures is provided in the earnings release issued this afternoon and can also be found on our Investors Relations website. In addition to historical information, this call may also involve forward-looking statements. The company's actual results could differ materially from any forward-looking statements, due to several important factors as described in the company's latest SEC filings. These statements are made on the basis of our views and assumptions regarding future events and business performance at the time we make them and the company assumes no obligation to update any forward-looking statements made during this call. Following our prepared remarks, we'll answer any questions you may have. I will now turn the call over to James. James?

Thank you, Tim, and good afternoon everyone. The world has been volatile to say the least these past few years with many companies reeling from the impact of that volatility. When the COVID pandemic first hit, we were coming off a decade of strong economic growth, a long bull market and historically low inflation interest rates and unemployment in a relatively peaceful global environment. Fast forward a couple of years and we've experienced not one, but two stock market corrections, almost double-digit inflation, interest rates that have tripled and heightened global tensions. Amid all this turmoil, there is one constant that gives me optimism, the resilience, ingenuity and resolve of America and in particular, its younger generations. In this environment, for us to continue to provide opportunities for this country to prosper, we need to ensure we are adapting to an increasingly diverse and evolving world. I believe part of that evolution is changing how we think about education. We need to focus our younger generations on skills and tools that will help them succeed in the digital world, and this requires rethinking some of the norms that we've held here for generations. The model Stride has built, in Online and Career Learning has taught us a lot, about some of the vulnerabilities in our education system. First and foremost, we need to begin treating our customers like customers. We should be listening to them and innovating to meet them at their point of need. And those customers extend beyond the students to include the families, teachers and employers, who will empower the next generation and build on America's legacy. And as we have listened to our customers, a few key themes emerge. Students and parents need more options, not just online and brick-and-mortar programs, but options around what our…

Thank you, James, and good afternoon, everyone. I want to start by thanking all of Stride’s employees for another successful school launch and enrollment season. It always impresses me that we can enroll and onboard hundreds of thousands of students onto our platform. We know how important it is for students and families to have a smooth start to the school year. So I thank all of the Stride teachers, administrators and support staff for their hard work. Now turning to our reported results, revenue for the quarter was $425.2 million, an increase of 6% over the same period last year. Adjusted operating loss of $19.9 million was down, compared to last year. And capital expenditures were $16.8 million, an increase of $1.4 million over last year. Career Learning strong enrollment growth coupled with increases in revenue per enrollment, delivering another quarter of revenue growth for Stride. General education enrollment and revenue decline, but remain above pre-pandemic levels. These results demonstrate what we have been saying for the past two years. Stride will emerge from the pandemic as a stronger company with a fast growing career and adult learning business and a solid core general education business. Overall, Career learning revenue for the first quarter increased 63% to $153.5 million, driven by strength in middle and high school career enrollments and adult learning growth. Career learning middle and high school revenues were $125.5 million. Enrollments for middle and high school reached [61.6] (ph) a 47% increase from last year. We are incredibly impressed with the continued enrollment growth in this business and believe there will be a growth driver for many years to come. Revenue per enrollment for the quarter was $200,029, up 20.2%. Some of the strength is timing related and we anticipate finishing the year up 7% to…

[Operator Instructions] Your first question comes from the line of Jeff Silber with BMO Capital Markets. Your line is open.

Thank you so much. I know the focus of the call was mostly on Career Learning, I completely understand it, but I'm going to start with General Education. Obviously, the enrollment decline was pretty surprising at least to us. Should we get into a little bit more color there, I mean, did you lose any contracts? Is it more of a competitive issue? Any color on that would be great.

Yes, I think, so first of all, I think that the Gen Ed enrollment, sort of, a bottomed out, and if you look pre-pandemic, our General Education business is sort of around those pre-pandemic numbers, so we feel pretty good that it's bottomed out at this level. We certainly see the return to school post-pandemic having an impact. I think we see some fatigue in the marketplace around online learning and we see some sort of increased competition from local brick-and-mortar schools. Having said all that, I also think that our execution this summer could have been better. And so I think it's a combination of factors. But overall, I think we see overall demand in the market for online education continuing to increase post-pandemic, and I think that we probably did lose a little bit of market share, and I think that's on us to improve. But I think the overall market for us continues to improve. And I think the overall market opportunity in both General Education and Career Learning is going to continue to improve. So, I think that we've got some work to do to improve our execution, but I think the markets are there for us, and I think that we got to execute better.

So let me just dig into those comments just a little bit. Maybe we can talk about some of the execution. Can you give us some examples of things that you might need to improve?

Yes. And I think, for example, we went into this year, I think less clear about the messaging we were putting into the market post-pandemic. I think we also had a number of situations throughout the country that either a teacher-strike or uncertainty around school situations, we could have been more localized and how we communicate with a certain market. So, I think part of it is really just adapting better to being a national footprint player, but having more localized messaging, because the reality is we're particularly with the pandemic. The sensitivities around school options and school choice have become very localized. And I think that a lot of what our messaging needs to do is to actually drive into that local residents as opposed to sort of the national cookie cutter if you will approach.

In your comments like that, some of the reasons why you think enrollments may have bottomed out, you think there could be room for some improvement if you do improve the execution next year?

Yes. And I give you even a couple of examples very recently, which I sort of referred to in my remarks. But just in the past, it's been 24-days, I guess, of information that we've got since the quarter end. We see -- we actually see improvement in the numbers, excluding sort of the pandemic here, October is generally a time where we bring on a lot of enrollments for the fall and then we do see some attrition through October into November. And we actually have gained enrollments in October. So I think little by little our execution is starting to improve. But I think that just -- the circumstances around education continue to work in our favor in that I think parents and customers. They continue to look for options and they continue to be, I think, be disappointed with the options that they're getting in some of their brick-and-mortar districts and I think we continue to be a good viable options. So I do think that there is evidence that suggests that even in the past few weeks that we've got some room, some upside here in-year and going into next year.

Okay, great. Thanks for the color. I'll jump back in the queue.

Your next question comes from the line of Greg Parrish with Morgan Stanley. Your line is open.

Hey, thanks for taking my question. I mean, sort of kind of double-down on this, but why is this the new baseline in Gen Ed, because I mean you mentioned a couple of things that, there is competition from brick-and-mortar. And brick-and-mortar knows how to do this now. There's also and you mentioned this in your remarks, as well as some cannibalization to middle and high school. So I mean, I guess what gives you such confidence that like this is the new baseline going forward?

Well, I guess, the first thing I'd say is that, I think the general public and most customers would disagree with you that brick-and-mortar figure this out. I think at least from all the information research studies that we can see and find, in fact most brick-and-mortar schools have not figured it out and there's not a lot of fast satisfaction with the programs from brick-and-mortar schools that are out there. So, I think that's the first data point. And I think you see brick-and-mortar schools somewhat retreating from even putting an emphasis on their ability to do virtual programs. So some of them still have programs, but you see, I think some of the retreating the emphasis on those programs. I think you also going to start seeing a little bit more emphasis on outsourcing some of those programs, because I think they realize that they're just not -- they're not going to be good at it. So, the other -- I think, the other piece of the comments there, I think we are seeing some cannibalization. So, I think that while there is cannibalization, I think just the strength in what we're seeing this fall in terms of the pipeline does tell us, I think that there's probably a bottoming out here. And I think, uncertainty in the marketplace tends to work in our favor. And I think that ongoing continued uncertainty in the marketplace, there is some new variants of the virus. We're seeing spikes because of that. So, I just think that the uncertainty that's happening in the marketplace works in our favor. And I'm just not sure that, we've been saying now for two years that's going to go away and we really haven't seen that go away. So, we think that this is a point at which we've got a floor underneath us, but I think it's a fair question and I think we'll see.

Okay, that's very helpful. Thanks. And I want to talk about the operating income margin guidance, because I mean, it sounds like you need a couple of things is to happen to get that and maybe that's wrong, correct me. But talk about a couple of things, just talk about in-year revenue acceleration, you talked about gaining efficiencies on the expense line throughout the year. I guess, I mean do those have to happen to meet your guidance or is that just upside?

Yes, no. I do think it actually has to -- we have work to do, and I don't think it's a slam dunk. But here what I would say, and this is just historical framing is that I think in the 10-years that I've been with the company, we have yet to miss guidance. And so, I think we tend to put guidance out that we feel. Even if we have still work to do, we still -- we feel comfortable in our ability to execute against that. And so, I think we feel pretty good. I mentioned in my comments, our goal, which is also within the range of our guidance is to be flat plus or minus a couple of percent on adjusted operating income. So, and that's above the mid-point. So I think, we're shooting for above the midpoint and we're working hard every day to make sure that we drive the cost structure to achieve that.

Okay, great. And then help me, maybe this is a sort of an ignorant question, but I mean you have a pretty big step down in kind of overall enrollments. But you have a pretty big step-up in some of your teacher costs and you had a pretty big teacher base last year. So I mean, I guess, I mean was there no kind of mark-to-market in teachers, I mean how do you kind of assess that internally, are you sort of over-staffed in Gen Ed, are they allocated somewhere else? And I know you have some sort of other areas where you want to sort of monetize those teachers with school districts, maybe that's the answer. But maybe kind of help me, kind of, fill the gaps there?

Yes. I think it's a little bit of a mix. We certainly are investing in certain places. But also, which is a little bit of a nuance that maybe not everybody is aware of but, oftentimes when we get funding increases, those funding increases come with pre-prescribed costs associated with them, often at zero margin to us. And so, there's some of that does that play here that we're sort of forces along way, but say, the way that the funding works is that we have to spend against it. And so, there is a mix of that in there as well as I think just we are investing in certain things. I do think that we were fully staffed in most years. We're actually, we go into the year a little bit under staffed. This year, we wanted to make sure we were fully staffed. So I think, there is a number of things at play there.

Okay, great. Thanks.

[Operator Instructions] Your next question comes from Tom Singlehurst with Citi. Your line is open.

Good evening. It's Tom here from Citi. Thanks for taking the question. Apologies, I missed this at the beginning. So, sorry if I'm covering all ground. I just wanted to understand, firstly, just sort of tracking the development of the General Eds enrollment trend, I recall, I think at the full-year, you talked about relatively robust sort of survey work in terms of sort of indicating that enrollment would be fairly resilient. I suppose the question there is, was that -- did that just turn out not to be the case and the survey work didn't work or coming back to your points about execution, do you think that was enough to sort of take the shine of that, just interested in sort of exactly whether it was a function of you guys not executing a 100% or whether that's generally being a pullback and sort of industry level demand. And in that context, I was interested in something that Pearson, that links to revenue per enrollment because they indicated that there had been a sort of revenue mix back to invest in the quarter for that, those were schools business thereby, enrollments were relatively weak, but the average revenue per student was very favorable. I was wondering whether there was anything sort of underlying that explains that sort of fuel’s effect in aggregate? Those are the two questions for the moment. Thank you.

Yes. I mean, I think for sure, we have also much like Pearson, and I think our business is probably mixed similarly to them, that we've got some revenue per enrollment strength that's due both to the overall funding environment, but also to the mix. So I think, there's sort of both components there. And so, yes, I think it's probably fairly similar. I think to your earlier -- your first part of the question, last year, we saw in-year demand, be very strong relative to the prior year. And I think, we continue to tell people that on our earnings calls, when we guide into the summer season, we didn't see that in-year strength translate as much in the summer season. And I do think that some of that was execution, some of that was a little bit of sort of -- I keep calling this fatigue that people have had around enrolling for some of these programs. But I think the overall market continues to grow, while the overall market continues to grow. And so, I think what we saw is a little bit of a softness, I think in our execution and we're talking several 1,000 enrollments can push us down, few percent to down 8%, right. So it's not a huge swing, we have to have for us to be down 8%. So, as I think that it's a combination of factors, but I definitely think that some of the execution coming into it and I think that the market continues to actually be robust for these programs. And I think the behaviors we're seeing were historically a lot of the behaviors of families we saw were happened sort of between 4 of July and Labor Day. And we are seeing now, some of the behavior shift to more in-year behaviors. And I think what we early indications are, is that families, I think, want to believe that sort of the default should be to go back into their brick-and-mortar school district. And I think when they go back in, sometimes they realize that things haven't changed, things haven't improved, they are not meeting the needs that I have as a customer. And so therefore, they look for new options in September into October and I think again for at least small sample size of the first several weeks of this sort of post-count a season, post Q1 season. We're seeing some relative strength even above and beyond last year, where we saw some strength and well above pre-pandemic levels. And that's why I think, we might see consumer behavior shift a little bit into season from relative to pre-pandemic levels we are seeing a much higher level of demand than we did pre-pandemic, so.

Perfect. One follow-up, if that's okay. On -- I suppose the cyclicality of the -- I think that the Career Learning business that I'm really talking about, the adult learning business and in particular the sort of institutional sort of offering, I presume within galvanized, should we be worried at all about -- of organizations and enterprise becoming more circumspect about, sort of, procuring sort of enterprise LNG resources and tools in this environment? Or do you think that we remain robust?

Well, I think, the good -- Yes, I'm sorry. I'm sorry, I thought you were finished. Go ahead

Do you think it will remain robust despite the macro challenges?

Yes, I think the good news, bad news for us is that within the context of our adult businesses, we didn't have a material amount of that enterprise side business. When we did some of these acquisitions, we were actually pretty bullish that would materialize, they didn't. And so, therefore, I think the risk of the macro trends working against us there is just mitigated by the fact that we just didn't have material amount of business there. As it turns out, what we are seeing is still some healthy opportunity on the enterprise side for those businesses. I think as companies try to figure out what their staffing hiring needs are, particularly in the technology space, technology tends to be prioritized. And there's still I think is, a lot of demand that employers don't know how to fill appropriately. And so, I think there is still a lot of opportunity there for us, but it's just not material enough one way or the other to impact us too much at this stage.

Okay, thank you.

[Operator Instructions] Your next question comes from the line of Stephen Sheldon with William Blair. Your line is open.

Hi, team. This is actually [Matt Fielek] (ph) on for Stephen Sheldon. To start, I was wondering if you can talk about what drove the increase in SG&A expense relative to the prior year. It sounds like higher marketing cost is driving some of that, but any additional detail would be helpful. And as a second part, how should we think about SG&A looking ahead over the next several quarters?

Yes, I think the higher SG&A, it's really a function of two things. I think you captured one piece of it, which is, I think the marketing expense did tick up a little bit for us. But I think of inflation, I think that's the big story right now is you've gotten inflation across the board in almost every cost item that we've got. And I think that's -- I don't know Donna, if you had any other, but I think that's really the two big drivers.

I think, I would sort of add that the timing of hiring had some impact on our numbers. But with respect to SG&A, I think the inflation on not only the marketing, but also on the salary and wages and I sort of think about the rest of the year. I would think about the increase being more in line with inflation.

Got it. That's helpful. Thank you. And then switching gears here, how have application to enrollment conversion rates been trending relative to your expectation? And if you could, what are some of the underlying forces driving those trends?

Yes. I think what we see -- we see from -- I'll actually start from the top of the funnel, you'd get traffic, traffic converts to leave, leave for an application, application for us to enrollment. And I think what we're seeing is actually strong conversion rates and improving conversion rates. And what we see in our enrollment center is that families have a better appreciation and understanding of the programs that we're offering. So therefore, they're converting at higher rates. And we saw that improved during the pandemic, through the pandemic and now sort of we see that sustained level, because the family still they have that appreciation and understanding of what the programs are and why they may or may not be a good fit for their needs. And so, we are seeing higher conversion rates all through the funnel including application to enrollment and we're seeing that pretty on a pretty sustained level.

Great, thank you.

There are no further questions. This does conclude today's conference call. Thank you for joining. You may now disconnect.