Stride Inc (LRN) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to be fourth-quarter and full-year 2011 K-12, Inc. earnings conference call. My name is Jenada and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Keith Haas. Please proceed.

Thank you. Good morning and welcome to the K-12 fourth-quarter 2011 earnings conference call. Before we begin the Company would like to remind you that statements made during this conference call and that are not historical facts may be considered forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. In addition, this conference call contains time sensitive information that reflects management's best analysis only as of the date of this live call. K-12 does not undertake any obligation to publicly update or revise any forward-looking statements.

For further information concerning issues that can materially affect financial performance related to forward-looking statements, please refer to our filings with the SEC. These filings can be found on the Investor Relations section of our website, www.K-12.com.

In addition to disclosing results in accordance with Generally Accepted Accounting Principles in the US, or GAAP, we will discuss certain information that is considered non-GAAP financial information. A reconciliation of this non-GAAP financial information to the most closely comparable GAAP information was included in our earnings release and is also posted on our website.

This call is open to the public and is being webcast simultaneously on our website. The call will be available for replay there for 60 days.

With me on today's call is Ron Packard, Founder and Chief Executive Officer, and Harry Hawks, Chief Financial Officer. Following our prepared remarks we will answer questions you may have. I will now turn the call over to Ron.

Good morning and welcome to K12's fiscal year 2011 earnings call. I am pleased to be speaking with you today about our accomplishments over the past year and provide some insight about the upcoming new school year.

Starting with our financial results, we ended the year with revenue of $522.4 million, an increase of 35.9% over the prior year. EBITDA increased by 9.7% to $67.1 million.

This was a transformational year for K-12. When you look at our success in opening schools in new states, increasing enrollment caps, completing acquisitions, building infrastructure and creating new businesses we may have accomplished more this past year than in any other year in our history.

First and foremost, we marched toward our manifest destiny of making a K-12 education available to every child. Last year we opened new schools in Michigan and Massachusetts; this fall we open new schools in Louisiana and Tennessee. Additionally, enrollment caps were raised in Oregon, Wisconsin, Texas, Michigan, Indiana and Hawaii and federal charter laws were passed in Maine, Iowa and Florida.

With regard to new state openings, the relaxation enrollment caps, this was an extraordinary year. We expect the business development environment to continue [to be] favorable in the coming year.

Our core business has never been better. In fiscal year 2011 we experienced an organic growth rate in our managed virtual public schools of 19.7%. This growth rate will be significantly higher for the 2012 fiscal year based on our preliminary enrollment numbers as of October 1.

Over the past year we saw major improvements in retention and re-enrollment, both in K-8 and high school, and that is a direct tribute to our dedicated employees. Few measures are better than student retention for validating the quality of our curriculum, systems and instruction.

Our norm-based tests show that on average our students are progressing more than one year for every year they're in the program. For example, the scores for the (inaudible) virtual charter school we manage in Pennsylvania were significantly higher than a typical school on state administered tests for growth. We anticipate that as states move to measure academic proficiency with the gains approach the benefits to be achieved from the K12 learning system will become more visible.

In the past year we successfully worked through another unfavorable state funding climate. State education funding has declined in each of the past three years, which we believe is unprecedented. Fortunately the growth rate of enrollments and the scaling of our business have allowed us to deliver solid financial results despite these funding reductions. We expect that 2012 funding levels will also be lower at on average than they were in the past year.

As you are aware, we now sell curriculum, systems and services to school districts across the United States. To accelerate the development of this channel we were fortunate in the past year to be able to acquire both Aventa and American Education Corporation at reasonable multiples which significantly expanded our product line and distribution.

Much of the integration has been completed and the anticipated synergies are beginning to be realized. For example, in the first quarter of the 2012 fiscal year American Education Corporation achieved 46% higher bookings than it had in any quarter in its history.

Our online Private School business is also gaining traction and grew by over 63% compared to fiscal year 2010. As part of our KCDL transaction we acquired the Keystone School which expanded our portfolio of private schools.

We also purchased the International School of Berne, a private school in Switzerland and one of a select group of international baccalaureate world schools. In fact, 100% of the seniors passed their IB diploma exams, one of only a handful of schools worldwide to achieve this distinction.

We launched the George Washington University Online High School as well. This marks the second selective higher education institution along with Middlebury College to partner with us. We combined the best of what these colleges have to offer with K12 core competencies to create something truly unique for students.

K12 also made a strategic investment in China. We purchased 20% of Web International English, a company that operates a network of learning centers in which tens of thousands of young adults learn English. Web is growing quite rapidly through center expansion and eventually will help K12 distribute its products in China. Our option to acquire a controlling interest in Web runs through June 30, 2012.

We also acquired over 200 higher education courses and a college LMS from Cardean Learning and are now building a business to help colleges launch their online programs. To date we have signed contracts with Trinity International University, Cumberland University and Sierra Nevada College. There are several more deals in the pipeline.

In addition, we acquired the assets of Kaplan Virtual Education and Insight Schools so we can now offer several brands of virtual schools to address different educational needs such as at risk students and tailor our instructional programs to improve academic performance.

This acquisition closed on July 1, so the transaction costs were incurred in fiscal year 2011, although the revenue expenses will begin to be included in our financials starting this fiscal year. The integration of these companies is now underway.

Toward the end of the fiscal year we received a $125 million investment from Technology Crossover Ventures. It is a vote of confidence that such a high-quality private equity firm would purchase a large stake in a public company. This funding should allow us to further accelerate our growth.

I am also particularly excited about our passport school in Chicago that exclusively serves high school dropouts in a hybrid setting. Last year over 94% of the students in this school graduated and over 60% pursued post-secondary education. We believe this type of school can draw many high school dropouts back into the school system and enable them to complete their studies and graduate.

The ability of these technologies to help these children is clearly on display at this school and we plan to expand this model to additional sites and cities.

At the beginning of the 2011 school year we opened the first Flex Academy in San Francisco and this past fall we opened a second Flex Academy in Silicon Valley. This new type of school is for families who desire a physical setting for their children to receive an individualized education.

The fact that we can serve such a variety of students in Passport and Flex schools is a testament to the power of an individualized technology-based education and we will continue to refine the model for these schools.

We partnered with Blackboard to solve a major problem for college bound students by providing developmental education courses in math and English. Student performance improved during our initial pilots of this remediation program. Additional colleges are expected to offer this program beginning in the spring.

In the US today a significant number of high school students do not graduate and many of those who do graduate need remediation prior to college. At K12 we are passionate about addressing these critical issues. Through our Passport program, Flex schools, private schools, remediation curriculum and our public virtual academies K12 is proud to be creating technology-based learning systems to help solve these great challenges.

In order to support our future growth we installed a new financial accounting system in the third quarter of fiscal year 2011. While the system went live as scheduled, the implementation has taken longer and costs more than we anticipated due to the need to migrate the accounting systems of the companies we acquired during the year as well as our extensive process redesign and quality control efforts.

Fortunately the only adverse consequences have been unexpected increased expenses and a delay in our Form 10-K filing. The operations of the Company have not been affected and, in fact, our business is performing better than ever.

Now I'll turn to the 2012 fiscal year. It's our policy not to issue guidance until our November call, but given that this year's -- and this year's year-end call is later than usual, we wanted to provide you with some visibility into our early 2012 outlook.

We are experiencing a significant acceleration in the growth rate of our core public-school business and this includes acceleration in the same state enrollment growth rates. It is quite rewarding to see the acceleration in organic growth occurring when the law of large numbers would suggest the opposite. This could potentially signal the mainstreaming of online education.

These enrollment gains are occurring while the cost of student acquisition has declined. Our online Private Schools continue to expand at a very rapid pace. Our institutional sales [business] had an excellent first quarter and appears to be on pace for a strong year. The business development environment continues to look favorable and losses in our nascent businesses should be lower than last fiscal year.

This year we do not anticipate that we will incur the same level of expenses arising from M&A transaction expenses, integration costs, financial systems, process improvement process and the effects of purchase accounting that we incurred in the past year.

We expect that there will be additional expenses as our financial accounting application proceeds with the new module editions in the first and second quarter. These expenses are now expected to be in the $3 million to $5 million range.

Victor Hugo wrote in History of a Crime in 1852, "Nothing is as powerful as an idea whose time has come," and that is how I feel about K12. The time has now arrived for technology to become an integral and constructive part of our global education system. With that, I will now turn the call over to Harry Hawks to walk you through the year-end financial results.

Thank you, Ron. Good morning to all of you participating on our call and webcast. I will address four key topics before we open the call for your questions. First, many of you have asked why was our 10-K filed late. While Ron touched on this in his remarks, let me add that despite extensive planning, hiring of some of the most respected experts in the industry and the investment of many, many thousands of man-hours delays were encountered.

Despite our firm commitment to timely filing we would not cut corners nor compromise our commitment to integrity and financial reporting. Therefore until management, our audit committee and our Board were all satisfied with the quality of the first financial statements produced with the new system we would not file.

Some of you have asked whether we had any accounting problems. The answer is no. In fact, there never was any disagreement with our auditors and we have a clean or unqualified audit opinion on our financial statements. Notwithstanding, a late filing is in and of itself a material weakness under S-Ox as of the initial date the filing was due, even though there were no accounting issues. Timely filing in the future in essence, however, cures the material weakness.

Second, I'd like to expand on one of Ron's points, that being our core business has never been better. As our core business of providing curriculum, technology and services to virtual charter schools across the country represents approximately 85% of our revenue, it's very important to point out its robust health and excellent operational and financial results.

However, as we report our financial results on a consolidated basis, it is evident that the acquisitions and new initiatives, related transaction integration cost and spending on infrastructure and process improvements have affected earnings in the short run. We've tried to provide as much transparency as we can in our press release and in our 10-K without providing pro forma or adjusted financial metrics, but would be happy to provide additional color and any follow-up.

Therefore metrics such as EBITDA, which is of course a non-GAAP measure, or the GAAP measures we provide such as operating income, fully reflect all costs and expenses which we try to highlight and explain in the narrative. Those costs and expenses as described total nearly $12 million and the losses from new initiatives approximately $8 million. Those are fully baked into the reported numbers.

Once again on the core health of the business, the full-year revenue growth of 35.9% is primarily driven by 23.7% growth in the core or base business, therefore organic growth. In the fourth quarter our revenue growth of 45% was driven by nearly 27% growth in the base business.

Fourth and final point, while we're not providing any forward guidance at this time other than the remarks that you heard from Ron, do want to touch on Ron's comment about transaction and systems-related spending in fiscal 2012.

Systems-related spending on the ERP implementation continued into Q1 as we stabilized the environment, completing the groundwork for what comes next which is system optimization, bringing new modules and functionality online, migration of remaining business units and achieving the scalable platform we originally intended.

Regarding transaction expenses and subsequent integration expenses, after completion of projects already underway, including the July 1 acquisition of Kaplan Virtual Education and the Insight Schools, we'll see a deceleration pending any other transactions.

Lastly, funding of start-up losses of new initiatives will be opportunity driven. And as Ron commented, we expect those to decline. Operator, we'd be pleased to take questions at this time.

(Operator Instructions). Amy Junker, Robert W. Baird.

Good morning. Please excuse my scratchy throat, just fighting a little bit of a cold. I'm hoping -- thank you so much for the early comments around 2012. That's really helpful. Harry, could you perhaps, now that -- given the first quarter is over, help us understand what the one-time costs that are going to hit first quarter would be and if you expect any of those to continue to linger into second or third quarter the remainder of the year, just so we can better -- I guess better model kind of that SG&A line, help us understand that a little bit.

Sorry you're not feeling well, Amy; hope you feel better. Amy, the first quarter of course ended on September 30 but we have not closed the first quarter yet. So in an effort to try to the responsive to your question I have to mention that -- one, we're not giving guidance; and number two, we actually haven't closed the quarter yet. But let me try to be helpful.

The first point is, as Ron mentioned, we expect there to be on the order of $3 million to $5 million worth of expenses spread over the first two quarters. Probably front loaded with that but a fairly significant drop-off after that primarily because many of the things that we're going to do throughout the year in terms of additional merger integration efforts and/or additional functionality and modules coming on line with our new ERP, we're at a point now where a lot of that going forward is actually done in-house and without external third-party cost.

So we'd see a fairly significant deceleration after the first two quarters with the disproportionate amount of those expenses occurring in Q1. So that's about as good a job as I can give you on the phone right now, but we'll try to be helpful as we go forward here and come up with full-year guidance on the next call.

No, that's very helpful, thank you. And if I missed this I apologize, but we didn't see it in the 10-K. Can you tell us what your same state enrollment growth was in the fourth quarter again -- if you said it in your prepared remarks I apologize -- versus new state contributions?

Amy, we did not break that out in the 10-K or the press release and we can follow-up with that. Most of the growth or almost all the growth is from existing states because our new states this year were pretty small. So it was almost all existing states.

Okay, thanks. And then just last question for Ron, and I'm sure you'll give us more color next quarter, but in thinking about overall enrollment -- or excuse me, revenue growth in 2012, can you perhaps just share a little bit more color about your thoughts on revenue per student given all of the moving parts?

I know there's -- obviously funding is going to play a role, but as well as mix and contribution from the acquisitions you did during the, I guess, fiscal 2010 year that are now going to be included in that? So can you maybe just talk a little bit about that and how you're seeing revenue per student shake out?

Yes. No, I'll try the best I can, because again there are a lot of moving parts going forward in a year. But on an apples-and-apples basis, meaning you look at each state and what happens to the funding, we expect it to be down a couple of percent. So if you'd had no mix shift, you had nothing else happening we'd expect it to be down, weighted average across the portfolio, somewhere in that couple percent range.

And bear in mind, there's still flux. If you ended up in a double dip recession or something it could be worse than that. Because we've seen now -- I think at least two years ago we saw states change in the middle of the year and there are one or two states it's still not completely clear what that funding level will be for the year.

That being said, you have a lot of other things happening that when you look at -- if you actually took the raw revenue and divided it by the number of students you'd actually see an increase. And what's happening with that is there's a lot of revenue in the numerator now without students in the denominator. So if you did sort of pure division you would actually see it go up.

With regard to the acquisitions, some of them -- KCDL was in almost the entire year having closed at the end of July, whereas you'd have more or less half a year of AEC and then those are the two big ones. So those will -- obviously gaining a full year of AEC will help. So all in all, I hope this is helpful.

No, it is. Thank you so much. I'll pass it on. Thanks.

Kelly Flynn, Credit Suisse.

Thank you. A couple questions. First following up on Amy's question, you said you expect $3 million to $5 million in kind of ERP-related expenses in the first half. Can you just clarify what's in that $3 million to $5 million? It's obviously got ERP, but what are the other one-time expenses in there and can I assume it doesn't include the start-up expenses, right?

Yes. Let me make sure I'm answering the right part of your question because I think there are two or three parts there. The primary driver to that $3 million to $5 million is completion of the ERP implementation. And so there is not much in the way of transaction expenses there.

A goodly portion of the transaction expenses associated with the Kaplan transaction actually were booked in the fourth fiscal quarter of 2011, so we probably have several hundred thousand dollars worth of stuff in Q1 that's related to that. So the bulk of those dollars that we're talking about are still more ERP related.

As it relates to losses of any of the new initiatives, that was not included in that number. But we see an improvement there year over year with positive trend lines there. But we've not given any specific guidance on that other than we expect this year to be better than last year.

Okay, great. And then second question, I don't know if you said this somewhere already, but can you tell us what the caps are in the two new states? And also how to think about this George Washington University Online High School in terms of size or anything else you think is relevant?

Sure. Louisiana the cap is 1,200. Tennessee does not have a cap, but they have an enrollment deadline by which you have to have kids enrolled, so it limits the continued growth of the school. George Washington University High School will be a slow on-ramp and we would expect a few hundred kids this year and then growing from there.

Okay, great. And then finally, I know you listed all the states where the caps were lifted. Can you run through what they were lifted to and from what?

Sure. So Oregon went to no cap; Wisconsin went to no caps; Texas went from 2,500 to 4,000; Michigan went from 400 to 1,000; Indiana went to no caps; and Hawaii -- I want to say we submitted going from 1,000 to 1,300, but I don't think there's an official cap in Hawaii right now.

Okay, great.

(Multiple speakers) year-by-year negotiation.

All right, great. I know you knew them off the top of your head, Ron. Thanks a lot.

That's my life, Kelly.

Thanks.

Suzi Stein, Morgan Stanley.

Good morning. Can you give us some more details on the KVE acquisition, maybe what you paid for it, how many students you expect to bring in? And then you commented that you have a meaningful presence in China, but can you elaborate with any metrics there?

Yes, I think we can do a lot. So the KVE acquisition, the price wasn't material and we didn't disclose it and I couldn't disclose that without talking with Kaplan, but it was not a large price and it was not material to K12.

We expected by the time we bought it had somewhere in the neighborhood of I believe 6,000 kids enrolled. So given that we only took it in July we wouldn't expect many more than that, in fact maybe even a few less than that for this coming fall with regard to that. That's [about all] we can disclose on that. Once we take it in and fully integrate it then we'll start growing that business.

Okay.

So China -- this will probably take a little more detail. So we have 20% -- we bought 20% of a company we purchased over there and they have 72 centers, now as I hear it it's almost 90 as they're adding centers there. And it's growing quite rapidly pushing in the neighborhood of 30% growth.

On July 30 of this coming year 2012, we have -- our option is to buy anywhere from 51% to 100% at one times 2012 revenue. So once that's complete -- right now it sits on our balance sheet and will then actually go unto the income statement and the business is actually generating cash we believe. And we'll buy it at 2012 end-of-year revenue multiple on June 30.

Okay. And then it's probably too early to tell, but are you expecting any change in the competitive environment just given the sale of connections to Pearson?

I think your preface to that question is the right one. I think it's too early to tell. I think who knows what Pearson does with it or how it changes. I think K12 just continues to invest in curriculum systems and services and from what we're seeing with regard to our retention, re-enrollment, cost of acquisition, every metric, we're just getting better and better. So I worry more about what we're doing and how we're helping kids than what they're doing, but we'll see.

Okay, great. Thank you.

Sarah Gubins, Bank of America Merrill Lynch.

Thanks, good morning. Related to the Kaplan acquisition, can you give us a little bit of color on how to think about costs there? I know the last time we saw numbers around Insight it was losing money under Apollo and I'm just wondering is that a reasonable run rate or are there costs that you can immediately take out of that?

We already took them out of that; in fact we never took them on. Because our infrastructure is so significant in our school management and all those things, a significant portion of the overhead costs -- this was an asset purchase, never came in with the transaction.

So the run rate profitability of the business changed dramatically the day we took it over because there were large amounts of overhead that actually Kaplan had cut previously and then there was a whole another slug that we didn't even take on.

So it's almost like a completely different business than it was with regard to the financials and the overhead structure. It's one of the reasons like even with KCDL we're able to take in these things and reduce overhead in some cases by maybe 80% or 90% we can reduce overhead. Certainly we would have if you looked at what Insight's overhead run was at its peak.

Okay, can we assume that it's not losing money or is that too --?

It's hard for us to give you that exact number because it's how you allocate our cost of things, but it's certainly not losing much.

Okay. And then the few percent pricing decline that you mentioned earlier in terms of expectations for fiscal 2012, is that worse or better than what you had last year?

It's similar.

Okay. I know you're not giving guidance; can you give us any sense for what you think about in terms of CapEx for next year?

We'll do that in the November call.

Okay. And then last question, for the fall you mentioned that you saw accelerating organic enrollment growth. Could you give us any color on how that breaks down between the states that had their caps lifted and states where there wasn't any change in cap but the growth rate wasn't capped? Meaning, I'm wondering if you're seeing accelerating growth in those states where they didn't get the benefit of a big cap increase?

We are. When I say it's across the board it's across the board. So states that had no cap a year ago and have no cap today, their growth rate has accelerated. It's really fantastic.

Okay, thank you.

Let me just and on the CapEx question, we don't have any guidance to give for this year other than I would say we would expect it to be materially less next year given the completion of the investment in the ERP system. We'll complete the buildout of the second data center and projects like that.

On the flip side, we will, of course, continue to invest in product development because that, of course, is a revenue opportunity for us to continue to bring new products to market. So that's where the emphasis in the capital spending will be in fiscal '12.

Gary Bisbee, Barclays Capital.

Good morning. I guess I saw an article that you probably saw as well in the New York Times yesterday looking at technology sold into public elementary schools and questioning some of the value of that. I guess it jogged a memory to maybe ask an update. Is there any more concrete data you can give us on test scores?

And I know at one point I had talked to you and you had mentioned that the better metric was students who had been in your schools for a couple of years. And is there a form in which you'd likely provide some of that or any just update on how we should think about the value that you're adding?

It's a good question and I think you'll see over the next year us providing more data with regard to that. What I will say about that is -- reiterating a little of what I said in the call is we do norm reference testing at the beginning and end of the year of our own tests using a national test and we see more than a year learning for every year the kids are in the school.

We also know that when you start with us in kindergarten and you go through fourth grade across our entire portfolio you see incredible rates of proficiency, in some cases almost perfect. And so the nation is moving to a gains measure which we believe is the right one and what you'll see is hopefully we're outperforming on those measures.

In Pennsylvania would actually have a gains measure, I think the state was we're in the top 20% or 25% of schools in the state with regard to academic gains. So we're going to start breaking that and providing more data on that. We're pretty excited about how well our kids do.

What is happening nationwide, and particularly as we move more and more high school and middle school students, is as virtual schools become more well known we're seeing a large influx of kids who would probably likely be dropouts from the system. So we're taking kids sometimes three or four years behind grade level and trying to uplift them.

Given our high growth rates of enrollment, and in many cases the majority of kids are taking the test with us for the first time. So because of that mix shift you may actually see average scores of states go down, in fact you have in several states. But in terms of what the gains measures are, they're actually quite good in most cases.

So I think we're trying to figure out how to put that in a comprehensive report, but the main message is we think we're delivering more than a year's gain; there's lots of evidence that shows that in most of the states certainly. And we'll provide you more detail as we know more.

But there's no question, I think it's important to understand that what virtual schools do -- public virtual schools is for most of the children in this country that is the only choice they have. So there's a large influx of kids who their only choice is they're unhappy with their brick-and-mortar high schools. They either drop out -- previously they would be dropouts, now they have an option that allows them flexibility, more individualized learning, and we're hopefully taking these kids in and able to graduate them.

So that's what's going on and we're pretty excited about what we're seeing in terms of results and we'll give you much more detail on that probably over the next 12 to 18 months as we figure out how to present that.

Okay, thanks for that. And then the follow-up is just I think you said that the enrollment in the virtual public schools is accelerating at the same time that acquisition costs are down. Can you give any color on the second half of that statement, what's driving that? It that just more people knowing that this is an option or (multiple speakers)?

I think it might relate to the -- I think there's a bunch of things going on, but I wanted to make sure you understood that because we're seeing the growth rate not because we're spending so much more, but actually because we're seeing a higher rate.

I think it's two things. I think one is we're getting better. As we mentioned in the first quarter last year that we had done some tests and other trials and found some things that actually worked effectively. So I think part of it is we're getting better.

But I also think it's the idea whose time has come, that people are becoming aware of virtual education, it's starting to become a mainstream option where if you are a child and for some reason your school is not working for you that this is now an option that enters not the fringe but the mainstream. And I think when that idea or tipping point happens you start seeing droves of people.

The fact that we are now getting kids in that are now being accepted in the most selective colleges in the United States and, literally, have been accepted into hundreds of colleges, I think when people see that and the credibility that comes with it that more and more people come and becomes accelerating. Now, despite all the -- whatever we do to recruit students, the most significant and I think the best thing I can tell you about K12 is the largest source of new students is referrals from existing students. So when you have something that is great with regard to the curriculum, the systems, the teaching, people tell their friends.

I think you combine that with mainstream credibility, I think it's why we are the seeing acceleration. It exceeded my expectations. So at the end of the day I think it's a combination of where we are doing things a little better, but I think it's also just an idea whose time has come.

Thank you.

Paul Condra, BMO Capital Markets.

Great, thanks a lot. Can you put any numbers behind how many of your student enrollments are referrals based, and then maybe what are the other main advertising avenues that you seem to get new students from?

I would rather not do that at this time; perhaps in November we will do more of that.

Okay. And then -- so you are not giving guidance, but I'm going to just try with asking about operating margins. If you can maybe just tell us for 2012, do you think they might be up or down compared to 2011?

We'd rather give that in the November call when we'll give you detailed guidance in regard to operating income.

Okay, that's fine, 0 for 2. Thanks a lot.

Well, one thing to point out is on a go-forward basis the consolidated results will be the combination of the core business plus all of the acquisitions and new initiatives. So we'll have -- we'll try to do our best in November to help you understand the different layers, if you will, in looking at margin.

But I think with regard to what we told you about already with one-time expenses and with regard to the cost of acquisition it should give you some insight as to what's happening.

No, it does. It's helpful. Actually just one more in terms of how you're disclosing your revenue -- or sorry, your enrollments now. Will you be restating that on a quarterly basis, just so we have a couple of past years data?

Yes, what we did this quarter, just for everybody to understand, is in prior quarters we basically listed our enrollment as public schools and private schools. And so thinking about, again, always trying to provide more information and be helpful, we broke it out in this report to have -- really follow our distribution channels for the managed schools, our Institutional Business and our private schools. And so we can give you some historical granularity in terms of what those numbers are and so we think this is a better way to reflect our focus going forward.

Okay, thank you.

Mike Malouf, Craig-Hallum Capital Group.

Thanks, guys. I just had a quick question on the pricing; as you said, down 2% on an apples-to-apples basis, is pricing actually helped by the mix of states given maybe the more northeast states versus the western states?

The answer is the mix does matter. It is not quite as simple as the generalization you gave, but probably directionally that's correct. So depending on the relative growth rates now we're talking relative growth rates across 30 states, the mix does play a pretty significant -- what also -- there's things like attendance that actually plays a significant factor. So it's very complex, but mix would absolutely help if it -- obviously if you had higher growth rates in some of the more higher reimbursement states.

Okay. Then with regards to China when you're talking about one times revenue; I guess two questions on that. Roughly what is the size of China right now? And then two, what would cause you guys to spend or to only purchase 51 versus the upper end of I guess 100%?

At this time I don't think there's anything we'd necessarily purchase it -- would ever say we'd only purchase 51%, if we purchased 51% we would then have three more years where we could go up to 100%. So you have the ability to step it up, but at this moment in time I would imagine if and when we do it we would purchase all of it, but that's still early. And the [magnitude of the] size, it's growing at 30%-plus a year, but it's somewhere in the -- plus at that time, by 2012 it should be in the $60 million range in terms of revenue.

Great. Thanks a lot.

Trace Urdan, Wunderlich.

Thanks very much. Ron, if you increasingly take on kids that could be described at risk or I think you said would have otherwise been dropouts, are you having to do anything differently in terms of serving those students to ensure a higher level of engagement or just to treat them differently in the classroom?

There is -- obviously when they're at risk it takes -- there's lots of things you do differently, right. You have to spend significantly more effort in bringing the kids up to grade level and remediating them. You also need probably a little more extensive interaction so you don't lose them so to speak.

So getting these kids to be engaged is -- we're figuring lots of ways to do that. We also have the teachers do a lot of one-on-one remediation sessions through an online tool; so they're not meeting with them face to face but they're doing it face to face online. And so, yes, there is a lot more intervention.

We've also over the past three, four years literally spent tens of millions of dollars doing nothing but building curriculum that's able to remediate these kids at all grade levels and moving to something called adaptive learning where basically the computer is automatically individualizing the curriculum for individual students and creating their own pathway towards success.

And in this way you're hoping to be able to remediate kids that may be in 2 for 1 or even 3 for 1 pace. And that's the only way you do it. Now as they get older and older it gets even harder when you're in ninth or 10th grade and you're four or five years behind, that's even a bigger challenge.

But the answer is yes, it's affecting every part of what we do whether it be the teacher interaction, whether it be the way we build the systems or actually the curriculum itself has been a big investment both at the high school level and also at the K-8 where we've developed some pretty spectacular new math curriculum that is adaptive as well as a reading program that's designed to take a kid up three years in one year.

Anyone who is in seventh grade or lower and behind we believe if they go through that program will gain three years in one year and that was several (inaudible) for that.

Just as a follow up there, I think one of the things we see in post-secondary is that part of the challenge is just getting the students to show up. And I'm wondering if you have to do additional outreach on that front as well in terms of making sure that they're attending class and maybe reaching out to the home to get them to persist?

The answer is we do. And again, there's just a portion of kids that with the individual interventions -- we know they work, but getting 100% of the kids who need them to show up is absolutely a challenge and we absolutely do have to do more outreach to achieve that. But these are the kids who need it the most. These are the kids who the systems has failed and we're their last option. And so we're going to continue to invest our time, our effort, our capital to figure out how to solve this.

We're living in a nation where in some places more than half the kids don't graduate from high school and these kids need choices. Prior to what K12 does, these kids were trapped in a school that wasn't working for them. And I think it's our obligation and our destiny to be able to help these kids. And what we saw happen in Passport in Chicago was miraculous.

When you look at taking kids who have been dropped out for more than a year and now 94% are graduating and 60% are going on to post-secondary, it shows us what technology can actually do if you can create that individualized flexible education.

So we're going to continue to work on that outreach, work on the content, work on the systems, work on how to train teachers to do this so that we can help solve this, what I think is our nation's biggest problem.

Okay, thanks for that. And then if I could take you back to China one more time, could you describe sort of a bigger picture in terms of what your plan is there? Obviously the English language instruction business is booming in China and you've got the 30% growth rate and that by itself is an attractive business. But what beyond just getting involved in English language instruction in China does the potential China acquisition bring you?

That's the right question to ask. So I think at the end of the day I do believe China is one of the most attractive markets in the world certainly for education. And the fact that you have such an extensive consumer driven education market where in a lot of cases families spend more on education than they do on housing makes it particularly attractive.

So it's very difficult to greenfield something in China. So by having a business over there that's a great business in itself with a great management team, it provides a base for us to do other things. So I'll give you examples of what we're already in piloting and doing.

We've now started doing AP courses with Chinese students and had a lot of success with that and both academically and in terms of number of kids that are interested. We believe there's an extraordinary opportunity for at the younger kid level for doing a lot of the instruction either for center based or online in English, so that for example they learn their math, their science actually in English which is a massive drive towards being bilingual with English even at the early ages.

So I think the opportunity to pilot, and we've already piloted one center designed at those younger kids. So I think having a great management team and having a business now with 90 beachheads across the city -- there are 200 cities in China with more than 1 million people. So I think you could never start something like this from scratch, at least what we're trying to do with kids.

So too have this base management team and business to be able to expand. So we want to take a lot of what we do, both the online education, but also even some center-based for kids and expand that alone. And so this gives us a perfect opportunity to do that which I don't think you ever could greenfield it.

Thanks, that's very helpful.

And at this time we have no further questions. I would now like to turn the call back over to Mr. Ron Packard for any closing remarks.

We want to thank everybody for joining us on the call and we look forward to a great, great year. Hopefully we'll see all of you in the coming year.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.