STRIDE, INC.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains certain forward-looking statements within the
meaning of Section 21E of the Exchange Act. Historical results may not indicate
future performance. Our forward-looking statements reflect our current views
about future events, are based on assumptions, and are subject to known and
unknown risks and uncertainties that could cause actual results to differ
materially from those contemplated by these statements. Factors that may cause
differences between actual results and those contemplated by forward-looking
statements include, but are not limited to, those discussed in "Risk Factors" in
Part I, Item 1A, of this Annual Report. We undertake no obligation to publicly
update or revise any forward-looking statements, including any changes that
might result from any facts, events, or circumstances after the date hereof that
may bear upon forward-looking statements. Furthermore, we cannot guarantee
future results, events, levels of activity, performance, or achievements.
This MD&A is intended to assist in understanding and assessing the trends and
significant changes in our results of operations and financial condition. As
used in this MD&A, the words, "we," "our" and "us" refer to Stride, Inc. and its
consolidated subsidiaries. This MD&A should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
Annual Report. The following overview provides a summary of the sections
included in our MD&A:
? Executive Summary-a general description of our business and key highlights of
the year ended
? Key Aspects and Trends of Our Operations-a discussion of items and trends that
may impact our business in the upcoming year.
? Critical Accounting Estimates-a discussion of critical accounting estimates
requiring judgments and the application of critical accounting policies.
? Results of Operations-an analysis of our results of operations in our
consolidated financial statements.
Liquidity and Capital Resources-an analysis of cash flows, sources and uses of
? cash, commitments and contingencies, seasonality in the results of our
operations, and quantitative and qualitative disclosures about market risk.
Executive Summary
We are an education services company providing virtual and blended learning. Our
technology-based products and services enable our clients to attract, enroll,
educate, track progress, and support students. These products and services,
spanning curriculum, systems, instruction, and support services are designed to
help learners of all ages reach their full potential through inspired teaching
and personalized learning. Our clients are primarily public and private schools,
school districts, and charter boards. Additionally, we offer solutions to
employers, government agencies and consumers.
We offer a wide range of individual products and services, as well as customized
solutions, such as our most comprehensive school-as-a-service offering which
supports our clients in operating full-time virtual or blended schools. More
than three million students have attended schools powered by Stride curriculum
and services since our inception.
Our solutions address two growing markets: General Education and Career
Learning.
General Education Career Learning
? School-as-a-service ? Stride Career Prep
school-as-a-service
? Stride Private Schools ? Learning Solutions Career Learning
software and services sales
? Learning Solutions software and
services sales ? Adult Learning
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Products and services for the General Education market are predominantly focused
on core subjects, including math, English, science and history, for kindergarten
through twelfth grade students to help build a common foundation of knowledge.
Programs utilizing General Education products and services are for students that are not specializing in any particular curriculum or course of study.
These programs provide an alternative to traditional school options and address a range of student needs including, safety concerns, increased academic support, scheduling flexibility, physical/health restrictions or advanced learning. Products and services are sold as a comprehensive school-as-a-service offering or à la carte. Career Learning products and services are focused on developing skills to enter and succeed in careers in high-growth, in-demand industries-including information technology, health care and general business. We provide middle and high school students with Career Learning programs that complement their core general education coursework in math, English, science and history. Stride offers multiple career pathways supported by a diverse catalog of Career Learning courses. The middle school program exposes students to a variety of career options and introduces career skill development. In high school, students may engage in industry content pathway courses, project-based learning in virtual teams, and career development services. High school students also have the opportunity to progress toward certifications, connect with industry professionals, earn college credits while in high school, and participate in job shadowing and/or work-based learning experiences that are required to succeed in today's digital, tech-enabled economy. A student enrolled in a school that offers Stride's General Education program may elect to take Career Learning courses, but that student and the associated revenue is reported as a General Education enrollment and General Education revenue. A student and the associated revenue is counted as a Career Learning enrollment or Career Learning revenue only if the student is enrolled in a Career Learning program or school. Like General Education products and services, the products and services for the Career Learning market are sold as a comprehensive school-as-a-service offering or à la carte. We also offer focused post-secondary career learning programs to adult learners, throughGalvanize, Inc. ("Galvanize"),Tech Elevator, Inc. ("Tech Elevator"), andMedCerts, LLC ("MedCerts"). These include skills training in the software engineering, healthcare, and medical fields, as well as providing staffing and talent development services to employers. These programs are offered directly to consumers, as well as to employers and government agencies. For both the General Education and Career Learning markets, the majority of revenue is derived from our comprehensive school-as-a-service offering which includes an integrated package of curriculum, technology systems, instruction, and support services that we administer on behalf of our customers. The average duration of the agreements for our school-as-a-service offering is greater than five years, and most provide for automatic renewals absent a customer notification of non-renewal. During any fiscal year, we may enter into new agreements, receive non-automatic renewal notices, negotiate replacement agreements, terminate such agreements or receive notices of termination, or customers may transition a school to a different offering. For the 2021-2022 school year, we provided our school-as-a-service offering for 80 schools in 30 states and theDistrict of Columbia in the General Education market, and 42 schools or programs in 24 states in the Career Learning market. We generate a significant portion of our revenues from the sale of curriculum, administration support and technology services to virtual and blended public schools. The amount of revenue generated from these contracts is impacted largely by the number of enrollments, the mix of enrollments across grades and states, state or district per student funding levels and attendance requirement, among other items. The average duration of the agreements for our school-as-a-service offering is greater than five years, and most provide for automatic renewals absent a customer notification within a negotiated time frame. The two key financial metrics that we use to assess financial performance are revenues and operating income. During the year endedJune 30, 2022 , revenues increased to$1,686.7 million from$1,536.8 million in the prior year, an increase of 9.8%. Over the same period, operating income increased to$156.6 million from$110.5 million in the prior year, an increase of 41.7%. Increases in operating income are driven by revenue growth, increases in gross margin and reductions in selling, general, and administrative expenses. Additionally, we use the non-financial metric of total enrollments to assess performance, as enrollment is a key driver of our revenues. Total enrollments for the year endedJune 30, 2022 was 185.1 thousand, a decrease of 1.2 thousand, or 0.6%, over the prior year.
While the long-term impact of the global emergence of COVID-19 is not estimable or determinable, in late fiscal
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year 2020, we experienced an increase in demand for our products and services.
Environmental, Social and Governance
As overseers of risk and stewards of long-term enterprise value, Stride's Board
of Directors plays a vital role in assessing our organization's environmental
and social impacts. They are also responsible for understanding the potential
impact and related risks of environmental, social and governance ("ESG") issues
on the organization's operating model. Our Board and management are committed to
identifying those ESG issues most likely to impact business operations and
growth. We craft policies that are appropriate for our industry and that are of
concern to our employees, investors, customers and other key stakeholders. Our
Board ensures that the Company's leaders have ample opportunity to leverage ESG
for the long-term good of the organization, its stakeholders, and society. Each
Committee of the Board monitors ESG efforts in their respective areas, with the
Nominating and Governance Committee coordinating across all Committees.
Since our inception twenty years ago, we have removed barriers that impact
academic equity. We provide high-quality education for anyone-particularly those
in underserved communities-as a means to foster economic empowerment and address
societal inequities from kindergarten all the way through college and career
readiness. We recently reinforced our commitment in this area by launching
several initiatives including initially offering scholarships to advance
education and career opportunities for black students, expanding career pathways
in socially responsible law enforcement and increasing employment of black
teachers at Stride-powered schools. We are also developing interactive, modular
courses focused on racial equity and social justice that are being made
available for free to every public school.
Among the many ESG issues we support within the Company, we endeavor to promote
diversity and inclusion across every aspect of the organization. We sponsor
employee resource groups to provide support for female, minority, differently
abled, LGBTQ+, and veteran employees and support employee volunteer efforts.
Our commitment is evident in the make-up of our leadership team. We have more
minorities in executive management and more women in executive management than
the representative population. Importantly, our Board of Directors is also
diverse with female, Hispanic, and African American members.
Our commitment to ESG initiatives is an endeavor both the Board and management
undertake for the general betterment of those both inside and outside of our
Company.
The nature of our business supports environmental sustainability. Most of our
employees work from home and most students at Stride-powered schools attend
virtual classes, even prior to the COVID-19 crisis, reducing the carbon output
from commuting in cars or buses. Our online curriculum reduces the need for
paper. Our meetings are most often held virtually using digital first
presentations rather than paper.
Key Aspects and Trends of Our Operations
Revenues-Overview
We generate a significant portion of our revenues from the sale of curriculum, administration support and technology services to virtual and blended public schools. We anticipate that these revenues will continue to represent the majority of our total revenues over the next several years. However, we also expect revenues in other aspects of our business to continue to increase as we execute on our growth strategy. Our growth strategy includes increasing revenues in other distribution channels, expanding our adult learning training programs, adding enrollments in our private schools, and expanding our learning solutions sales channel. Combined revenues from these other sectors were significantly smaller than those from the virtual and blended public schools we served in the year endedJune 30, 2022 . Our success in executing our strategies will impact future growth. We have several sales channels from which we generate revenues that are discussed in more detail below.
Factors affecting our revenues include:
(i) the number of enrollments;
(ii) the mix of enrollments across grades and states;
(iii) administrative services and curriculum sales provided to the schools and
school districts;
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(iv) state or district per student funding levels and attendance requirements;
(v) prices for our products and services;
(vi) growth in our adult learning programs; and
(vii) revenues from new initiatives, mergers and acquisitions.
Virtual and Blended Schools
The virtual and blended schools we serve offer an integrated package of systems, services, products, and professional expertise that we administer to support a virtual or blended public school. Customers of these programs can obtain the administrative support, information technology, academic support services, online curriculum, learning system platforms and instructional services under the terms of a negotiated service and product agreement. We provide our school-as-a-service offerings to virtual and blended public charter schools and school districts. We define an enrollment as any student enrolled in a full service virtual or blended public school where we provide a combination of curriculum, technology, instructional and support services inclusive of administrative support. Generally, students will take four to six courses, except for some kindergarten students who may participate in half-day programs. We count each half-day kindergarten student as an enrollment. School sessions generally begin in August or September and end in May or June. To ensure that all schools are reflected in our measure of enrollments, we consider the number of students onSeptember 30th to be our opening enrollment level, and the number of students enrolled on the last day of May to be our ending enrollment level. For each period, average enrollments represent the average of the month-end enrollment levels for each school month in the period. We continually evaluate our enrollment levels by state, by school and by grade. We track new student enrollments and withdrawals throughout the year.
We believe that our revenue growth from enrollments depends upon the following:
? the number of states and school districts in which we operate;
? the mix of students served;
? the restrictive terms of local laws or regulations, including enrollment caps;
? the appeal of our curriculum and instructional model to students and families;
? the specific school or school district requirements including credit recovery
or special needs;
? the effectiveness of our program in delivering favorable academic outcomes;
? the quality of the teachers working in the schools we serve;
? the effectiveness of our marketing and recruiting programs to attract new
enrollments; and
? retention of students through successive grade levels.
We continually evaluate our trends in revenues by monitoring the number of student enrollments in total, by state, by school and by grade, assessing the impact of changes in school funding levels, school mix (distribution of enrollments by school), changes in state funding rates and higher utilization in federal and state restricted funding per student, and the pricing of our curriculum and educational services. Enrollments in virtual and blended schools on average generate substantially more revenues than enrollments served through our other sales channels where we provide limited or no administrative services.
Learning Solutions
Our Learning Solutions sales channel distributes our software and services to schools and school districts across theU.S. Over the past few years, public schools and school districts have been increasingly adopting online solutions to augment teaching practices, launch new learning models, cost-effectively expand course offerings, provide schedule flexibility, improve student engagement, increase graduation rates, replace textbooks, and retain students. State education 45 Table of Contents funds traditionally allocated for textbook and print materials have also been authorized for the purchase of digital content, including online courses, and in some cases mandated access to online courses. With the impact of the COVID-19 pandemic on education, school districts are seeking more complete virtual learning solutions in addition to curriculum, including virtual instructional delivery, scheduling, attendance monitoring for virtual instructional sessions, teacher professional development, consulting support in effective virtual instruction, and special education accommodations. Additionally, districts are seeking support for implementations that blend virtual and in-person instruction. To address the growing need for digital solutions and the recently emerging need for comprehensive virtual solutions, our Learning Solutions team provides curriculum and technology solutions, packaged in a portfolio of flexible learning and delivery models mapped to specific student and/or district needs. This portfolio approach provides a continuum of delivery models, from full-time programs to individual course sales and supplemental options that can be used in traditional classrooms to differentiate instruction. Our Learning Solutions team strives to partner with public schools and school districts, primarily in theU.S. , to provide more options and better tools to empower teachers to improve student achievement through personalized learning in traditional, blended and online learning environments and to provide comprehensive support for teachers and administrators to deliver effective virtual and blended instructions.
Sales opportunities are driven by a number of factors in a diverse customer population, which determine the deliverable and price. These factors include:
? Type of Customer-A customer can be a public school district, private school,
charter school, early childhood learning center or corporate partner.
Curriculum Needs-We sell our curriculum solutions based on the scope of the
? customer need, and a solution is generally purchased as end-user access to a
complete catalog, individual course or supplemental content title.
License Options-Depending on the scope of the solution, a license can be
? purchased for individual course enrollments, annual seat, school or
district-wide site licenses or a perpetual license (a prepaid lifetime
license). We may charge incrementally if we are hosting the solution.
Hosting-Customers may host curricula themselves or license our hosted solution.
We are able to track all students for customers who use our hosted solution.
? However, more often in large-scale, district-wide implementations, a customer
may choose to host the curriculum, and in that case, we have no visibility of
individual student usage for counting enrollments.
Services Menu-Instructional services may be provided and priced per-enrollment
? or bundled in the overall price of the solution. Additional services, including
professional development, title maintenance and support may also be provided
and are priced based on the scope of services.
Private Schools
Private schools are schools where tuition is paid directly by the family of the
student. We receive no public funds for students in our private schools. We
operate three accredited private online schools at differing price points and
service levels. We define an enrollment as any student enrolled in one of these
schools where we provide a combination of curriculum, technology, instructional
and support services inclusive of administrative support. Our revenues are
derived from tuition receipts that are a function of course enrollments and
program price. In some circumstances, a third-party school may elect to enroll
one of its students in a Stride private school course as a supplement to the
student's regular on-campus instruction. In such cases, the third-party school
may pay the Stride private school tuition. We have entered into agreements that
enable us to distribute our products and services to our international school
partners who use our courses to provide electives offerings and dual diploma
programs.
We believe our revenue growth depends primarily on the recruitment of students
into our programs through effective marketing and word-of-mouth referral based
on the quality of our service. In addition, through high service quality, we
seek to retain existing students and increase the total number of courses each
student takes with us. In some cases, students return each summer and take only
one course. In other cases, students choose a Stride private school as their
principal form of education and may stay for many years. The flexibility of our
programs, the quality of our curriculum and teaching, and the student community
features lead to customer satisfaction and therefore, retention.
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Consumer Sales
We also sell individual K-8 online courses and supplemental educational products
directly to families. These purchasers desire to educate their children as
homeschoolers, outside of the traditional school system or to supplement their
child's existing public or private school education without the aid of an online
teacher. Customers of our consumer products have the option of purchasing a
complete grade-level curriculum for grades K-8, individual courses, or a variety
of other supplemental products, covering various subjects depending on their
child's needs. Typical applications include summer school course work,
home-schooling and educational supplements.
Similar to our private schools, we believe our revenue growth depends primarily
on the recruitment of students into our programs through effective marketing and
word-of-mouth referral based on the quality of our service.
Adult Learning
We offer adult learning training programs through Galvanize, Tech Elevator, and MedCerts, which provide programs that address the skills gap facing companies in the information technology and health care sectors. Galvanize and Tech Elevator offer in-person and remote immersive full-time programs designed for adult learners looking to advance their technology careers by providing such learners with skills and real-world experiences. These programs are offered in software engineering. MedCerts provides self-paced, fully online structured training programs that lead to certifications in the health care field. In many cases, Galvanize, Tech Elevator, and MedCerts work directly with a company to create a customized, tailored education plan to help the company reach its goals and train its employees according to such plan. We believe that revenue growth in our adult learning brands depends on our ability to identify and attract prospective learners through various marketing channels. Continued growth in these brands will also require that we demonstrate success in placing these learners in jobs following their completion of the program.
Instructional Costs and Services Expenses
Instructional costs and services expenses include expenses directly attributable
to the educational products and services we provide. The public schools we
administer are the primary drivers of these costs, including teacher and
administrator salaries and benefits and expenses of related support services. We
also employ teachers and administrators for instruction and oversight in
Learning Solutions and Private Schools. Instructional costs also include
fulfillment costs of student textbooks and materials, depreciation and
reclamation costs of computers provided for student use, the cost of any
third-party online courses and the amortization of capitalized curriculum and
related systems. Our instructional costs are variable and are based directly on
our number of schools and enrollments.
Our high school offering requires increased instructional costs as a percentage
of revenues compared to our kindergarten to 8th grade offering. This is due to
the following: (i) generally lower student-to-teacher ratios; (ii) higher
compensation costs for some teaching positions requiring subject-matter
expertise; (iii) ancillary costs for required student support services,
including college placement, SAT preparation and guidance counseling; (iv) use
of third-party courses to augment our proprietary curriculum; and (v) use of a
third-party learning management system to service high school students. Over
time, we may partially offset these factors by obtaining productivity gains in
our high school instructional model, replacing third-party high school courses
with proprietary content, replacing our third-party learning management system
with another third-party system, leveraging our school infrastructure and
obtaining purchasing economies of scale.
We have deployed and are continuing to develop new delivery models, including
blended schools, where students receive limited face-to-face instruction in a
learning center to complement their online instruction, and other programs that
utilize brick and mortar facilities. The maintenance, management and operations
of these facilities necessitate additional costs, which are generally not
required to operate typical virtual public schools. We are pursuing expansion
into new states for both virtual public and other specialized charter schools.
If we are successful, we will incur start-up costs and other expenses associated
with the initial launch of a school, including the funding of building leases
and leasehold improvements.
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Selling, General and Administrative Expenses
Selling, general, and administrative expenses include the salaries and benefits of employees engaged in business development, public affairs, sales and marketing, and administrative functions, and transaction and due diligence expenses related to mergers and acquisitions.
Also included are product development expenses which include research and development costs and overhead costs associated with the management of both our curriculum development and internal systems development teams. In addition, product development expenses include the amortization of internal systems. We measure and track our product development expenditures on a per course or project basis to measure and assess our development efficiency. In addition, we monitor employee utilization rates to evaluate our workforce efficiency. We plan to continue to invest in additional curriculum development and related software in the future. We capitalize selected costs incurred to develop our curriculum, beginning with application development, through production and testing into capitalized curriculum development costs. We capitalize certain costs incurred to develop internal systems into capitalized software development costs.
Critical Accounting Estimates
The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. In the preparation of our consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements. Our critical accounting policies have been discussed with the Audit Committee of our Board of Directors. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services using the following steps:
? identify the contract, or contracts, with a customer;
? identify the performance obligations in the contract;
? determine the transaction price;
? allocate the transaction price to the performance obligations in the contract;
and
? recognize revenue when, or as, the Company satisfies a performance obligation.
Revenues related to the products and services that we provide to students in kindergarten through twelfth grade or adult learners are considered to be General Education or Career Learning based on the school or adult program in which the student is enrolled. General Education products and services are focused on core subjects, including math, English, science and history, for kindergarten through twelfth grade students to help build a common foundation of knowledge. Career Learning products and services are focused on developing skills to enter and succeed in careers in high-growth, in-demand industries-including information technology, business, and health services, for students in middle school through high school and adult learners.
The majority of our contracts are with the following types of customers:
? a virtual or blended school whereby the amount of revenue is primarily
determined by funding the school receives;
? a school or individual who licenses certain curriculum on a subscription or
course-by-course basis; or
? an enterprise who contracts with the Company to provide job training.
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Funding-based Contracts
We provide an integrated package of systems, services, products, and
professional expertise that is administered together to support a virtual or
blended public school. Contractual agreements generally span multiple years with
performance obligations being isolated to annual periods which generally
coincide with our fiscal year. Customers of these programs can obtain
administrative support, information technology, academic support services,
online curriculum, learning systems platforms and instructional services under
the terms of a negotiated service agreement. The schools receive funding on a
per student basis from the state in which the public school or school district
is located. Shipments of materials for schools that occur in the fourth fiscal
quarter and for the upcoming school year are recorded in deferred revenue.We generate revenues under contracts with virtual and blended public schools and include the following components, where required:
? providing each of a school's students with access to our online school and
lessons;
? offline learning kits, which include books and materials to supplement the
online lessons;
? the use of a personal computer and associated reclamation services;
? internet access and technology support services;
? instruction by a state-certified teacher; and
management and technology services necessary to support a virtual or blended
? school. In certain contracts, revenues are determined directly by per
enrollment funding.
To determine the pro rata amount of revenue to recognize in a fiscal quarter, we estimate the total expected funds each school will receive in a particular school year. Total funds for a school are primarily a function of the number of students enrolled in the school and established per enrollment funding levels, which are generally published on an annual basis by the state or school district. We review its estimates of funding periodically, and updates as necessary, by adjusting its year-to-date earned revenues to be proportional to the total expected revenues to be earned during the fiscal year. Actual school funding may vary from these estimates and the impact of these differences could impact our results of operations. Since the end of the school year coincides with the end of our fiscal year, annual revenues are generally based on actual school funding and actual costs incurred (including costs for our services to the schools plus other costs the schools may incur). Our schools' reported results are subject to annual school district financial audits, which incorporate enrollment counts, funding and other routine financial audit considerations. The results of these audits are incorporated into the Company's monthly funding estimates for the current and prior periods. For the years endedJune 30, 2021 , 2020 and 2019, the Company's aggregate funding estimates differed from actual reimbursements impacting total reported revenue by approximately 1.4%, (0.1)%, and 0.6%, respectively. Each state and/or school district has variations in the school funding formulas and methodologies that it uses to estimate funding for revenue recognition at its respective schools. As the Company estimates funding for each school, it takes into account the state definition for count dates on which reported enrollment numbers will be used for per pupil funding. The parameters the Company considers in estimating funding for revenue recognition purposes include school district count definitions, withdrawal rates, new registrations, average daily attendance, special needs enrollment, academic progress, historical completion, student location, funding caps and other state specified categorical program funding. Under the contracts where we provide products and services to schools, we are responsible for substantially all of the expenses incurred by the school and have generally agreed to absorb any operating losses of the schools in a given school year. These school operating losses represent the excess of costs incurred over revenues earned by the virtual or blended public school (the school's expected funding), as reflected in its respective financial statements, including our charges to the schools. To the extent a school does not receive sufficient funding for each student enrolled in the school, the school would still incur costs associated with serving the unfunded enrollment. If losses due to unfunded enrollments result in a net operating loss for the year that loss is reflected as a reduction in the revenues and net receivables that we collect from the school. A school net operating loss in one year does not necessarily mean we anticipate losing money on the entire contract with the school. However, a school's net operating loss may reduce our ability to collect its management fees in full and recognized revenues are constrained to reflect the expected cash collections from such schools. We record the school's estimated net operating loss against revenues based upon the percentage of actual revenues in the period to total estimated revenues for the fiscal year. Actual school net operating losses may vary from these estimates or revisions, and the impact of these differences could have a material impact on results of operations. 49
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Subscription-based Contracts
We provide certain online curriculum and services to schools and school districts under subscription agreements. Revenues from the licensing of curriculum under subscription arrangements are recognized on a ratable basis over the subscription period. Revenues from professional consulting, training and support services are deferred and recognized ratably over the service period. In addition, we contract with individual customers who have access for one to two years to company-provided online curriculum and generally prepay for services to be received. Adult learners enroll in courses that provide specialized training in a specific industry. Each of these contracts are considered to be one performance obligation. We recognize these revenues pro rata over the maximum term of the customer contract based on the defined contract price.
Enterprise Contracts
We provide job training over a specified contract period to enterprises. Each of these contracts are considered to be one performance obligation. We recognize these revenues based on the number of students trained during the term of the contract based on the defined contract price.
Income Taxes
Accounting for income taxes prescribes the use of the asset and liability method to compute the differences between the tax bases of assets and liabilities and the related financial amounts, using currently enacted tax laws. If necessary, a valuation allowance is established, based on the weight of available evidence, to reduce deferred tax assets to the amount that is more likely than not to be realized. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of sufficient future taxable income. We exercise significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets.
Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to examination by tax authorities in the ordinary course of business. We periodically assess the likelihood of adverse outcomes resulting from these examinations to determine the impact on our deferred taxes and income tax liabilities and the adequacy of our provision for income taxes. Changes in income tax legislation, statutory income tax rates or future taxable income levels, among other things, could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
We have a valuation allowance on net deferred tax assets of$6.7 million and$5.0 million as ofJune 30, 2022 and 2021, respectively, for the amount that will likely not be realized. Results of Operations
Impacts of COVID-19 on Stride's Business
While the long-term impact of the global emergence of COVID-19 is not estimable or determinable, in late fiscal year 2020, we experienced an increase in demand for our products and services. We continue to conduct business as usual with some modifications to employee travel, employee work locations, and cancellation of certain events. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers and prospects, or on our long-term financial results.
Lines of Revenue
We operate in one operating and reportable business segment as a technology-based education company providing proprietary and third-party curriculum, software systems and educational services designed to facilitate individualized learning. The Chief Operating Decision Maker evaluates profitability based on consolidated results. We
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have two lines of revenue: (i) General Education and (ii) Career Learning.
Enrollment Data
The following table sets forth total enrollment data for students in our General
Education and Career Learning lines of revenue. Enrollments for General
Education and Career Learning only include those students in full service public
or private programs where Stride provides a combination of curriculum,
technology, instructional and support services inclusive of administrative
support. No enrollments are included in Career Learning for Galvanize, Tech
Elevator or MedCerts. This data includes enrollments for which Stride receives
no public funding or revenue.
If the mix of enrollments changes, our revenues will be impacted to the extent
the average revenue per enrollment is significantly different. We do not award
or permit incentive compensation to be paid to our public school program
enrollment staff or contractors based on the number of students enrolled.
The following represents our current enrollment for each of the periods
indicated:
Year Ended June 30, 2022 / 2021 2021 / 2020
2022 2021 2020 Change Change % Change Change %
(In thousands, except percentages)
General Education (1) 143.2 156.7 107.8 (13.5) (8.6%) 48.9 45.4%
Career Learning (1) (2) 41.9 29.6 13.1 12.3 41.6% 16.5 126.0%
Total Enrollment 185.1 186.3 120.9 (1.2) (0.6%) 65.4 54.1%
Enrollments reported for the first quarter are equal to the official count
(1) date number, which was
year 2022 and
(2) No enrollments are included in Career Learning for Galvanize, Tech Elevator
or MedCerts.
Revenue Data
Revenues are captured by market based on the underlying customer contractual
agreements. Where customers purchase products and services for both General
Education and Career Learning markets we allocate revenues based on the program
for which each student is enrolled. All kindergarten through fifth grade
students are considered General Education students. Periodically, a middle
school or high school student enrollment may change line of revenue
classification.
The following represents our current revenues for each of the periods indicated:
Year Ended June 30 , Change 2022 / 2021 Change 2021 / 2020
2022 2021 2020 $ % $ %
(In thousands, except percentages)
General Education$ 1,273,783 $ 1,280,199 $ 933,809 $ (6,416) (0.5%)$ 346,390 37.1% Career Learning Middle - High School 321,416 200,774 96,003 120,642 60.1% 104,771 109.1% Adult 91,467 55,787 10,953 35,680 64.0% 44,834 409.3% Total Career Learning 412,883 256,561 106,956
156,322 60.9% 149,605 139.9% Total Revenues$ 1,686,666 $ 1,536,760 $ 1,040,765 $ 149,906 9.8%$ 495,995 47.7% 51 Table of Contents Products and Services Stride has invested over$600 million in the last twenty years to develop curriculum, systems, instructional practices and support services that enable us to support hundreds of thousands of students. The following describes the various products and services that we provide to customers. Products and services are provided on an individual basis as well as customized solutions, such as our most comprehensive school-as-a-service offering which supports our clients in operating full-time virtual or blended schools. Stride is continuously innovating to remain at the forefront of effective educational techniques to meet students' needs. It continues to expand upon its personalized learning model, improve the user experience of its products, and develop tools and partnerships to more effectively engage and serve students, teachers, and administrators. Curriculum and Content - Stride has one of the largest digital research-based curriculum portfolios for the K-12 online education industry that includes some of the best in class content available in the market. Our customers can select from hundreds of high-quality, engaging, online coursework and content, as well as many state customized versions of those courses, electives, and instructional supports. Since our inception, we have built core courses on a foundation of rigorous standards, following the guidance and recommendations of leading educational organizations at the national and state levels. State standards are continually evolving, and we continually invest in our curriculum to meet these changing requirements. Through our subsidiaries Galvanize, Tech Elevator and MedCerts, we have added high-quality, engaging, online coursework and content in software engineering, healthcare, and medical fields. Systems - We have established a secure and reliable technology platform, which integrates proprietary and third-party systems, to provide a high-quality educational environment and gives us the capability to grow our customer programs and enrollment. Our end-to-end platform includes single-sign on capability for our content management, learning management, student information, data reporting and analytics, and various support systems that allow customers to provide a high-quality and personalized educational experience for students. A la carte offerings can provide curriculum and content hosting on customers' learning management systems, or integration with customers' student information systems. Instructional Services - We offer a broad range of instructional services that includes customer support for instructional teams, including recruitment of state certified teachers, training in research-based online instruction methods and Stride systems, oversight and evaluation services, and ongoing professional development. Stride also provides training options to support teachers and parents to meet students' learning needs. Stride's range of training options are designed to enhance skills needed to teach using an online learning platform, and include hands-on training, on-demand courses, and support materials. Support Services - We offer a broad range of support services, including marketing and enrollment, supporting prospective students through the admission process, assessment management, administrative support (e.g., budget proposals, financial reporting, and student data reporting), and technology and materials support (e.g., provisioning of student computers, offline learning kits, internet access and technology support services). 52 Table of Contents Financial Information
The following table sets forth statements of operations data and the amounts as a percentage of revenues for each of the periods indicated:
Year Ended June 30,
2022 2021 2020
(In thousands, except percentages)
Revenues $ 1,686,666 100.0 % $ 1,536,760 100.0 % $ 1,040,765 100.0 %
Instructional costs
and services 1,090,191 64.6 1,001,860 65.2 693,232 66.6
Gross margin 596,475 35.4 534,900 34.8 347,533 33.4
Selling, general, and
administrative
expenses 439,847 26.1 424,444 27.6 315,076 30.3
Income from
operations 156,628 9.3 110,456 7.2 32,457 3.1
Interest income
(expense), net (8,277) (0.5) (17,979) (1.2) 698 0.1
Other income
(expense), net (1,277) (0.1) 2,829 0.2 272 0.0
Income before income
taxes and income
(loss) from equity
method investments 147,074 8.7 95,306 6.2 33,427 3.2
Income tax expense (40,088) (2.4) (24,539) (1.6) (8,541) (0.8)
Income (loss) from
equity method
investments 144 0.0 684 0.0 (380) (0.0)
Net income
attributable to
common stockholders $ 107,130 6.4 % $ 71,451 4.6 % $ 24,506 2.4 %
Comparison of the Years Ended
Revenues. Our revenues for the year endedJune 30, 2022 were$1,686.7 million , representing an increase of$149.9 million , or 9.8%, from$1,536.8 million for the year endedJune 30, 2021 . General Education revenues decreased$6.4 million , or 0.5%, year over year. The decrease in General Education revenues was primarily due to the 8.6% decrease in enrollments, and changes to school mix (distribution of enrollments by school). Career Learning revenues increased$156.3 million , or 60.9%, primarily due to a 41.6% increase in enrollments, school mix, as well as from the acquisition of MedCerts and Tech Elevator. Instructional costs and services expenses. Instructional costs and services expenses for the year endedJune 30, 2022 were$1,090.2 million , representing an increase of$88.3 million , or 8.8%, from$1,001.9 million for the year endedJune 30, 2021 . This increase in expense was due to hiring of personnel in growth states and salary increases. Instructional costs and services expenses were 64.6% of revenues during the year endedJune 30, 2022 , a decrease from 65.2% for the year endedJune 30, 2021 . Selling, general, and administrative expenses. Selling, general and administrative expenses for the year endedJune 30, 2022 were$439.8 million , representing an increase of$15.4 million , or 3.6% from$424.4 million for the year endedJune 30, 2021 . The increase was primarily due to an increase of$9.1 million in bad debt expense resulting primarily from reserves related to our investment inTallo, Inc. ,$8.7 million in licensing fees, and$8.0 million in professional services and marketing expenses, partially offset by a$7.8 million decrease in personnel and related benefit costs, including stock-based compensation. Selling, general, and administrative expenses were 26.1% of revenues during the year endedJune 30, 2022 , a decrease from 27.6% for the year endedJune 30, 2021 . Interest income (expense), net. Net interest expense for the year endedJune 30, 2022 was$8.3 million as compared to$18.0 million in the year endedJune 30, 2021 . The decrease in net interest expense was primarily due to adoption of ASU 2020-06 in fiscal year 2022 which resulted in the elimination of interest expense related to the debt discount of the Convertible Senior Notes. Income tax expense. Income tax expense was$40.1 million for the year endedJune 30, 2022 , or 27.2% of income before taxes, as compared to$24.5 million , or 25.6% of income before taxes for the year endedJune 30, 2021 . The increase in the effective income tax rate for the year endedJune 30, 2022 , as compared to the effective tax rate for the year endedJune 30, 2021 , was primarily due to the increase in the amount of non-deductible compensation, which was partially offset 53 Table of Contents
by the increase in excess tax benefit of stock-based compensation.
Comparison of the Years Ended
Revenues. Our revenues for the year endedJune 30, 2021 were$1,536.8 million , representing an increase of$496.0 million , or 47.7%, from$1,040.8 million for the year endedJune 30, 2020 . General Education revenues increased$346.4 million , or 37.1%, year over year. The increase in General Education revenues was primarily due to the 45.4% increase in enrollments, and changes to school mix (distribution of enrollments by school). Career Learning revenues increased$149.6 million , or 139.9%, primarily due to a 126.0% increase in enrollments, school mix, as well as from the acquisitions of Galvanize, MedCerts and Tech Elevator. Instructional costs and services expenses. Instructional costs and services expenses for the year endedJune 30, 2021 were$1,001.9 million , representing an increase of$308.7 million , or 44.5%, from$693.2 million for the year endedJune 30, 2020 . This increase in expense was primarily associated with the incremental personnel and related benefit costs associated with supporting higher enrollments, as well as costs associated with serving Galvanize's customers. Instructional costs and services expenses were 65.2% of revenues during the year endedJune 30, 2021 , a decrease from 66.6% for the year endedJune 30, 2020 . Selling, general, and administrative expenses. Selling, general, and administrative expenses for the year endedJune 30, 2021 were$424.4 million , representing an increase of$109.3 million , or 34.7%, from$315.1 million for the year endedJune 30, 2020 . This increase was primarily due to an increase of$39.9 million in personnel and related benefit costs,$26.4 million in professional services expenses,$18.8 million in licensing fees, and$15.7 million in stock-based compensation. The increase in personnel and related benefit costs was partially related to the additional headcount of MedCerts and Tech Elevator, as well as a full year of headcount related to Galvanize. Selling, general, and administrative expenses were 27.6% of revenues during the year endedJune 30, 2021 , a decrease from 30.3% for the year endedJune 30, 2020 .
Income tax expense. Income tax expense was
Discussion of Seasonality of Financial Condition
Certain accounts in our balance sheet are subject to seasonal fluctuations. As our enrollments and revenues grow, we expect these seasonal trends to be amplified. The bulk of our materials are shipped to students prior to the beginning of the school year, usually in July or August. In order to prepare for the upcoming school year, we generally build up inventories during the fourth quarter of our fiscal year. Therefore, inventories tend to be at the highest levels at the end of our fiscal year. In the first quarter of our fiscal year, inventories tend to decline significantly as materials are shipped to students. In our fourth quarter, inventory purchases and the extent to which we utilize early payment discounts will impact the level of accounts payable. Accounts receivable balances tend to be at the highest levels in the first quarter of our fiscal year as we begin billing for all enrolled students and our billing arrangements include upfront fees for many of the elements of our offering. These upfront fees result in seasonal fluctuations to our deferred revenue balances. We routinely monitor state legislative activity and regulatory proceedings that might impact the funding received by the schools we serve and to the extent possible, factor potential outcomes into our business planning decisions. The deferred revenue related to our direct-to-consumer business results from advance payments for twelve month subscriptions to our online school. These advance payments are amortized over the life of the subscription and tend to be highest at the end of the fourth quarter and first quarter, when the majority of subscriptions are sold.
Liquidity and Capital Resources
As ofJune 30, 2022 , we had net working capital, or current assets minus current liabilities, of$648.5 million . Our working capital includes cash and cash equivalents of$389.4 million and accounts receivable of$418.6 million . Our working capital provides a significant source of liquidity for our normal operating needs. Our accounts receivable balance fluctuates throughout the fiscal year based on the timing of customer billings and collections and tends to be highest in our first fiscal quarter as we begin billing for students. In addition, our cash and accounts receivable were significantly in excess of our accounts payable and short-term accrued liabilities atJune 30, 2022 . 54
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During the first quarter of fiscal year 2021, we issued$420.0 million aggregate principal amount of 1.125% Convertible Senior Notes due 2027 ("Notes"). The Notes are governed by an indenture (the "Indenture") between us andU.S. Bank National Association , as trustee. The net proceeds from the offering of the Notes were approximately$408.6 million after deducting the underwriting fees and other expenses paid by the Company. The Notes bear interest at a rate of 1.125% per annum, payable semi-annually in arrears onMarch 1st andSeptember 1st of each year, beginning onMarch 1, 2021 . The Notes will mature onSeptember 1, 2027 . In connection with the Notes, we entered into privately negotiated capped call transactions (the "Capped Call Transactions") with certain counterparties. The Capped Call Transactions are expected to cover the aggregate number of shares of the Company's common stock that initially underlie the Notes, and are expected to reduce potential dilution to the Company's common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes. The upper strike price of the Capped Call Transactions is$86.174 per share. The cost of the Capped Call Transactions was$60.4 million and was recorded within additional paid-in capital. BeforeJune 1, 2027 , noteholders will have the right to convert their Notes only upon the occurrence of certain events. AfterJune 1, 2027 , noteholders may convert their Notes at any time at their election until two days prior to the maturity date. We will settle conversions by paying cash up to the outstanding principal amount, and at our election, will settle the conversion spread by paying or delivering cash or shares of our common stock, or a combination of cash and shares of our common stock. The initial conversion rate is 18.9109 shares of common stock per$1,000 principal amount of Notes, which represents an initial conversion price of approximately$52.88 per share of common stock. The Notes will be redeemable at our option at any time afterSeptember 6, 2024 at a cash redemption price equal to the principal amount of the Notes, plus accrued and unpaid interest, subject to certain stock price hurdles as discussed in the Indenture. OnJanuary 27, 2020 , we entered into a$100.0 million senior secured revolving credit facility ("Credit Facility") to be used for general corporate operating purposes withPNC Capital Markets LLC . The Credit Facility has a five-year term and incorporates customary financial and other covenants, including, but not limited to, a maximum leverage ratio and a minimum interest coverage ratio. The majority of our borrowings under the Credit Facility were at LIBOR plus an additional rate ranging from 0.875% - 1.50% based on our leverage ratio as defined in the agreement. The Credit Facility is secured by our assets. The Credit Facility agreement allows for an amendment to establish a new benchmark interest rate when LIBOR is discontinued during the five-year term. As ofJune 30, 2022 , we were in compliance with the financial covenants. As part of the proceeds received from the Notes, we repaid our$100.0 million outstanding balance and as ofJune 30, 2022 , we had no amounts outstanding on the Credit Facility. The Credit Facility also includes a$200.0 million accordion feature. We are a lessee under finance lease obligations for student computers and peripherals under loan agreements withBanc of America Leasing & Capital, LLC ("BALC"). As ofJune 30, 2022 and 2021, the finance lease liability was$66.3 million and$68.9 million , respectively, with lease interest rates ranging from 1.52% to 3.95%. We entered into an agreement with BALC inApril 2020 for$25.0 million (increased to$41.0 million inJuly 2020 ) to provide financing for our leases throughMarch 2021 at varying rates. We entered into additional agreements during fiscal year 2021 to provide financing of$54.0 million for our student computers and peripherals leases throughOctober 2022 at varying rates. Individual leases with BALC include 36-month payment terms, fixed rates ranging from 1.52% to 3.95%, and a$1 purchase option at the end of each lease term. We pledged the assets financed to secure the outstanding leases. Our cash requirements consist primarily of day-to-day operating expenses, capital expenditures and contractual obligations with respect to interest on our Notes, office facility leases, capital equipment leases and other operating leases. We expect to make future payments on existing leases from cash generated from operations. We believe that the combination of funds to be generated from operations, borrowing on our Credit Facility and net working capital on hand will be adequate to finance our ongoing operations for the foreseeable future. In addition, we continue to explore acquisitions, strategic investments and joint ventures related to our business that we may acquire using cash, stock, debt, contribution of assets or a combination thereof.
Operating Activities
Net cash provided by operating activities for the year ended
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million for the year endedJune 30, 2021 . The$72.7 million increase in cash provided by operations between periods was primarily due to an increase in net income and a lower increase in accounts receivable, partially offset by a decrease in accrued compensation and benefits and deferred revenue and other liabilities. Net cash provided by operating activities for the year endedJune 30, 2021 was$134.2 million compared to$80.4 million for the year endedJune 30, 2020 . The$53.8 million increase in cash provided by operations between periods was primarily due to an increase in net income including non-cash adjustments partially offset by a decrease in working capital of$56.8 million . The decrease in other assets and liabilities was primarily due to increases in accounts receivable, and inventory, prepaid expenses and other assets; partially offset by an increase in accounts payable and accrued compensation and benefits. The increase in accounts receivable was related to the increase in revenue with schools with payment terms that extend beyond our fiscal year, while the increase in accrued compensation and benefits was related to an increase in our corporate bonus and accrued salaries. Net cash provided by operating activities for the year endedJune 30, 2020 was$80.4 million compared to$141.6 million for the year endedJune 30, 2019 . The$61.2 million decrease in cash provided by operations between periods was primarily due to a decrease in working capital of$63.3 million . The decrease in other assets and liabilities was primarily due to decreases in accounts payable, as well as increases in accounts receivable, and inventory, prepaid expenses and other assets. Investing Activities
Net cash used in investing activities for the years ended
Net cash used in investing activities for the year endedJune 30, 2022 decreased$54.6 million from the year endedJune 30, 2021 . The decrease was primarily due to the acquisitions of MedCerts and Tech Elevator for$71.1 million in fiscal year 2021, partially offset by an increase in capital expenditures year over year of$15.3 million . Net cash used in investing activities for the year endedJune 30, 2021 decreased$52.0 million from the year endedJune 30, 2020 . The decrease was primarily due to the acquisition of Galvanize during the year endedJune 30, 2020 being more than the acquisitions of MedCerts and Tech Elevator during the year endedJune 30, 2021 and purchases of marketable securities of$40.5 million . Net cash used in investing activities for the year endedJune 30, 2020 increased$156.3 million from the year endedJune 30, 2019 . The increase was primarily due to the acquisition of Galvanize of$165.0 million , plus working capital, net of cash. Financing Activities
Net cash used in financing activities for the year ended
Net cash used in financing activities for the year endedJune 30, 2022 compared to net cash provided by financing activities for the year endedJune 30, 2021 , a decrease of$297.9 million . The decrease was primarily due to the net proceeds from the issuance of our Notes of$408.6 million , partially offset by capped call purchases related to the Notes of$60.4 million , the repayment on our Credit Facility of$100.0 million in fiscal year 2021;$22.9 million in deferred purchase consideration payments related to MedCerts and Tech Elevator in fiscal year 2022; and an increase in the repurchase of restricted stock for income tax withholding of$37.9 million . Net cash provided by financing activities for the year endedJune 30, 2021 increased$139.0 million from the year endedJune 30, 2020 . The increase was primarily due to the net proceeds from the issuance of our Notes of$408.6 million , partially offset by capped call purchases related to the Notes of$60.4 million and the repayment of our Credit Facility of$100.0 million . The net increase was partially offset by the net proceeds from our Credit Facility during the year endedJune 30, 2020 .
Net cash provided by financing activities for the year ended
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primarily due to borrowings from the Credit Facility of $105.0 million partially
offset by an increase in the repayment of finance lease obligations incurred for
the acquisition of student computers of $6.6 million .
Recent Accounting Pronouncements
For information regarding, "Recent Accounting Pronouncements," please refer to Note 3, "Summary of Significant Accounting Policies," contained within our consolidated financial statements in Part II, Item 8, of this Annual Report on Form 10-K.
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