Stride, Inc. (LRN) Earnings Call Transcript & Summary

Okay. Great. So thank you, ladies and gentlemen. I'd like to introduce one of our top analysts, Gowshi Sriharan. Gowshi is a seasoned analyst with over a decade of experience in equity research, encompassing both buy-side and sell-side exposure. He has held pivotal roles at South Texas Money Management, Gravity Capital, Sidoti, CL King & Associates and others. As an experienced generalist, he has analyzed a myriad of sectors, quickly identifying and diving into the key factors driving investment theses. Gowshi holds a CFA designation. He's a native of the U.K., and he splits his time between London and the United States. Welcome, Gowshi.

Thank you, Timothy.

Just while I finish this, so Gowshi is going to be presenting Stride. Stride is a technology-enabled education platform delivering online K-12 and career learning solutions. So go ahead, Gowshi, get started. Thank you.

Okay. Thank you, Timothy. So let me dive in straight. We thought we'll talk about Stride today, our view on Stride and why we think it's a compelling opportunity right here. What Stride is the largest K-12 education, virtual K-12 education provider in the United States. They are serving over 240,000 students across 100 schools in 30 states. They dominate the market. They have the reputation and the relationship. They are twice the size of their nearest competitor. The business model is very pretty straightforward. Stride contracts with school districts, charter boards for typically 3 to 5 years, runs the entire virtual school operation and gets paid per pupil using the same state funding formulas as a traditional brick-and-mortar school, talking about around $9,000 to $10,000 per student on average. So the economics are attractive. They're running high 30s gross margins, mid-20s EBITDA margins with strong free cash flow generation. Importantly, this business is recession-resistant. K-12 education is compulsory and state funded, so you don't have the same cyclical dynamics you see in a lot of other sectors. What's the upside here? Well, our price target is $136.60, which represents over 60% upside from current prices, which is around $81 or around $84. The stock is trading just around 10x our fiscal 2026 earnings estimate compared to a historical 12x to 15x. The base case -- our base case assumes that mid-teen revenue growth resumes as the learning management system issues from the last year get resolved, we expect that the margins would normalize back to high teens or low 20s percentage. The Career Learning segment, which has been growing at over 20% annually, should continue to see a favorable -- drive favorable revenue mix and margin expansion. And we're modeling cash flow compounding at a 10% or better. The way we see it is you're buying a scaled cash-generative business at a distressed multiple because of a 1-year operational stumble that appears to be fixable. So what's the downside here? To be realistic, when we did the worst-case scenario, which would involve regulatory shutdowns in key states if legislators or regulators decided to severely restrict the virtual public schooling options, you could see enrollment growth stall if the demand doesn't materialize or if New Mexico-style disputes are becoming more common. I'll talk about that a little in further detail down the track. Margins could get compressed if technology costs remain elevated or if competitive dynamics intensifies. The New Mexico litigation could potentially create a negative precedent that affects how the company operates in other states. When we initiated the company last year in a true bear case where the growth and margin thesis could structurally break, we thought the stock could trade down to $60 to $70 range. It's already hit that range, kind of did that in late October, and it has bounced back. But we think that's the real downside. So what is the market missing? Here, we think the disconnect is the market has over extrapolated a 1-year IT implementation failure into a structural bear case. Last year, Stride botched a learning management system rollout. It was messy. It cost them around 10,000 to 15,000 students' enrollments, and the stock got cut in half. It was an execution error, not evidence of a broken demand. The Q2 fiscal 2026 results actually showed stabilization in enrollment growth, which came in at around 8%. Management said -- raised adjusted operating income guidance, and the platform issues appears to be resolved. Customer support volumes have dropped sharply. Withdrawal rates have normalized. So the underlying demand is still there. The other thing the market is doing is treating this like a for-profit education, drawing some parallels to the University of Phoenix-type scandals from 2008-2012. But the funding structure here is completely different. There is no Title IV federal student loans here, no stipend skimming schemes, no -- this is a state per-pupil funding for compulsory K-12 education. The regulatory and fraud risk profile is just isn't the same. So what will be the catalyst that will trigger the appreciation? For the next 12 -- 6 to 12 months, we're watching what -- first, the Q3 and Q4 results. If enrollment and withdrawal trends stay stable or improve without new platform setbacks, that will confirm the recovery narrative and removes a major overhang. Secondly, the fiscal 2027 enrollment season, which kind of kicks off in summer 2026. If Stride demonstrates strong sign-ups, management restores mid-teen growth guidance for the following year, that would be a big miss signal that the demand is intact and the IT issues were truly onetime. And then thirdly, the New Mexico litigation, whether it's a settlement or a favorable court ruling, getting that behind them removes the legal uncertainty and clarifies what compliance standards actually are. Right now, the lawsuit might be creating some headline risks that's disproportionate to the actual financial exposure. If that, coupled with the Career Learning, if that segment continues to maintain healthy growth, keeps driving margin mix up, it will reinforce the thesis that Stride isn't just a K-12 story. They're also positioned in workforce development and has strong fundamental -- strong structural tailwinds. So the bottom line is that Stride is a scaled operator in a niche but growing segment of K-12 education. The business has good economics. It's recession-resistant, and the category still looks underpenetrated. Virtual education is only about 1% of the total U.S. K-12 enrollment nationally versus 5% or more in states like Oklahoma that have embraced it. So still a lot of runway for growth. The stock got hammered because of self-inflicted technology screw ups, and so -- and some noisy litigation about the -- but the fundamentals like parent demand, state funding, competitive positionings remain solid for the company. And we think the risk/reward is very compelling with an upside up to $136 and a downside to $60 or $70 if the execution normalizes over the next year. So just to briefly give you a background into [ KS ] Stride. It was formerly known as K12, founded back in 2000, offered virtual education as a real alternative to traditional schools, from early support from investors like Larry Ellison, Michael Milken. The company scaled and quickly went public in '07. In 2020, they rebranded to Stride to reflect a broader mission supporting not just K-12, but also adult and career education. The company operates in 2 main segments: General Ed and Career Learning. The General Ed side runs the virtual and hybrid schools for K-12 students, supporting over 100 schools in 31 states. And the Career Learning side focuses on workforce readiness, offering training in fields like IT, health care. And these programs serve middle schoolers, high schoolers and even some adult learners looking to gain real job-ready skills. Under the current CEO, James Rhyu, Stride has doubled down on innovation and operational efficiency. They have invested in tech and acquired some key education companies, now serves students in all 50 states and over 100 companies. The stats is that they served over 3 million students that have engaged in their platform since inception. They have a go-to-market strategy that -- the biggest revenue stream comes from, like I said, from the long-term virtual school contracts with public districts. They also work with traditional schools to provide set of blended learning tools, digital curriculum. On the consumer side, they run tuition-based private schools, offer supplementary products like summer courses and tutoring. For adults, they provide training in fields like software, health care, so they either directly to the learners or to employers looking to upscale their workforce. So at their core, Stride is meeting the rising demand for flexible, tech-enabled education while addressing the skills gap in the labor market, making it a key player in the next chapter of EdTech. So just the price action here. Let me walk you through. So -- what happened with the stock over the last few months -- because the chart tells a very dramatic story. In late October 2025, Stride reported Q1 fiscal 2026 earnings. And while the numbers themselves were actually solid, beating both on the revenue and the EPS, they revealed that they had some major operational problem. Over the summer, they had rolled out 2 technology platform upgrades, a new learning management system and a new student information system. The implementation did not go smoothly. And so the result was a management call was a poor customer experience, which led to higher withdrawal rates, lower conversion rates. And by their estimate, they -- an estimated 10,000 to 15,000 fewer enrollments than they otherwise would have been able to capture. The stock absolutely cratered on -- around the end of October, it dropped around 50% -- over 50% in a single day from $154 to $70. The market was clearly spooked not just by the enrollment miss, by what could that imply, whether there were deeper structural problems, was the demand actually weaker than the management had been signaling. And on top of that, they had multiple law firms announcing securities fraud investigations, questioning about whether the company had properly disclosed risks around the platform changes. Since then, we've seen some recovery. Stock has climbed back from the 70 -- low 70s. And now it's trading around in the 80s, $81, $84. So we've recaptured some of that losses, but still well below where we were before the crash. And what's driving the recovery is, in our view, is the Q2 fiscal 2026 results that came out in late January. Management showed that platform issues are largely behind them. The enrollment growth rate is at around 8%, have normalized. Customer support calls, volumes have dropped sharply. And their full year adjusted operating income -- and they raised their adjusted income guidance. So that's a big signal that this was an execution stumble and not a broken business model. So when we look at the chart, we see is a massive overreaction to a real fixable problem. The technology rollout was bungled, no question about that. But the underlying demand for virtual K-12 education is still there. The contracts are long term and they are sticky, and the economics of the business is -- haven't fundamentally changed. And the market seems to have punished them for a 1-year operational failure, and we think there's a clear path for the stock to rerate as execution normalizes through the rest of fiscal '26 and into fiscal '27. So just to give a brief, Stride is shaping up to be a strong opportunity in EdTech space. Fiscal 2026 guidance is around -- revenues close to $2.480 billion, $2.555 billion. And the adjusted operating income, around $485 million to $500 million, which signals confidence that the underlying demand remains intact. And the confidence is backed by the 8% enrollment growth in Q2, stabilizing platform performance and continued momentum in the Career Learning, which is growing at roughly 20%, 25% and driving that favorable margin mix. Stride's appeal lies in its ability to adapt where education is headed. It's not just riding a short-term wave. Structural trends are moving towards more personalized, flexible and career-oriented learning, and we think Stride is positioned right at the center of that shift. Financially, it's in a solid spot with strong free cash flow, $676 million in cash, marketable securities. Add in some favorable policy wins like continued support for school choice, and you've got a company with room to recover and potentially upwards north of 60% return from current levels at a price target of $136. And like we mentioned, the risks of platform rollout, management is currently prioritizing stability over aggressive near-term growth to rebuild their partner confidence. The litigation also highlights some importance of maintaining strong compliance and operational standards across all segments. The Adult Learning performance segment remains a little subdued, but -- though it's not material to the overall thesis. There's also elevated short interest, around 15% to 16% of the float, which could add to some volatility. Bottom line, Stride is a well-run company with strong growth drivers. While it's not without its risk, the upside story remains very compelling as execution normalizes and education continues to evolve. So that's the enrollment numbers. We're seeing a long shift in how families and individuals approach education, and Stride is at the right at the center of it. The pandemic may have sparked the initial move towards virtual learning, and the continued -- but the continued growth in enrollment shows that demand for flexible online education isn't going away. It's now a structural part of the kind of the education landscape. What makes Stride particularly relevant is how it goes around beyond just academics. Its Career Learning segment is designed to meet a very real need in the labor market, skilled areas like IT and health care, the trades. These programs aren't just theoretical. They also build in some partnership with local businesses to give students experience through internships and certifications. So instead of just graduating with the diploma, students will be able to leave with some real-world skills and a resume that help them to stand out. There's also support at a policy level with growing bipartisan movement towards career readiness and alternative education pathways. So in short, Stride is well positioned to meet those -- both the educational and workforce needs of a changing economy. So the school choice is gaining serious momentum across the U.S., and Stride is well positioned to benefit. As of mid-2024, more than 35 states have implemented school choice programs, everything from vouchers to education savings account, broadening the access to alternative education options. I think remarkably, around 40% of students in the U.S. are now eligible for some form of private choice support, and that number is expected to grow even further. The shift isn't just state-driven. At the federal level, political backing is now helping accelerate adoption. In January '25, President Trump signed an executive order on expanding educational freedom and opportunities for families that directs the Department of Education, Defense and the Interior to develop plans for allowing military families and those served by the Bureau of Indian Education Schools to use certain federal funds for schools of their choice, including private and charter options. In July 2025, the Congress passed the Big Beautiful Bill, which created a federal tax credit for scholarship program, allowing taxpayers to receive federal credits for donations to K-12 scholarship granting organizations. The program is projected to scale from $500 million of credits to around $4 billion annually over time. Participation is optional and depends on whether states choose to opt in. So states like Idaho, Wyoming, Tennessee are leading the charge with new expanded programs aimed at giving families more flexibility in choosing where and how their children are educated. And while the critics have raised concerns about public school funding, accountability in private education, the broader trend remains clear. More parents want options, and more policymakers are making that possible. What that means for Stride is that the addressable market share and the policy-driven tailwinds support continued enrollment growth and long-term expansion. Recent data continues to support the case for sustained growth in alternative education. In January 2025, a survey by the National School Choice Awareness Foundation highlights strong and consistent interest among parents exploring nontraditional education options, especially home schooling, micro schools. Some takeaways were that while the number of patients -- the number of parents actively considering switching schools slightly dropped to 60%, down from 72% the year before, the interest in alternative models remains very high. Nearly 2/3 of the parents have considered home schooling, making -- marking a significant uptick. Younger parents, military families, Black parents are leading the kind of the trend, with as many as 71% of the younger parents exploring new schools options. That said, only around 28% of the parents who considered switching actually followed through. Financial constraints, limited seat availability were kind of the main barriers underscoring the -- well, that really underscores the unmet demand that Stride is well positioned to address. So the importance of awareness of school choice options is growing, with few parents saying they need more information compared to last year. Beyond K-12, the outlook for career and technical education is also strong. Bureau of Labor Statistics demand for roles that require nondegree post-secondary education like medical assistance, commercial truck drivers is also projected to grow faster than the overall job market. Again, a trend that supports the long-term value that Stride's career learning programs provide. And of course, the path forward isn't without challenges. Enrollment caps, competition and execution risk will remain. But with the strategic investments in tutoring, skilled trades and platform improvements, we think Stride is positioned to continue to capture the demand. And altogether, the data supports a clear narrative that the appetite for flexible workforce aligned education is real and growing. That's a slide kind of explains the motivation for parents to opt to a virtual education kind of falls into 3 buckets there: health and well-being, flexibility and concerns about the environment of their previous school. And that's the data from the January survey that I was talking about, where it shows that parents are favoring -- more and more parents are favoring choice. So on the financial side, Stride isn't just recovering. It's demonstrating it can navigate the operational challenges while maintaining the underlying economics that make it attractive. Financially, the company is stabilizing after the platform disruptions. Management's reaffirmed the 2026 guidance and raised the operating income guidance to around $500 million. The kind of upward revision, mobility revision to profitability, especially coming out of a difficult period, signals that they are regaining control of operations and cost structure. One of the key drivers here is margin discipline, with enrollment growing -- moderating around 8% year-over-year due to the platform issues. Stride has still been able to maintain healthy margins and continued to show operating leverage. And total enrollment now is around close to 250,000 students as of Q2 2026. And the company is managing to spread its fixed cost more effectively as it scales, particularly in the career -- high-margin Career Learning segment. And importantly, Stride is also accomplishing this while maintaining strict cost discipline on the SG&A. SG&A number dollars actually declined by 2% year-over-year in Q2, which points to operational rigor even as the company has navigated the platform remediation. Management is obviously choosing to prioritize stability over aggressive near-term growth, which we think is the right trade-off to -- required to rebuild that partner confidence and the system resilience. Stride's balance sheet remains strong. The company ended with close to $676 million in cash and marketable securities, ample liquidity to fund any ongoing platform investment, growth initiatives in tutoring and skilled trades. Capital efficiency adds a runway and minimizes any financial risk, especially as the company works through this transition year. The pricing environment also seems to be -- remain rational. Revenue per student has held up well despite the operational noise and the litigation noise, which tells us that districts and parents still value the services and that Stride has remained in competitive positioning even through this challenging period. In short, I think the financial story right now demonstrates resilience, execution discipline during a reset year. Enrollment growth is normalizing, margins are holding. Cash flow remains strong. If the next 2 quarters show continued platform stability and the enrollment season for 2027 shows solid sign-ups, the growth narrative can reaccelerate into fiscal 2027, and that creates a compelling setup for investors willing to look through the near-term noise. So that's just long-term growth targets for the company. You can find that on the investor presentation. And key financial metrics, just quickly go through that. Our valuation -- to estimate the fair value, we used a blended framework that kind of combined peer multiples with discounted cash flow model that lets us anchor our view both on how the market is pricing comparable EdTech names and companies' underlying cash generation capacity. On the multiple side, we applied a sector average to our forward estimate, reflecting Stride's solid growth, profitability and leadership in the online and career-focused K-12, but also the overhang from recent execution of legal risks. The approach reads to around $107 per share on the relative valuation scale. When we pair that with our DCF, which we weight more heavily because we see Stride as a value as primarily driven by long duration cash flows than near-term sentiment. The DCF is built on forecasting cash flow over 10 years, assuming kind of a 10% EBIT growth through year 1 to 10, and then it reflects a more subdued 3%. And so the DCF produces a value around $144. And so combining that -- and we weight the DCF price a little higher. And so that weighted price gives us a fair value of around $136. So that reflects like over a 60% upside. Okay. So to sum up, Stride is a -- offers a meaningful upside from our framing now and reflects a transition year and a straight-line growth story. Today, the opportunity is driven less by headline enrollment spikes and more by a combination of normalized enrollment growth, improving platform stability and the continued shift in mix towards a higher-margin career learning. And after the platform missteps in fall of 2025, I think we have -- that the management has deliberately prioritized stability over maximizing near -- in-year volume. And yet, Q2 delivered some healthy growth and meaningful gross margin expansion. So that tells us that the core economics remain intact. The markets remains overly cautious for different reasons than a year ago. A year ago, they were concerned about the ESSER and the pandemic funding issues that highlighted by the short pitch research paper that came out last year in its -- that phase is in its liquidation phase, and that will be wound up by spring '26. So the pandemic relief is no longer an issue that reflects the investment thesis. Instead, investors now worry about lingering execution risks from prior tech rollouts, the legal noise around New Mexico and whether General Education can grow alongside a fast Career Learning franchise. We think those are all valid watch points, but we see that the platform risk is receding, withdrawals have normalized. On the policy side, the backdrop is still net positive. School choice eligibility has expanded. Roughly 40% of U.S. students are expected to rise -- and that eligibility is expected to rise as more states push forward universal and near universal programs. And so the demand for career and technical education will also continue to accelerate. So at the end of the pandemic funding issues, the ongoing legal and political issues around the choice seems to be -- means that funding is becoming more normal, which raises the bar on execution, but also favors scaled and compliant operators like Stride that have the relationship over other smaller undercapitalized players. Bottom line is Stride is no longer a pure post-COVID growth story. It's a scaled cash-generative operator working through some self-inflicted reset. And our view is that with that platform issues largely contained, solid liquidity and a growing higher-margin business, the risk/reward is very attractive. And if management can string together a few more clean quarters and a strong summer enrollment for 2027, we see a credible path to $136, and the market will rerate the name for normalized earning powers. That's all we had for the company's presentation. And if there is any questions, we'll address that.

Thank you, Gowshi. This is Tim again. And yes, a couple of questions came in. Let me see. So you mentioned the New Mexican legal issue. Can you explain a little bit, what are the main legal issues Stride is dealing with right now and how serious they are for investors?

Okay. So yes. So the main legal issues Stride is dealing with right now kind of falls into 2 buckets of legal risk, so the New Mexico district lawsuit and the securities class action related to -- tied to the October '25 stock drop. On the operating side, Gallup-McKinley County Schools in New Mexico had sued Stride, alleging fraud and misconduct in how the virtual schools was run. The complaint accuses Stride of keeping ghost students on the rolls to draw state funding, overloading teachers on the rolls to draw state funding and overloading teachers beyond statutory limits and failing to -- falling short on compliance areas like background checks and special services. It sounds alarming, but it's a single district dispute in 1 state. Stride's exposure is largely tied to potential damages and legal costs and any operating changes that New Mexico might require. Importantly, after the contract was terminated, Stride was able to stand up a new school in the state and enroll -- reenroll most of the families, which suggests that the issue is not a broad loss of parent demand, but a localized governance and a compliance issue. The second bucket is the investor litigations after the stock dropped in October '25 and had announced the platform issue -- upgrade issues and poor customer experience. Many -- some -- multiple law firms have filed advertised securities class actions arguing that management misled investors about enrollment strength, platform readiness and the impact of New Mexico allegations, including claims that Stride inflated their rolls with the students. These cases typically seek monetary damages and hinges on whether the company's prior disclosures were materially incomplete or misleading. So from an investor standpoint, we think that financially, these matters are unlikely to threaten the company's viability. They could result in settlement of higher legal expenses. Stride generates solid cash flow and has over $600 million in cash for the last quarter. The New Mexico case is more important than the dollar -- in reputation than the dollar amount. It kind of puts a spotlight on the attendance tracking, teacher loads and specialized compliance areas that regulators already care about, but which means that Stride has to demonstrate tight controls across the network to reassure other boards and state. So the -- I think for valuation, there's an overhang mainly, which shows up as a higher risk premium. The market is baking a possibility of a further negative headline or a perception problem around ghost students. Even though the allegations stem from 1 district and not being -- and still being litigated. So in short, these legal issues are nontrivial, but contained. They are better thought of as execution or multiple contraction. But there isn't an existential threat to the business model, provided that Stride can continue to clean up the platform issues and tighten up compliance so that the new Mexico looks like more like an outlier than a start of a pattern.

Okay. Great. And it looks like we might have time for one more question. Let's see, here's one. Longer term, what are the biggest real risks that you worry about? And do you think that the market is overpenalizing them?

Yes. The market is probably overpenalizing the idea that the 1 enrollment year means that the virtual K-12 market is tapped out. We see multiple data points. So if you look at parent forums, state policy moves in places like Texas and Oklahoma, the company's own -- and the company's own application volumes, that points to a durable demand for a virtual option for a small but meaningful slice of families. So -- but we all have to be cautious about the execution on the compliance side. This is taxpayers' funded, highly regulated education. Stride has to prove every day that kids are logging in and being served appropriately and that attendance and withdrawals are tracked to the letter of each state's rules. So the New Mexico is a good example that the headline sounds scary. But when you read the complaint, it's about a few dozen students and the timing of the withdrawal reporting, not thousands of fake enrollments. And so the company opened another school in that state and reenrolled most of those families. So the true long-term risk isn't that the model doesn't work. It's that the management might stumble on systems and compliance in a way that erodes the trust of regulators and the Board. And that's why we have to focus much on the recent platform fixes and the governance and the compliance companies willing to prioritize stability over the near term.

Okay. And real quickly, there is one more question that just came in. So how should we think about student outcomes versus traditional schools? Aren't virtual schools just doing worse? What's your thought about that?

Yes. So that's a question that comes up regularly. It's a fair question. But this is not an apples-to-apples comparison. So if you look -- if -- you have to be careful about the baseline we are using here. The Stride students, as I showed you on that 3 buckets, the students, the parents that choose Stride are not random slices of the state population. They're disproportionately mobile. They are behind grade. They've been bullied or dealing with some special need or health need or some family issues. That's why they have opted to leaving in the local school environment in the first place. So comparing their average test scores to need to neighborhood schools, like it won't be an apples-to-apples comparison. So there needs to be a more meaningful lens in the progress of each student's starting point and not a simple cross-sectional average. So regulators might require all the same standardized testing and specialized compliance. But directionally, I think the company and the Board sees improvement, and this will always be nuanced by student-by-student story than a single headline metric.

Very good. Very interesting presentation. Thank you, Gowshi.

Awesome. Thank you.