Patrick McIlwee

Pat McIlwee asked about the potential risk of negative word-of-mouth impacting top-of-funnel trends next year, assuming platform issues are resolved. He also inquired about how Stride managed to drive G&A efficiency despite the unforeseen circumstances and associated labor/capital requirements.

Answer

CEO James Rhyu indicated no evidence of negative word-of-mouth overhang impacting demand, noting strong organic demand despite reduced marketing, which he attributed to strong macro conditions and Stride's leadership. CFO Donna Blackman explained that G&A efficiency was driven by maintaining discipline, right-sizing the adult business, and pulling back marketing spend, with platform-related costs primarily impacting gross margins. James Rhyu also praised the dedicated efforts of employees.

Pat McIlwee asked about the potential risk of negative word-of-mouth activity impacting top-of-funnel trends for the next year, given the recent platform issues. He also inquired about how Stride managed to achieve G&A efficiency despite the unforeseen circumstances and the associated labor and capital requirements.

Answer

CEO James Rhyu stated that while concerns existed in the fall, there's no current evidence of negative word-of-mouth impacting demand. He highlighted strong organic demand, even with reduced marketing, suggesting macro conditions and Stride's leadership mitigate such risks. CFO Donna Blackman attributed G&A efficiency to continued discipline, right-sizing the adult learning business, and pulling back marketing spend due to the focus on stability. She clarified that platform-related costs were reflected in gross margins, not SG&A. Mr. Rhyu also praised the team's commitment and effort in resolving issues.

Patrick Mcilwee of William Blair, on for Stephen Sheldon, asked management to attribute the persistently strong enrollment trend between greater market demand versus company-specific initiatives. He also inquired about the monetization potential and timing for Stride's growing tutoring business.

Answer

CEO James Rhyu attributed the enrollment strength to a combination of factors: a clear increase in overall market demand for school choice, and strong company execution, which has led to growing brand awareness and word-of-mouth referrals. On tutoring, Rhyu explained it is monetized at market rates when sold externally to other districts and states, where Stride sees traction due to its use of certified U.S. teachers and its status as a U.S.-owned company.

Patrick McIlwee, on behalf of William Blair, asked whether Stride's recent demand is driven more by broad macro uncertainty or by a 'flywheel' effect from the company's scale and word-of-mouth referrals. He also inquired about the potential for further gross margin expansion.

Answer

CEO James Rhyu attributed the demand to both factors, noting that uncertainty at the local district level (e.g., school safety, policy) is a driver, as is the flywheel effect from scale and high customer satisfaction. CFO Donna Blackman stated that while efficiency efforts continue, she is not changing long-term gross margin targets. Rhyu added that the company is balancing efficiency with significant reinvestments in its programs, such as tutoring and socialization tools.

Patrick McIlwee, on for Stephen Sheldon, asked about the specific drivers for the outsized growth in Career Learning, progress on creating a separate marketing funnel for it, and for an update on state expansion targets.

Answer

CEO James Rhyu explained that Career Learning's growth is a proxy for strong demand in high school grades, as most high school programs are now career-focused. He acknowledged they have not yet 'cracked the nut' on a separate marketing funnel. On expansion, he stated it's a multi-year effort with no new states to announce for FY25.

Patrick McIlwee of William Blair asked for the latest aggregate retention rate and an update on the attrition trends for the initial cohorts that included bundled, lower-priced subscriptions. He also requested guidance on the expected revenue contribution from Formation Nation for the second half of 2025.

Answer

CFO Noel Watson reported the aggregate retention rate was 59%, down slightly from 60% due to the mix shift from bundled lower-priced subscriptions, a trend that was previously signaled. CEO Jeff Stibel added that for core compliance products, both retention and engagement trends are positive. Regarding Formation Nation, Watson stated it contributed over $12 million in total revenue in Q2 and expects a similar to slightly lower contribution in H2 due to seasonality, though Stibel cautioned that deep integration complicates a clean organic growth calculation.

Patrick Mcllwee of William Blair inquired if the new brand campaign and increased marketing for Formation Nation would elevate overall marketing spend, and asked about the forward-looking revenue run rate for Formation Nation.

Answer

CEO Jeff Stibel clarified that the changes represent a shift in marketing spend, not an increase, aiming to reinforce LegalZoom's premium brand authority. COO & CFO Noel Watson confirmed they expect a similar level of CAM spend for the year. Both executives cautioned against extrapolating Formation Nation's revenue contribution due to high seasonality and the integrated strategy of shifting customers between brands.

Patrick Mcllwee questioned the recent step-down in implied market share, the outlook for formation volumes including the impact of Formation Nation, and the long-term vision for leveraging AI on the platform.

Answer

CEO Jeffrey Stibel emphasized a strategic shift from raw market share to 'quality share,' focusing on higher-value customers, and noted this will stabilize over time. He explained that the Formation Nation acquisition allows them to serve the value-end of the market without diluting the LegalZoom brand. Regarding AI, Stibel's vision is to use it to augment human expertise (attorneys, service experts) to enhance service and scale, a key differentiator. COO & CFO Noel Watson added that AI will also drive operational efficiencies.

Patrick Mcilwee, on for Stephen Sheldon at William Blair, asked if the sequential decline in Udemy Business customer count was due to the upmarket focus or other factors, and inquired about the drivers behind the "green shoots" in the Consumer business.

Answer

CFO Sarah Blanchard confirmed the customer count decline was expected and related to the SMB segment as the company shifts focus upmarket. CEO Hugo Sarrazin attributed the Consumer segment's positive signs to a deliberate strategic shift towards subscriptions, a focus on high-demand categories like AI and certifications, and optimizing marketing spend in key regions.

Patrick McIlwee of William Blair & Company asked for more detail on the business and macroeconomic trends in the EMEA region, noting softness in both leasing and services, and inquired about the company's strategy for balancing debt repayment with growth investments.

Answer

CFO Neil Johnston described EMEA as the weakest economic region but noted it is likely at a cyclical bottom with green shoots in U.K. capital markets and property management. He attributed services softness to the wind-down of project work. CEO Michelle MacKay confirmed the capital allocation strategy is unchanged, balancing continued deleveraging with a primary focus on investing for growth.

Patrick McIlwee asked about the company's focus on ARPU expansion versus new location growth, given that ARPU was flat sequentially while location additions were strong. He also inquired about the future outlook for gross margins with the continued scaling of Olo Pay.

Answer

CFO Peter Benevides explained that the flat sequential ARPU was influenced by the full impact of Wingstop reducing its modules and the onboarding of new single-module customers. He affirmed that ARPU expansion remains the larger long-term growth driver due to the potential to upsell from an average of 3-3.5 modules to the 16 available. Regarding margins, Benevides projected Q4 gross margin to be flat compared to Q3, with Olo Pay's mix shift being offset by cost optimizations. He stated that the primary goal for 2025 is to reaccelerate gross profit growth.