Stride Inc (LRN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 K12, Inc. earnings conference call. My name is Ann, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time all participants are in listen-only mode.

(Operator Instructions)

We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Mr. Keith Haas. Please proceed, sir.

Thank you. Good morning, and welcome to the K12 first quarter 2012 earnings conference call. Before we begin, the Company would like to remind you that statements made during this conference call 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. K12 does not undertake any obligation to publicly update or revise any forward-looking statements. For further information concerning issues that could 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 mostly 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. The call will be available for replay on our website 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 any questions you may have. I will now turn the call over to Ron.

Good morning. Welcome to K12's fiscal year 2012 first quarter earnings call. Our financial performance in the quarter was strong. Revenue was $193.3 million, up 43% from the first quarter last year. This was driven primarily by strong organic growth and augmented by acquisitions.

Before we begin, first and foremost I would like to welcome students in all 29 of our states, including the schools we opened this year in Louisiana and Tennessee. We are now that much closer to our manifest destiny of making a K12 education available to every child. This fall also marks the 10th anniversary of our launch in 2001. We have come a long way from those first 1,000 students in Pennsylvania and Colorado that year, having grown now over 100 fold in annual enrollment, and invested over $240 million in curriculum and systems.

This year, the school launch went smoothly once again. With students receiving their materials and computers on time, and we hired and trained over 800 new and full- and part-time teachers. With a total over 3,500 full- and part-time teachers, we believe we have the finest teaching corps in the country. Our enrollment grew over 30% this past year, as we experienced acceleration in key metrics, including growth from cap expansion, growth from new states, and most impressively, the enrollment growth in non-cap states was almost 10% higher this year than last year, in both K-8 and high school. We believe this trend reflects both improvement in K12 operations, as well as the mainstreaming of online education.

We experienced similar growth trends in our four private schools, where growth was 24% higher than it was last year, based on full-time equivalent students. Some of this is attributable to the Kaplan and KCDL acquisitions. The Keystone School, which we acquired from KCDL, grew for the first time in four years. In fact, Keystone's revenue is expected to increase over 15% this year. Being able to acquire businesses and improve their performance suggests that K12 has the skills to drive significant value through acquisitions.

Web International English, which currently operates over 100 centers in 52 cities, continues to expand rapidly and consume less cash than we anticipated. We remain very bullish on the opportunity for a consumer-pay education business in Asia, where many families spend more on education than they do on housing.

Our institutional business has completely transformed over the past 18 months, and now has over 2,300 school district customers that purchase products and/or services from K12. Our A+ division acquired last year had a record quarter, with billings that increased by over 48%, as compared to the same quarter last year. This was the largest quarter for both billings and revenue in A+'s history.

We are currently building our institutional sales and client support teams at a rapid pace. As you know, new salespeople typically do not generate meaningful revenue until after the first year. Thus when we grow the sales force, we incur expenses that year with little associated revenue. We are in investing in this channel, as we believe that all school districts will eventually utilize some online learning to some degree, and K12 intends to be the leading provider of high-quality technology-based educational products and services to school districts.

As mentioned previously, the business development environment last year was strong, as we again opened two new states and saw caps increased in several other states. We again see early signs of a favorable environment this year, as we seek to educate more students. Due to state budgetary uncertainty, we have built our financial models on the assumption that per-pupil funding will decline this year by several percent due to education funding cuts. We believe funding levels may still be in flux, both positively and negatively in several states in which we operate. This could therefore affect financial results both positively and negatively. Recently the Wall Street Journal reported state tax collections are up. This bodes well for our future, although some states could still see tax collection and per-pupil funding decline.

We now have two flex schools in California and one in Seoul, Korea. Additionally, we will open a new school in conjunction with the Dubai Women's College this November. We remain steadfast in our belief that flex schools will be a significant part of our future and the future of education. We we expect startup losses from our investments in new businesses to be in the $5 million to $6 million range, approximately the same as last year. We are encouraged by the trend in enrollment rates, reflecting an overall increase in student demand in these businesses. These businesses, namely Middlebury, Interactive Languages, Capital Education, and flex schools, are showing progress, and their revenue growth year-over-year is expected to be slightly over 65%. We believe all of these businesses have a bright future.

Our acquisition of Kaplan and Insight schools is proceeding as planned. We obviously could not make all the changes necessary to optimize these schools this year, as we have only owned the assets for less than two months prior to the new school year. Losses have been significantly reduced so by next year, we hope to make these businesses a positive contributor as we complete their full integration. Having revenue from Insight schools and IS Berne with little operating income contribution obviously has a negative effect on K12's margins. We anticipate these schools' performance will perform significantly in the next school year.

We are proceeding with the full implementation of our Oracle ERP system, and we expect to incur approximately $5 million implementation-related costs in fiscal year 2012. Other infrastructure projects under way this year include a new CRM system, as well as completion of a new data center to ensure system redundancy, capacity for future growth, and risk mitigation. These investments are positioning K12 to handle the Company's current and future robust growth.

Despite all of our recent acquisitions and systems projects, we have maintained focus on the core business, and on constantly improving our operating metrics -- retention, re-enrollment, and cost of customer acquisition. We are pleased to report that all these metrics improved in the past year and we will strive to improve them again this current year.

For the 2012 school year we released 16 new courses and 83 customized courses for various states. Our curriculum now includes 123 full-year K-8 courses and 493 high school courses. At the same time, we remain an innovator in educational content. In the past year we released computational fluency, games, MathCasts, materials-free solutions for some high school courses, and mobile applications that supplement our core content while aiding brand awareness. Our world IB school in Berne, Switzerland, is delivering stellar performance. 100% of the seniors in our International School Berne passed their IB diploma exams, one of only a handful of schools worldwide to achieve this distinction.

Now I would like to take some time to address academic performance, as there have been some articles about this in recent weeks. Unfortunately, most of these articles exhibit little understanding of how to measure academic quality in schools with a fast-growing and dynamic student population, which is the characteristic of almost all of the schools we serve. 10 years ago I was stunned by the variety of children we were able to attract to virtual schools. The fact that we can serve both highly gifted children, as well as children significantly below grade level demonstrates the power of online education and its appeal -- continued appeal -- to more and more families.

We continue to improve our product and services to enable us to better serve this wide range of learners. In recent years, we have seen an increase in number and percentage of students who enroll in our schools who are significantly behind grade level. This is not surprising, as virtual public schools provide a choice for all students for the first time in history. Children are no longer shackled to their local brick-and-mortar school. While a local school works for most children and will continue to do so, this new-found educational liberty that virtual schools provide is a godsend for children for whom their local school is not a fit. These include highly gifted children, as well as children who are struggling academically, and those with special needs. That is the power of individualized education.

In today's world, where an education is so important to making a living, denying these children educational liberty is effectively denying them economic opportunity. The number of students coming to us behind grade level and how far they are behind grade level is startling. For example, in California almost 70% of the students coming to us in the sixth grade would need to make more than the annual expected gain in order to be proficient on their state exam, with almost 50% of them needing to make more than two times the annual expected gains to reach the proficiency level.

Because of the growth and our increased enrollments, approximately half of the students in several schools we serve are in their first year. This can result in test scores below state averages as no educational organization can remediate these students fast enough to perform well on the state tests in their first year with the school. To measure a school with such a high growth rate using static state test scores is not only wrong, it's absurd. We pride ourselves on being able to help these children realize academic success. Without this option, they would likely join the 30% of students who do not graduate from high school in this country.

It's probably worth reviewing what we do know about our student performance. There are three critical facts that suggest that these public virtual schools are having a significantly positive impact. First, the longer students are with K12, the better they do. Second, children who start with K12 in kindergarten do well. And third, on nationally normed exams given to students at the beginning and the end of the year, our students generally out-perform the norm groups. There are many ways of evaluating student achievement, but at K12 we measure our success to whether students are learning at a faster rate than they did before they enrolled.

There's a growing consensus to move away from outdated student achievement metrics such as AYP and to adopt growth models that measure a student's gains in one year and year-over-year. We believe we're on the right track, because our internally administered Scantron tests have demonstrated many of these students are now making gains of one year or more per year in schools, which confirms the benefits of individualized education. For example, if a student who comes to us in the sixth grade three years behind grade level, and then has gains of one year per year, that is a great improvement. He would now be learning at twice his previous rate, even though it will take years to bring that student to grade level, and we must accelerate him even more rapidly than one year per year to achieve proficiency.

To meet these challenges, K12 continues to make significant investments in our curriculum and instructional methods. Over the past two years we rebuilt our entire K-6 math curriculum to facilitate more efficient and accelerated remediation. To further address the needs of students we have developed national math labs and one-on-one online intervention programs. When combined with our individualized approach to education and engaging curriculum, these programs have the power to more effectively remediate students who are behind on grade level.

These investments demonstrate our commitment to meet the needs of the children who require the most assistance. It should not be overlooked that K12 is able to deliver these innovative solutions at significant savings to the nation's taxpayers. As the rate of enrollments in virtual public schools increases, there is no casual relationship between that phenomenon and the emergence of declines in the academic state test scores of some schools.

Rather, the truth of the matter is that a higher number of academically at-risk students are increasingly choosing online schools, often because they're the only choice available to these children. This can have a negative impact on the average state test scores. If we're to manage the Company with the primary goal of achieving the maximum passing rate on a state test, we have turn our backs on the large segment of our students who desperately need our help, and we are simply unwilling to go down that path. To go down this path would be immoral.

Turning to the outlook for fiscal year 2012, we anticipate that revenues will be over $680 million, and EBITDA will be over $90 million. It is interesting to note that our revenue growth from fiscal year 2007, the year before our IPO, to this fiscal year is almost five-fold. And our year-over-year revenue growth, as well as our first-quarter revenue, are now both higher than our fiscal year 2007 revenue of $140 million. While we had previously stated that our three-year revenue growth rate would be approximately 18% to 20%, the recent acceleration in growth suggests it may actually be significantly higher than this, as online education becomes mainstream. We anticipate investing this year to support a higher growth rate than 18% to 20%.

Now I will turn the call over to our CFO, Harry Hawks

Thank you, Ron. Good morning to all of you participating in our call and webcast. I'll address s a few key topics before we open the call for your questions.

First, let me recognize the incredible efforts of the thousands of dedicated men and women who work at K12 in support of the mission articulated by Ron. It is through their tireless efforts to support innovation and education and to make a positive change in the lives of the students we serve that we're able to report a strong first quarter as evidenced by -- revenue of $193 million, which is an increase of 43%; EBITDA of $21 million, an increase of nearly 44%; operating income of $8.3 million, an increase of 53%, net income of $4.6 million, an increase of over 100%; and EPS of $0.12 a share, an increase of 71%.

Second, as I mentioned last quarter, we've tried to provide as much transparency as we can in our press release and 10-Q regarding matters such as transaction expenses, implementation costs, start-up losses, without providing pro forma or adjusted financial metrics, but we're always happy to provide additional color in any follow-up. Therefore when you see metrics from us such as EBITDA or certainly GAAP measures such as operating income, those numbers will always reflect all costs and expenses, but we do try to highlight and explain those in the narrative.

Third, the financial strength of our Company, which is the result of our innovation and problem-solving, also gives us the wherewithal to develop leading online curriculum to take risks on new technologies and to continually re-invest in our Company. In fact, as referenced in Ron's remarks, to date we've invested over $240 million in curriculum, technology and learning platforms. The capital investments made during this quarter, and included in our full-year forecast, were almost all related to further curriculum development, software development, and systems enhancements. These important investments support our education mission first and foremost, while also contributing to a scalable infrastructure to support our growth.

Fourth, our financial position is excellent. We have substantial liquidity and financial flexibility. At September 30, our cash balance was over $133 million, we had zero bank debt, and slightly over $30 million of computer-related capital leases outstanding. The reduction in cash from June 30 is almost entirely related to the seasonal build-up in accounts receivable -- for example, over $118 million just during this quarter, the funding of investments during the period and the provision of working capital to the schools acquired in the Kaplan Insight acquisition, where we did not acquire the working capital of those schools.

Fifth, we provided fiscal 2012 guidance in the press release, but to quickly summarize, we expect revenue of over $680 million, EBITDA of over $90 million, depreciation and amortization of somewhere between $53 million and $57 million. I will note that Q1 depreciation and amortization was approximately $13 million, just for reference. Capital expenditures of about $45 million, capital leases of around $20 million. The tax provision -- we estimate for this year is between 44% to 46%, a reduction from the prior year, as we forecast a reduction in non-taxable, non-tax-deductible items this year versus last year. Ron mentioned in his remarks that transaction expenses, system implementation expenses, start-up losses, et cetera, are also forecast for this year. The estimates just given, give effect to those costs and expenses.

Lastly, you'll notice that we filed our 10-Q yesterday, and a 10-Qa overnight. Just so you'll know, the numbers did not change, the amendment was only to incorporate edits to the narrative that the financial printer inadvertently did not incorporate. I think it's safe to say there was nothing material in the amendment. Operator, we would be pleased to take questions at this time.

Okay, thank you.

(Operator Instructions)

And our first question comes from the line of Suzanne Stein with Morgan Stanley. Please proceed.

Hi, guys. Actually, Thomas Allen filling in for Suzy. I guess we were a bit surprised that you didn't expect the KVE Insight schools to be profitable until fiscal 2013. Were there some additional costs there that you weren't expecting, or anything else that was going on? Thank you.

No. We expected those schools -- as you know, they were losing a significant amount of money in their previous hands. We expected those schools to basically be around break even this year, and that's about where they are. So they're actually kind of right where we expected them to be, and we were able to make enough changes in a very short period of time to get them to break-even, but I think it's important to note to really get where we need to do, we have to do a lot more integration of systems, curriculum, and some of the ways they operate. You just can't change those over the summer, and we didn't expect to. So they're right where we expected them to be, which is close to break-even.

Okay, thanks. Then my second and final question is, 2012 is a big election year, definitely on the federal level and I believe on the state level, also. Do you think that could have any negative or positive impact on the favorable tail winds that you've been having in terms of cap removals, as politicians attention are diverted? And then kind of related to that near-term, you've had some big wins in terms of cap removals, is it -- could that kind of slow down a little bit or any change there? Thank you.

Sure, that's a good question. Obviously, we are sometimes -- elections help us and elections hurt us. The elections aren't until November, so all of business development for the current year will happen long before those elections. We don't see any significant change, and we expect the environment to be favorable, and what happens in 2012, who knows? What I will say is, I think online education and supporting it has been become much more bipartisan, so we're probably not that as affected by it. For example, this current administration in Washington has been nothing but supportive of technology-based education. We don't worry about elections. We'll just continue to help kids, and we think right now the business development environment is very strong.

Okay. Great, thank you.

And our next question comes from the line of Gary Bisbee with Barclays Capital.

Hi, this is Zach Fadem for Gary. Another question on the Kaplan Insight acquisition. Once you've completed the integration, do you expect these schools to operate with margins similar to your existing managed schools?

There's no reason to believe they won't be able to operate with margins that are similar.

Okay. Could you give us a little more color on what kind of work you need to do to the operating model to kind of reach profitability?

Well, I mean there's lots of things. One is -- there's kind of three things that need to happen. One is you obviously want to integrate the curriculum, so you rationalize the curriculum being used, which we've done a lot of. You want to get them on the same learning system platform, and the third is you just need to get them up to scale. A lot of the schools are smaller, and there's an economies of scale in schools, and until you grow that student population, you won't get near the same profile. And then, so there's a few things. But it's all doable.

Okay. And just another question. Can you give us an update on your current Capital Education offering and how that's going?

Sure. Capital education, which is our business helping colleges, is in the process right now of signing up partnerships with multiple not-for-profit colleges, and the business is still small. It still has negative contribution, and probably will for several years, because you have to invest in this business. But we're signing up good schools and we're getting the range of programs we need. You really want to make sure you have the full range of programs across the various partnerships, and we're in the process of doing that. I would still call it in the venture stage, but it is generating revenue, and it is making progress signing up partners.

Okay, thanks a lot.

Our next question comes from the line of Sara Gubins with Bank of America Merrill Lynch.

Hi, good morning. On the revenue guidance, I'm hoping to get a little bit more color around revenue per student expectations. I know you don't model it this way, but if I try to get to your guidance, given the enrollment that we saw the first quarter, it looks like your revenue per student would be down year-over-year for the rest of the year, in the 8% to 10% range. I'm trying to understand just how much of declines are you really assuming at the state level? Does that basically assume that mid-year cuts, which I know we've seen this time around, but aren't really standard? Or maybe is there some seasonality that should suggest that the first quarter should be by far the largest revenue quarter this year?

Well, a couple things and then I think Terry can finish this. One is, the first quarter usually is the higher quarter in the sense that we have a lot of the new enrollments and the material shipments that go out with that create a higher revenue per student in the first quarter. I'd say second, we do model in potential for some revenue cuts during the year. We have modeled across the portfolio the overall revenue per student is down for two reasons -- one is we do see price reductions in several states; and second, there is a mix shift that also drives it down. Keith, do you want to add to that?

The other thing I would confirm your point, Ron, that the first quarter is usually our highest quarter in terms of revenue, and the fourth quarter is usually the lowest. So there is some seasonality there, Sara. Also, we are getting quite a shift to enrollments in our institutional business, which since those are more product offering-oriented, and a lot less services in those sales, that the average revenue per student for a typical institutional business student is lower than our traditional managed business. So as you see those enrollments growing faster, you have a shift to those enrollments.

Okay. Second, Ron, I appreciated your comments about educational outcomes. I'm wondering, are there any states where we need to worry about tripping AYP or other requirements? Understanding the underlying reasons, but is that something we to watch?

I think the more important thing to watch is what's going to happen with AYP is NCLB gets re-authorized and changed. The question you're asking is a longer question, but we can take that off-line. It would be too long to answer on this call but, no, I don't think there's any immediate worries of that.

Okay. Last question, given how much the business has changed over the last year, it's very difficult to compare enrollment growth, kind of, in comparable areas. Could you give us some more comparisons about how growth rates have been trending in same states, and perhaps some other metrics that you would call out on comparable enrollment trends?

Yes. I'll try to kind of reiterate a little bit what I said, and put a little more context around it. One of the things that I think was very exciting about this year is that in states where there are no caps, right, so there was no artificial restriction on growth, when we look at the growth rates year over year, in those states, versus the previous year-over-year growth rates, we were seeing both at K through 8 and high school, organic same-state un-capped growth go up by almost 10%. So you had a significant acceleration in growth in states that a lot of them have been with us for a long time. States that had been with us for 9, 10 years, saw a significantly higher growth rate this year than they did the previous year, and it wasn't the result of any cap expansion.

What that tells me is one, we must be getting better at what we do, but also I think online schools are becoming more mainstream. It's very difficult and you could never -- we could never have predicted all of a sudden acceleration in growth rates in states that have been with us 9, 10 years. So we're extraordinarily excited about that, and the growth -- that acceleration of growth happened both in high school and K-8 on year-over-year measures. And then, we also had a significant part of our growth came from cap expansion, but to actually see states accelerate on a same-state basis in non-cap states is amazing.

Okay, thank you.

And our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed.

Thanks so much. In your prepared comments, you mentioned that this year was going to be another year of investing. If you can help us out in terms of modeling, where will we see that on the income statement? Which line item do think we'll have the most investment there?

Well, you're clearly going to see -- there's investment that happens with regard to systems and product development, but also we're seeing -- we saw not only an increased acceleration in the organic growth, but we also saw lower cost of customer acquisition in the previous year. A lot of what you'll see is, rather than investing for an 18% to 20% growth rate, we're going to invest for a higher growth rate because it looks like the demand is so strong. You see that across the board in systems infrastructure, you see it in student recruiting expenses, you see it in the upgrade of the CRM systems. So it's really across the board. You have to bring more Management on to handle the high growth rates, and you don't bring them on next fall, you have to bring them on in the second half of this year, and they would come in the SG&A number. So it's really across-the-board. Harry or Keith, do want to add to that?

Yes, I'll give a brief follow-up comment. First, in the business or in the situations where we're incurring transaction expense, or system implementation expense, things like that, that is generally reported in the SG&A line item. So for example, a lot of the -- as you know, just a few years ago, accounting rules allowed you to capitalize transaction expenses, but now that we -- the rules have changed, we run them through the P&L. So when we incur those expenses, it's in the SG&A line item. The implementation expenses and the additional audit-related expenses, for example, with the delayed 10-K filing, that impacted Q1 SG&A materially.

Now, as it relates to the losses associated with the new ventures, that's a little bit more difficult to track. Or let me say it this way -- the expenses are reported in instructional cost line item on the P&L, it's just that there's not a correspondingly higher revenue item in the revenue line on top. Therefore, you've got a negative contribution to the operating income line on the P&L, or to EBITDA, the non-GAAP measure. So it's in more easily understood and followed as it relates to transaction implementation expenses, probably a little bit more subtle as it relates to where to look for the losses from startups.

Okay. Again, I know this is another investment year, last year was a big investment year, as well. You guys have obviously shown that you can grow the top line. Should we keep on expecting these big investments, or do we expect over time to see margins go back to where they were, let's say in 2009, 2010?

I'm glad you asked it that way, because I think at the end of the day, the Company is almost always in an investment stage when you're growing at these kinds of rates, because remember, a large part of what we spend, particularly with regard to student recruiting, happens in the fourth quarter of this year. That's also true as you grow the institutional business, you're bringing on salespeople, and we're significantly growing the sales force which is expensive. These people come on in their first year and there's no associated revenue.

So as this business grows, you have a normal curve, where you have these large expenses that happened, particularly in the third and fourth quarter of the year that have zero effect on revenue. When you're driving revenue at 30% plus, and then I'm sitting on three or four businesses that are growing at those rates, you naturally have that. If you go back to two years ago, which is the year you referenced to, you want to equate what's going on, I think the business is showing all the signs of scaling you would like to see in a business like this, despite those heavy investments in growth and the high growth rates.

If you just look at now having, for example, both the Bern acquisition and the Insight schools, which produced very little, and you take that ERP expenses, which were not expected to happen this year, but as we've all clearly beat to a dead horse, we had expenses leak into this year, and you take the new ventures. Each one of those things is about a point of EBITDA margin, with regard. So you would actually see, without those three things, the margins would be higher this year than -- the EBITDA margins would be higher this year than they were two years ago. So you can trace back and you are actually seeing the growth we talked about, but there are those three events that would make it slightly less.

Okay.

And, Ron, I'll add one comment to yours. In addition to EBITDA margin, those of you that are looking at operating income margin, you'll see some separation between the two, because operating income is, of course, impacted by depreciation and amortization expense, which going back to 2010 and rolling forward to this year, you'll see that depreciation and amortization expense more than doubles during that period of time, from around $25 million, $26 million to more than $50 million this year. So you'll see some compression of operating income margin, if for no other reason, the significant ramp-up in depreciation and amortization, largely related to purchase accounting and, as well as, our fairly robust launch of new products and creation of intellectual property, and things like that.

I mean, I'd also say we manage the business on a three- to five-year horizon, and we just feel incredibly blessed to have the kind of opportunities to grow businesses we have. I think few, if any, have that kind of pathway in front of them. We could, obviously, turn it more profitable any time we wanted to by slowing it down. But we're here to serve the most number of children and maximize the long-term potential of the business. I think we're delivering -- while the margins may not have returned quite where they were, we're delivering significant increases, at least in EBITDA, and expect to continue to do so.

That's great. Just a quick numbers question. What should we expect for interest expense this year, and what type of share count should we be using for the rest of the year?

Jeff, for interest expense, we wouldn't expect too much growth over last year in that item, because interest rates are down a little bit. So last year's number would be a pretty good approximation with modest growth for this year, 2012. And then for share count, we published the share count number on the front of the 10-Q, which is basically 36.3 million for the quarter at November 7. So there is a sort of the existing share count. Make sure you add to that though, the 2.75 million shares of Series A stock, which is not included in that number.

Okay. All right, great. Thanks so much.

Thank you.

And our next question comes from the line of Kelly Flynn with Credit Suisse. Please proceed.

Thanks. I'm also trying to, I guess, put together some of the pieces of this fiscal 2012 guidance. I think Sara asked you about kind of the organic growth. Can you help with revenue expectations for each of the sets of acquisitions? So let's start with Kaplan and Insight. Can you tell us what you're assuming for revenue for fiscal 2012 there?

We haven't, in the past, given guidance broken out by line of business. So we apologize, but we're probably not going to start that on this call today. So now, what you heard from Ron was commentary and color on the various pieces. But I think in terms of more explicit guidance by business group, I'm not sure we're going to go there. Ron, is there another way we could try to help?

I think you can -- I think we did disclose what the enrollments were for those schools, did we not? In the queue?

Yes, you did. The other thing is, for Insight it was owned by a company a lot of us cover, so we have access to the historicals, I mean, it ranged from sort of $21 million last year to $30 million the year before in revenue. And the 7,000 enrollment, I mean, that doesn't kind of -- that doesn't fit with that revenue level. I don't know, based on what I just said, can you give us a rough estimate of what or how we should think about Insight's revenue?

What I'd rather do is give you a better number and maybe put it at one of the investor conferences and see if we can give you that. I don't want to give you a wrong number on the call, Kelly.

Okay. That's fair. Then let's talk about Insight's margins, though. I know this has come up a couple times that you basically said, it's not profitable, and you don't expect it to be until fiscal 2013. I mean, should we be thinking in terms of it being close to break-even at this point, or is it a significant drag?

I would think of it as more or less break-even at this point. We did a great job of getting it to break-even. As you know, it was generating losses for its previous owner.

Yes.

And part of it is, you just need to get it up to a scale. A big part of it is, you've got to get it to a scale size. There are some things in the operating model that aren't good, but the bigger thing is just getting it up to a scale size. We did not heavily recruit kids into that, as we go through the process, so we didn't have a lot of growth in that business, but I think getting it to scale makes the biggest difference of all.

Okay. That's fair. I'll follow-up off line with the rest. Thank you.

And our next question comes from the line of Amy Junker with Robert W. Baird.

Hi, thanks. If I can just follow up on Jeff's questions on the margin, and certainly understand what you're saying, Ron, so maybe I can ask it another way. As we move into 2013, will you -- do you think you'll be in a position where we can see some bottom-line growth? Because certainly top-line growth is very solid. Good to see those trends. But if none of it's kind of falling down to the bottom line -- I guess I'm just curious as to when we can start to see at least some of that growth come down to the bottom line.

Well, I would say we have bottom-line growth, Amy. What you're asking is for margin growth, correct?

Correct. But even the guidance you've all given with tax rate and interest rate, it doesn't look like EPS is going to be up this year in 2012. Am I wrong on that? Because you've got share count up, you've got interest rate flat, you got tax rate a little bit better, but EBITDA down. Or excuse me, EBITDA up a bit, but that's kind of -- we're kind of coming out to mid $0.50.

Amy, we're not giving EPS guidance, but we'll try to come back to the conversation about margins. I would say that as we cycle through some of these things that we're talking about here, we do have a goal of margin improvement. So, bounce it over to you, Ron.

Amy, we think about the business in terms of EBITDA, and EBITDA did grow significantly year-over-year from last year to this year. I do think it's kind of -- in some ways it's arbitrary numbers, because we make decisions in the third and fourth quarter on the growth for the next year, and can literally create numbers significantly higher or lower, depending on what we want to invest in future growth. That's the nature of a hyper-growth business is it's particularly one that has such an odd cycle of student recruiting that all happens in the third and fourth quarter, and then no revenue shows up until the next year.

So we anticipate EBITDA margin growth going forward, and I think you'll see that. As I mentioned, I think, to Jeff, if you take the three things I talked about, you pretty much would have EBITDA margins 100 basis points higher than two years ago, if you didn't look -- if you took out the new businesses, the Bern and the ERP. So there will be growth investments, but we do expect to see margin growth going forward, and I'm speaking with regard to EBITDA margins, because that's the way I manage the business.

Okay, great, that's helpful. Just one other one, Ron, on kind of looking at how some of the new states over the last couple of years has ramped. I know you said in the past that non-cap states tends o the greatest growth in the second year. A little tough to look maybe this year, just because Massachusetts and Michigan were both capped, although Michigan's cap want up. But maybe you could talk to states from the prior year; Virginia, Oklahoma, Wyoming, Alaska. Have you seen the growth in some of those states really accelerate, kind of following that same trend you've seen over years past?

When they're not capped, we absolutely see that acceleration. Again, a lot of those you mentioned, Alaska's a little small, but we do see, usually, triple digit rates from the first year to the second year in non-capped situations.

Great, thank you.

What was really interesting about this year is even states that were 9, 10 years old saw acceleration in their growth rates year-over-year.

That's great, thanks.

And our next question comes from the line of Mike Malouf with Craig-Hallum Capital Group.

Yes, thanks, guys. I have a question on acquisitions. I know you did, I think around seven last year, and I'm just wondering as you look over 2012, where do you think -- I mean, do you think that's going to come down quite a bit with regard to acquisitions, or any? Then maybe a sense of if there are going to be some, where you think it might be likely, whether it's here in the US or perhaps in China? Thanks.

Great. Thanks, great question. So we obviously did more than we expected in the past year and are pleased that they didn't distract us and our core businesses continues to thrive. We expect doing less this year, but because acquisition is hard to predict, because it takes a meeting of minds of the buyer and seller to come to a point of agreement on price. But I think it's possible we will do some this year, and I think they would either come in one of two places. One would be to actually add more product lines and breadth to our institutional business selling to school districts, and the other would be add-on acquisitions in Asia. So those are the two places that we would actively look to find an acquisition that would fill in or add to what we're doing in China.

Great, thanks. Then with regards to what you had talked about with the call of the outcomes issue that was in the Wall Street Journal, I'm just wondering, do you typically get, especially with an article that's so widely read, can you get fallout from that? How are you going about sort of combating that perception?

We don't see fallout with regard to -- certainly, students keep coming to us in droves, in fact, I think it may make students actually more, because people realize that we're helping kids, even when the article doesn't completely spell the story out and we have to obviously explain often how well our schools are doing. What we're going to try to be doing over the next year to two years is defining what defines a good school, and the measures that are out there, are, as I mentioned that are static, are terrible.

They go under an assumption somehow that kids have been with that school for a long time, which traditionally with that limited population mobility, there's a lot of districts where kids are 80% or 90% of the kids are there, have been there for multiple years. We see where the majority of kids taking the test have been with us four months or less. When you look at a population like we had in -- we just had an outside firm look at the population in California, you see such a significant percentage. I mean, 70% below grade level, and some of them are three, four years behind grade level.

So the way we look at it is, if a student comes to us -- give you an example that kind of makes this very simple to see, if you have a student come to K12 in the sixth grade, and he's three years behind, that student is more or less been adding one half year of learning for every year they've been with us. So if you all of a sudden get that child to go one year for every year, the way they should be learning, you've done an amazing thing, because a lot of the reasons why that student may have been at a half-year per year haven't changed, so you've doubled their rate of learning which is phenomenal.

But even if you doubled the rate of that student's learning, he's not going to make two years per year -- he has to make two years per year just to catch up in three years. So if you want to catch a student up three years behind in three years, they have to not learn it one year per year, they have to learn it two years per year. You take a student learning at two years per year when starting in kindergarten, he's going to college at 12.

So one of the big things that has to happen is you need to define what a good school is, and we look at it, if the student's learning at a faster rate than they did previously, we're doing a great job. We want to get kids earlier and earlier, because when a kid's starting kindergarten with us, the overwhelming majority of them are on grade level and stay on grade level. One of the things that speaks for the country with the math I just told you, we can't be producing so many kids at sixth grade who are so far behind grade level. It's -- the task of bringing to grade level is almost impossible in a lot of cases.

Great, thanks a lot.

Thank you.

Our next question comes from the line of Trace Urdan with Wunderlich Securities.

Excellent pronunciation. Hi, I wondered if you, first of all, Ron, when you talk about scales in the Insight schools, I'm not sure I really understand the concept there. Are you talking about each one of the individual schools is not sufficiently sized? Because obviously you guys are at scale. Joining -- you do the same thing they do -- joining them to you would seem to suggest immediate scale. So how do you --

Not if you run the schools -- if you run the schools separately under different brands you have separate administrations and a lot of the fixed costs are duplicative. We have not merged the schools, so you have separate administration and those types of things. So the individual schools also need to reach a certain size. We are able to get a lot of benefits because we didn't need the overhead structure that had been created for them. Not all of it, at least. And we didn't need a lot of the regional management structure, but there was -- you still also need to reach it at the individual school basis.

So maintaining a separate brand, is that a function of just the timing, or is that a deliberate strategy on your part?

No, we believe we'll be maintaining a separate brand. We think the Insights can be positioned in a way that will actually increase the overall number of students that will be attracted to our schools.

Okay. I was a little confused because you were talking about cuts in per-pupil reimbursement, and it wasn't clear to me whether you're actually experiencing that, or whether you're anticipating the potential for those cuts. So are you experiencing cuts in the quarter?

Year-over-year, in certain states, looking at what they funded last year versus what we expect them to fund this year, we absolutely have seen cuts.

Okay. So on a weighted average basis, just looking at per-pupil reimbursement, where would you say you are this year versus last year?

We're down, I think, a similar percentage of what we would have been down last year, year-over-year.

Which is what?

It depends on how you actually calculate it, whether you do an average across the thing, or you do a weighted average based on pupil count. We can provide more detail --

Weighted average?

What was that?

On a weighted average basis?

We'll do that at one of the investor conferences, because I don't have the exact number, I don't want to give you a number that wouldn't be verified.

Okay. Fair enough.

It's clearly down.

You're obviously getting a lot of questions about your margins today. I think one of the -- something that's underneath the surface there is that at some level you're asking investors to kind of take your word for it on a number of the initiatives that you've launched, certainly with respect to the enterprise sales. How would you -- what would you say to investors that might be anxious that some of the investments that you're making might not be worthwhile? How will we see -- how can investors track the growth in profitability of some of those investments that you're making that are away from your core business?

Fair enough, and a good question. I think with regard to those investments -- what we're trying to do is we can easily, I think, give as we did with the portfolio of venture investments -- the growth rate in revenue in those businesses you're getting traction. Having started K-12 10 years ago from just a piece of paper, the most important thing is the business getting traction with customers. I think we're able to give you more than enough information that is clear. In the institutional business selling to school districts, I mean, we're looking at growth rates significantly higher than 30% in that business. We talked about the acquisition of American Education Corp and what their quarter was, versus what it was a year ago. So if we're seeing customer demand and revenue growth in those segments, it's pretty clear that they will pay off.

Growth businesses require investment, and the faster you grow, the more it's required. I think the fact that we're seeing traction on the revenue side should give more than enough comfort that we're building a successful business. Again, I can't emphasize enough about how margins can be completely misleading, particularly when you're looking at expenses that are tied to revenue that happens in the next year, which is the natural cycle of the public virtual school business, and the fact that business is thriving and scaling. I don't know how else to say it.

Have you given any thought to maybe breaking out your operating income in a little bit more detail by segment?

Anything we did by segment, I think, in a lot of ways would be -- again, by revenue, yes, you can do that, and we probably, I think we'll get to that point. But by operating income would be arbitrary. I hate things that are arbitrary, because we are sharing a tremendous amount of resources. We are sharing curricular resources. We are sharing learning management systems, content management systems. We are in certain cases sharing even business development functions that generate leads for both businesses. You can basically allocate as you will between these different things, but the power of what we're doing is the fact that we're able to share those curricular and systems, particularly, and in some cases brand and marketing, across multiple channels. That's the power of the strategy and why we're seeing the kind of revenue growth rates we're seeing.

Okay. That's really helpful. Thank you.

Thank you.

Ladies and gentlemen, with no further questions, this concludes today's question-and-answer session. I would now like to turn the call back to Mr. Ron Packard for closing remarks.

Thank you, everybody. As you can see we're very excited about where the business is, and we will be at the Citibank conference. I believe it's tomorrow I will be there, so I look forward to seeing some of you there. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.