Stride Inc (LRN) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to the third quarter 2012 K12 incorporated earnings conversation call. My name is Katina and I will be your coordinator for today. At this time all participants are in listen only mode. We will facilitate a question and answer session towards the end of the presentation. (Operator Instructions)As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call Ms. Christi ParkerVice-President of Investor Relations. Please proceed.

Thank you. Good morning and welcome to the K12 third 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 under take any obligation to publicly update or revise any forward-looking statement. For further information concerning issues that could materially affect financial performance related to forward-looking statements, please refer to K12's Form 10-Q and 10-K filings with the SEC. These filings can be found on the Investor Relations section of our website at www.k12.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 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 any questions you have. I will now turn the call over to Ron.

Good morning and welcome to K12's fiscal year 2012 third quarter earnings call. I'm pleased to report strong revenue growth and significant progress in building out the infrastructure to support our long term expansion. Revenue was $178.2 million up 36.8% as compared to the third quarter last year. And EBITDA was $26.2 million. A quarter-over-quarterincrease of 24.8%.

Online education continues to become more mainstream as restrictive entry barriers are removed for virtual public schools, school districts recognize the value of K12 online courses and student demand for our curriculum rises.

I would like to begin the call today by introducing you to some important new additions to the K12 leadership team, most notably Tim Murray recently joined us as President and Chief Operating Officer, a newly created position at the company. Tim was formerly the CEO of Pulse Point and a senior executive at AT&T where he worked for over 20 years leading up to the position of Executive Vice-President Business Service Operations. Tim brings significant operating and management experience to K12 and is already involved in efforts to improve the efficiency of the organization and deliver greater profitability to our shareholders.

Additionally, please welcome Christie Parker our new Vice-President of Investor Relations. She is joining us from Cooley LLP where her legal practice focused on corporate and securities law. Christie has extensive public company experience and she's looking forward to speaking with many of you over the coming weeks.

I'm especially pleased to report that 2012 is shaping up to be one of our best development years ever. Last quarter we announced the expansion of open enrollment period window in Wisconsin. Since then. The cap in Michigan was raised from 1,000 students to 10,000 students for fiscal year 2014. We are optimistic that caps in other states may be increased or eliminated before the next school year begins.

Equally exciting, more new states are embracing virtual public schools starting this fall. Beyond the new virtual academy in Iowa that we recently announced new virtual schools will be opening in New Jersey this coming school year. A second virtual charter school in Oregon will also commence this fall. In addition our approval was received for a new Florida virtual academy in Osceola county and there are several additional application in various stages of the appeals process in Florida.

We also had success this past quarter renewing our existing agreements with fully managed it schools. We recently renewed our agreement with the California Virtual Academy at Kern for another five years with two new charters for K-8 and high school and we renewed our agreement with the California Virtual Academy at San Joaquin for five years based on a new K through 12 charterWe renewed virtual academy agreements in Arkansas and Oregon as well as agreements with Insight Los Angeles and Insight Washington. This makes a total of seven renewals this quarter alone.

While we decided to end our relationship with the Steilacoom Historical School District in the state of Washington, students attending that school will have several other K12-managed virtual programs to choose from in Washington next year including Washington Virtual Academy at Omak and Washington Virtual Academy at Monroe both of which are more favorable for K12.

Our innovative new Flex Schools continues to receive significant attention from the education community and the experience with the pilot schools is encouraging. We are excited to have received approvals to open two of these schools in New Jersey and two in Ohio, to bring our domestic total to six flex schools and our total number of blended public school sites to over 30.

We are also proud of our new PreK curriculum that will be launched that fall. We see opportunities to sell this PreK curriculum to public schools, child care centers and to consumers directly. We expect to pilot this curriculum in several locations this fall.

Our national math lab continues to deliver promising results. As you may recall from our investor day conference our experience indicates that students who enrolled in this optional program are staying in our schools at a significantly higher rate than non-participating students. The full academic results are not yet available but the early indicators are promising. As a result of K12 high growth rate over the past several years, in fact a five-fold increase in revenue since fiscal year 2007, it has become essential to invest in infrastructure improvements to enable us to manage and sustain our growth.

To this end, we recently completed our implementation of a leading CRM system on time and on budget. The system will enable us to attract, engage, acquire, support, and retain customers more effectively while improving operational efficiencies across the customer life cycle.

In addition, our second data center has now gone live and we are moving business applications to this status center as we speak. This second data center provides us with improved business continuity and disaster recovery capabilities. The increased size of this center and its state of the art technology provide us with improved scalability as the company grows and our business needs evolve.

Lastly, we improved and expanded our internal call center in Herndon, Virginia in order to increase our capacity and efficiency during what we expect to be a busy enrollment season. At the same time as we are making these infrastructure improvements, we are focused intently on increasing our profitability in fiscal year 2013. Our initiative to accomplish this goal without any adverse affects on student performance, employee retention, customer satisfaction, or our growth rate has already found over $10 million of such cost savings that we have begun implementing. We have also identified another $10 million of potential savings which we will are developing plans to capture.

These cost saving opportunities include reducing our reliance on third party curriculum providers as well as exploring ways to use technology to remediate students who are behind grade level more effectively and economically. We are also expecting to realize cost savings by reducing our use of ERP consultants, improving our vendor pricing and reducing losses at nascent businesses.

We are in the middle of extensive due diligence review of the Chinese English Language Learning Center Company web which has grown significantly since we made our 20% investment in early 2011. Doing business in China is enticing but also challenging so we are proceeding prudently. We have until June 30th to decide whether to acquire the remainder of web and therefore we are not yet ready to commit at this time.

On the private school side, the K12 International Academy continues to expand, and now draws students from three additional countries bringing a total to 85 countries. For those of you who are curious, the three new countries are Afghanistan, Madagascar, and Burkina Faso, which some of you may remember from your Geography classes as Upper Volta.

Also our International School of Bern has been selected as one of four schools to participate in the pilot of the International Baccalaureate Open World School. As part of the pilot the school operated an online program that delivers international baccalaureate diploma-level high school courses over the internet to students anywhere in the world.

Visibility into state funding for fiscal year 2013 is still not precise. While tax collections have increased in many states this additional revenue has not yet been reflected in school budgets for this year and is certainly not consistent across all states. For example one of our larger states has notified its public schools that it will delay payments this year. In this state, K12 will therefore be receiving delayed payments resulting in larger than anticipated accounts receivable buildup.

It is still too early to predict what the state funding levels for education will be next year but we are hopeful that improved state tax revenues will put less pressure on public school funding than we have experienced over the past four years. By our next earnings call we should have much better visibility into next year's school funding levels. We should also note that our funding expectations for this current year have not changed since our last call.

It was nice to see many of you at our investor day in Chicago last month. We enjoyed spending time with our owners who share our passion for improving educational opportunities for children around the world. Hopefully the value of the K12 educational program is now clearer than ever and more compelling to all of you.

Also in case you missed it, we published a report last month about the academic performance trends of students in the virtual academies we manage. This report is available to the Investor Relations section of our website. It provides details and analysis on the complex topic of the academic performance of our students and the associated challenges and inaccuracies of applying traditional static performance evaluation methods to virtual public schools with their high student growth and dynamic school population.

We hope to see you at the Baird's Growth Stock Conference in Chicago on Thursday. With that I will turn the call over to Harry.

Thank you Ron. Good morning to everyone participating in our call and webcast. I would like to touch on a few key topics before we open the call to your questions. First I'm pleased to be able to reports a strong third quarter as evidenced by revenue of $178 million, versus $130.3 million same quarter last year increase of 36.8% EBITDA of $26.2 million as compared to $21 million an increase of 24.8%.

Operating income of $11.6 million, versus $10.8 million increase of 7.4% and net income of $7 million versus $5.6 millionan increase of 25%.

Our diluted EPS of $0.18 compares to $0.16 last year.

Second I'm especially pleased to also introduce Christi Parker. As Ron mentioned she has just joined K12 after a distinguished career as a public company securities and corporate finance lawyer from a major international law firm. Her expertise in capital markets, SEC compliance, and corporate governance will be of significant value to us as we continue to grow while seeking to continually improve our communication with you, the owners of K12.

Third, I would like to emphasize the importance of our significant ongoing investments in K12's future. To date we have invested over $275 million in curriculum technology and learning platforms. These capital investments made during the quarter and planned for the fiscal year were almost all related to the curriculum development, software development, and systems enhancements.

These investments are critical to our education mission and contribute to a scalable infrastructure necessary to support our future growth. Our investment and scalable infrastructure will decelerate in coming quarters as Ron mentioned, and our investments in content and technology will continue to be opportunistic, strategic, and in support of future growth.

Fourth, our financial position remains strong. We have a substantial-- we have substantial liquidity and financial flexibility At March 31, our cash balance was over $123 million. We had no bank debt and approximately $36 million of computer-related capital leases.

I would like to take this opportunity to respond to a frequently asked question that I get from many of you regarding working capital and its effect on the GAAP statement of cash flowsThis fiscal year our cash flow statement has been a little harder to understand for many, particularly given the significant changes in accounts receivable. The provision of working capital to the schools acquired in the Kaplan-Insight acquisition where we did not acquire working capital, the launch of new schools, significant growth in institutional sales and other new initiatives has resulted in a significant increase in accounts receivable this year. Indeed more than $109 million increase just in the nine months since June 30, 2011.

As Ron mentioned briefly, we have also seen an impact on the seasonal pattern of collections as some states are paying more slowly than in the past resulting in an increase in accounts receivable aging on average. In the past we have seen our fourth quarter fiscal quarter as a period of high cash receipts with the expected impact on cash flow from operations in the cash flow statement.

We estimate some of those collections will carry over into Q1. Therefore on a comparative basis we believe fiscal 2012 will not be representative of the typical cash flow patterns for K12 but that fiscal 2013 may swing the other direction as we expect a disproportionate amount of 2012 collections will be received then. Those observations are primarily directed at those of you that calculate free cash flow as GAAP cash flow from operations less capital expenditures. I'm happy to take questions on that offline if you like.

Finally a comment regarding our outlook for fiscal 2012. We currently expect fiscal 2012 revenue of approximately $700 million and EBITDA at the lower end of our previous guidance. Operator, we would be pleased to take questions at this time.

Thank you. (Operator Instructions)Your first question comes from the line of Sara Gubins representing Bank of America Merrill Lynch. Please proceed.

Hi, good morning. Thank you. Thanks for providing in the release the details about revenue by segment. We used it to try to calculate revenue per student for managed schools and it looks like that was down 9% year-over-year in the quarter. I'm wondering if irrelevant comment on that it's more than I would have expected to have seen. Is that the kind of declines that you have been seeing recently, would you expect that to continue? Thanks.

Good morning Sarah. No, we are not seeing in the public schools revenue declines to that extent. We are seeing probably on the, at the low single digits range but not 9%. Probably just some mixed changes and the like. But that's not representative of our actual experience.

Okay. Is there any chance that could you provide us revenue for the managed schools for the first two quarters of this fiscal year? So they could do the same calculation.

Well, Sarah, I think that's the [best] calculation. I'm not so sure you are going to get the right answer from. Because the mixed changes that affect that number are so complex. That's why we try to give you what we saw was approximately a couple percent reduction on the price per student on average on the portfolio. But as you see mixed shifts between not only among the different states but also between the different grade levels some states fund high school more some fund sigh school less, you will end up getting misleading conclusions if you look at the numbers that way. It's not the right way to look at it.

Okay. and then separately, just a question on the updated outlook for the year. One on the below the line type items, is there any change in your expectations D&A, CapEx, tax rate that, sort of thing?

No material change. The tax rate probably at the low end of what we previously said. D&A probably right in the middle. Capital expenditures pretty much in line. Everything else not much in the way of change.

Okay. Thank you.

Your next question comes from the line of Kelly Flynn representing Credit Suisse. Please proceed.

Thank you. My question relates to state funding also. Can you talk in more detail about the $8 million revenue hit you referenced last quarter and where that stands? Have you gotten any of that back, if you will, from the states it related to. And have you seen any similar issues popping up in other states.

Kelly, you know, the $8 million from last quarter was a adjusted revenue made based on expectations of payments in certain states and the answer is we have gotten some of that back but there are some other potential offsets to that so we made no such adjustments to it this quarter. We did get some of it back but we didn't take that because there are some other things that could happen adversely. So there was no revenue adjustment made positive or negative this quarter.

Okay. And then as far as the offsets you referenced, that offset what you got back, were those related to new states?I guess I'm just looking for more color on how you can be referable you may not see additional negative adjustments next year.

I think a couple things. When you normally -- historically as well with the exception of last quarter generally what ends up happening is you do have positive effects and negative effect and they have generally worked out relatively close to zero to be immaterial. Last quarter what made it a little different is they all seemed to work in a different direction which created a material change which we had to talk about. As you move toward this part of the year, every month we move forward, the visibility gets greater and greater. So the odds of something happening go down every single month we operate. So I think the probability of it happening isn't zero but it certainly is a lot less than it would have been a quarter ago.

Okay great.

And I might just -- perhaps this is stating the obvious but as you are thinking about that, encourage you to also note that we just said we expected revenue to come in at around $700 million. That is an increase over our previous guidance.

Yep. Okay great. Thank you guys.

Thanks Kelly.

Your next question comes from the line of Jeff Silber representing BMO Capital Markets please proceed.

Thanks so much. Harry, actually just to follow up on that. You did raise your revenue guidance but if you are looking to come in at lower end of EBITDA guidance are there any specific line items that you expect to be worse than before?

You know, Jeff, one of the things about our business is we are, the more successful we become with regard to business development the more costs we incur in the fourth quarter. Every time we open a new state every time expand to cap, every time we open a flex school, all of a sudden we have additional call center people we bring in for recruiting we have additional marketing spend we have to hire school staff including sometimes -- almost always principal, sometimes teachers in advance of it. The weird thing about our business is, the more successful we are in terms of growing the business and opportunities, the fourth quarter has startup expenses that go with that business without any revenue increase at all in the fourth quarter.

Okay. I got it. That's understandable. You mentioned in your prepared remarks about ending the relationship with the school district in Washington. I'm assuming it's relatively small in the scheme of things if you could give us more color exactly why that happened.

Sure. We decided to do that because we have several Schools in the state of Washington and Washington is one of the states where economics are difficult so the relationship that we could have -- we would have with the other partners was better in terms of the working relationship but also with the economics of those schools. So what matters to us is that we have great schools for the students because we believe the students come because they want what K12 is offering and the relationship with the other two districts is better, easier and more economically favorable.

Great. Thanks so much.

Thank you.

Your next question comes from the line of Joe Jansen representing Barrington Research. Please proceed.

Yeah, that's Joe Jansen filling in for Alex Paris. Ron in your-- in the press release you mentioned acquisition costs have been declining and conversion rates increased. Just was curious, was that-- acquisition cost was that a function of the overall brand is starting to resonate more or is that a mix shift in the ads base.

We think it's a bunch of things one we think obviously our brand gets stronger every year we operate and continue to deliver. Referrals from existing customers has been very high. But also we went through a pretty extensive reworking of our call center process which really touched all things. There was a list of 60 different improvements made to the call center.

We brought a lot more of the call center internally to K12 and what we think that does is it creates a culture in the call center that seems to have a higher conversion rate. We also looked at who we hired at the call center, how we train people, and the fact is our scripts is almost more less inviting in the sense we are much clearer about how many hours it takes to do this, but I think that we noticed the significant change in conversion. I think part of this because of what we've done and part of it is online education is becoming more mainstream.

Great jumping around a little bit could you talk about the enrollment trends and what your seeing on the state level are you seeing any weaknesses in any states or are they still trending ahead of expectations?

No we are not seeing weaknesses enrollment continues to be strong. And we expect of that to hopefully continue. I think the big thing going on here is online education, I think, is becoming much more mainstream and people are viewing it and students and families are viewing it as a more mainstream option for their children it's certainly different than when I startedK12 12 years ago it was very avant garde and on the edge to going to a virtual school. Now it sounds much more mainstream. I think it's like any idea curve or new product curve it becomes more mainstream and you continue to see it grow and I think that's what we are seeing.

Maybe you can talk about the political side of it. I hate to bring it up but given the article back in December, how three ways it could affect your business, two of which you have talked about the third being the political fallout which you really couldn't comment at that time your wouldn't see until I think early spring, summer. Is that still in [stance] or...

What I would like to do -- I can tell you, I don't need to even comment on it in the sense that we are literally just finishing one of the best if not the best business development years in our history. This included significant legislative votes in places like Michigan and Wisconsin. We will are seeing seven charters renewed. We are seeing -- we have several cap removals in the queue. You know, so the business development success I think speaks for itself. And we haven't seen the slightest slow down in our ability to deliver educational liberty to more families.

However that was expecting an effect we haven't seen it as of this time. I think one of the good things that's come out about this is we have probably been a little too shy about talking about our academics and the student growth and the Scantron data , and I think sharing that data now so openly both our retention at the investor day, but also the academic data from our Scantron valuated gains test, sharing the -- the Arkansas study that happened to come out and the continued work we're doing in research, I think we are in a much stronger position politically than we would have been a year ago (inaudible) And in this case the truth is in the value we're delivering, whether it be for kids who are drop-outs trying to get a diploma in Chicago, whether it be for virtual school families who were struggling in their public school option previously and are not having success. I mean what we do for children is fantastic and I think that's getting out there and the article actually helped us in communicating what that value proposition

Great, I appreciate it. Thanks for taking my call, Ron. Great quarter

Thank you very much.

(Operator Instructions)Your next question comes from the line of Jeff Meuler representing Baird. Please proceed.

Good morning this is Nick Nikitas for Jeff.

Good morning.

You are probably still in the fiscal 2013 budgeting process but given that fiscal 2012 was such a large infrastructure investment year and it sounds like fiscal 2012 revenue drills will likely remain strong how are you guys thinking about the fiscal 2013 margins going forward?

We are looking to improve margins. What I mentioned in my comments is we set in place a major efficiency initiative here to try to drive some costs out of the system without like I said affecting growth rates, student experience, employee satisfaction. So -- and we have already identified over ten that are already been captured or in the process of being implemented with another ten to come. And one of the reasons we moved to hire President and Chief Operating Officer is to help us drive those efficiencies. So given hopefully that we see a little better funding outlook where I'm not fighting this head wind combined with these initiatives and the dropoff of ERP expenses which were quite substantial this year, we would hope to see margin improvement for 2013. That's our goal and everyone is working toward it and we are focused intently on it.

Great. I guess given the new hire of the CEO do you see your organizational roles changing or do you see the hierarchy have you talked about that?

I think the organizations -- my role has changed every year for 12 straight years. When you are in the first year as CEO entrepreneur you do every business role there is because we put every dollar we had into the product and systems. I view my role hopefully this allows me to be more external, do more business development work than I have been able to do the last year or two and I think we can concentrate more on some of the infrastructure whether it be the ERP that much I haven't had all the time to be able to put my personal attention on and I would like to spend more time upon next generation of products which I haven't been able to spend enough time on. Hopefully this allows me to do more of the things with regard to business development and product innovation and have a lot of the P&L and efficiencies driven by a President COO who I think is perfectly suited and his background is fantastic for doing that.

Great thanks.

Thank you.

With no further questions at this time I would now like to turn the call back to Mr. Ron Packard for closing remarks.

I would like to thank everyone for joining us and I look forward to seeing many of you this Thursday in Chicago.

Ladies and gentlemen thank you for your participation in today's conference. This concludes the presentation. Your may now disconnect. Good day.