Stride Inc (LRN) 2014 Q4 法說會逐字稿

Greetings and welcome to the K12 2014 fourth-quarter and full-year earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Kraft, Vice President of Investor Relations. Thank you, sir, you may begin.

Thank you and good morning. Welcome to K12's FY14 earnings conference call.

Before we begin, I would like to remind you that in addition to historical information, certain comments made during this conference call may be considered forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, and should be considered in conjunction with cautionary statements contained in our earnings release and the Company's periodic filings with the SEC. Forward-looking statements involve risks and uncertainties that may cause actual performance or results to differ materially from those expressed or implied by such statements.

In addition, this conference call contains time-sensitive information that reflects management's best analysis only as of the day of this live call. K12 does not undertake any obligation to publicly update or revise any forward-looking statements.

For further information concerning risks and uncertainties that could materially affect financial and operational performance and results, please refer to our reports filed with the SEC, including without limitation, cautionary statements made in K12's 2014 annual report on form 10-K. These filings can be found on the investor relations section of our website at www.K12.com.

In addition to disclosing financial 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. The call will be available for replay on our website for 30 days.

With me on today's call is Nate Davis, Chief Executive Officer and Chairman; Tim Murray, President and Chief Operating Officer; and James Rhyu, Chief Financial Officer. Following our prepared remarks, we will answer any questions you may have.

I would like to now turn the call over to Nate. Nate?

Good morning, everyone. Thanks for joining us on the call today. I'm pleased to say that we ended FY14 with solid results. For the quarter and full-year, our results met the guidance we provided.

Revenue for the year was $919.6 million, increasing 8.4% year over year. Our operating income, excluding the charges recorded for the second quarter, was $55.1 million, increasing 20.6% year over year. Our capital expenditures were $73.5 million, slightly below the $75 million we invested the prior year.

As I said last quarter, our financial performance this year is a direct result of the discipline we have instilled in the assignment of resources. Regarding operational performance, the entire organization is very committed to our core focus on academic outcomes.

Our investment philosophy over the next couple of years is to drive operational excellence in academics with well-placed expenditures in three key areas. As well as key investments in products to serve the growing market of online programs in public school districts.

The three areas are: First, we will invest in the effectiveness of our school work force. We're expanding our training and professional development programs for our teachers.

And we recently established a new program to better develop our local school leaders, or what we call Heads of Schools. We will seek to provide more teachers and more teacher coaches, as well.

Second, we will continue the development of new instructional approaches that increase student and parental engagement. An example would be more hybrid or part-time face-to-face learning environments for those students who need it the most.

Third, we will enhance our curriculum and our systems architecture. We've talked about this before.

This includes improving core systems with an eye toward mobility and more information for teachers about individual student progress, greater accessibility for students with disabilities and updating our content as state standards and state assessments change. This is a multi-year effort that will support growth initiatives and performance for our Managed Public Schools in the short run, as well as our international, Private Pay and Institutional groups, over time.

I've been asked multiple times for the vision of where this Company is headed. I want to be clear that our number one mission will always be improving the academic outcomes for all students we serve and supporting the independent boards in their quest to build great schools.

But I do see a transition in education to more hybrid models and more traditional school districts offering online summer courses, online supplemental programs, and full-time district-run online programs. This is why our institutional business that we've branded Fuel Education, is so important to us.

This is the way we will participate in the growth of technology in the classroom in the United States. I'm encouraged by the number of programs we see coming online for which we are a competitive provider.

Before I hand the call off to Tim to review some operational highlights, I wanted to provide you status on our Managed Public Schools enrollment season which began in early April and will go through early October of this year. From an operational standpoint, we have effectively executed on our commitment to improve processes, streamline operations and provide new reporting and tools for the enrollment season.

I believe the majority of the issues that we faced last enrollment season have been addressed. The new parent portal application process has been built and deployed. This portal is performing as expected and reduces the number of steps to enrollment.

This provides families better information and better control over the enrollment process. Families can upload compliance documents on their own, easily add multiple students to the family account, track their enrollment process and perform other functions.

In addition, the new K12 all-in cloud-based telephony platform is now live. This improves our management of inbound calls.

The new family support center in Knoxville, Tennessee opened on schedule in May. We have hired, trained and onboarded 152 employees to date and plan to increase total employee capacity to approximately 330 by the end of the year as we prepare for next year's enrollment season.

And, we built and deployed a new suite of internal reports that provide greater (inaudible)visibility from media acquisition through student interest to applications all the way to enrollments. At the same time, while it's too early to predict with any certainty, our total enrollment for the 2014-2015 school year, there have been a few developments which are creating some headwinds and challenges to enrollment growth. I'd like to highlight some of those for you, now.

First, in Tennessee. The Education Commissioner reported that annual assessment scores for the 2013-2014 school year at Tennessee Virtual Academy, which we manage, in total the scores were low. At the same time, he concluded those students who persisted in the school for two or more years performed at a reasonable level, scoring in three out of five, which is significant improvement from previous years.

The Commissioner stated that the Tennessee Virtual Academy students have shown improvement in years two and three, and that the challenges rested primarily with first-year students. The net result was that the Commissioner asked the Union County Public school, our partner, not to take new enrollments after the July 10, because it was the new students who were bringing down the school's overall score.

Just so you understand, the potential impact in the first two years, the last two years of the school, we had an average of approximately 3,000 students per year in enrollments in the Tennessee Virtual Academy. When this cap on new student growth was enacted, K12 had to turn away approximately 2,000 students within the enrollment process who were already interested in attending the program this fall, and potentially more as the season progressed.

The positive point here is that the Tennessee experience again underscores what we've said repeatedly about persistence. For those students who stay with the K12 program, even for students who come into the program behind grade level, academic results improve each additional year they are in the program.

Second, Colorado. In Colorado, one of our partners took longer than expected to finalize their state-authorized charter renewal. Subsequently, the contract with K12 took longer.

While that renewal was eventually secured, the result was a delay in the beginning of the enrollment season for this fall. Last year the school opened for enrollment it mid-June. This year enrollments began in late July. We believe the short enrollment time-frame will translate into lower Colorado enrollments this season compared to previous years.

Third, on a more macro level, while I see the overall market adoption for online education growing because families today have more choices in choosing full-time and part-time virtual programs for their child. In the past, if you were a family seeking a virtual education option for your son or daughter, the only choice you had was a full-time managed program like the ones K12 manages.

Today, there are more public schools and districts that offer summer online courses, in-season electives online, supplementary skill-specific online programs and full-time programs run by the public school district itself. The number of online options is broader. We believe that the overall demand for virtual choice is increasing.

As I mentioned earlier, K12, through our institutional group, FuelEd, is participating this market shift and we're seeing increase in the interest of our services we offer. However, in the short-term, these market dynamics create a challenge to enrolling students in the public schools.

To bring that home for you in specifics, in the state of Pennsylvania the overall growth rate for enrollments for online charter schools, according to the Pennsylvania Department of Education, has slowed from 11.7% in school-year 2010-2011 to 4.1% in 2013-2014. In Ohio the growth rate in the same periods slowed from 5.5% per year to 0.5% in 2014, according to the Ohio Department of Education and the National Education Policy Center. There are similar stats in Arizona, another state where online schools had existed for some time, but the growth in online programs has now slowed down.

To give you a balanced point of view, Texas, Michigan and Georgia are relatively new markets compared to Ohio, Arizona, and Pennsylvania. The penetration in those markets is less for us. Growth in Texas, Michigan and Georgia online programs remains strong.

At some point, we do believe New Jersey, Illinois, Connecticut, Kentucky and New York will become states allowing online charter schools, and will experience the same growth that these other states experienced. In fact, legislation in North Carolina was enacted this past year, allowing two online charter programs to be authorized and to convert to permanent programs in four years, if successful. We certainly will attempt to be one of the education management organizations for the charter boards who receive authorization.

All of the headwinds I just mentioned are all on top of our school boards and K12 itself, pushing to keep students enrolled only if they're truly engaged and ready to learn. We help students in every way we can. But, if they are not engaged, they often have to shift back to the structure of the traditional brick-and-mortar school. Those withdrawals hurt our enrollment as well.

With all these key factors, keep in mind we just started in the busiest portion of the enrollment season. Every day we are enrolling new students for the upcoming academic year and will continue to do so through the end of September.

There will continue to be a lot of variability over the coming weeks. Therefore, we can not take final enrollments and where they will land. In the meantime, we wanted to share with you these events and challenges we are facing to help you understand the growth trends we're seeing for the upcoming year. Thanks very much. Now let me hand it off to Tim. Tim?

Thanks, Nate, and good morning, everyone. It's been a very busy quarter, closing out the school year with students participating in year-end state standardized exams before heading off to summer vacation. We moved a number of initiatives forward and once again our education solutions and products won industry awards that acknowledge K12's innovation and quality.

Operationally, student experience levels through the end of the year were consistent with expectations. System-wide performance exceeded 99% availability for our learning management platform and for our PEAK solution for school districts.

We of course continue to build out K12 portfolio of courses. This quarter, we released a number of new course options, and clearly enhanced assessments for primary and middle school students, and expansion of our use of games as part of our mobile and desktop applications and customized curriculum to meet state-specific requirements.

We were always proud to be recognized by our peers in this sector, and once again the K12 team garnered new accolades. K12's EmbarK online and Noodleverse applications won both the 2014 Parents Choice and the 2014 Mom's Choice Awards.

Turning now to our institutional business. We expanded the PEAK library to include more choices for schools, and added the capability for schools to utilize additional third-party applications like YouTube education and the Khan Academy through the PEAK application.

The K12 platform now also allows teachers to upload their own content to create new courses or supplemental information. We will continue to invest to expand the capabilities of this platform to provide schools with the choice of a single application for online course management, analytics, and reporting.

K12's technology team continues to excel, moving many projects forward this quarter. We've enhanced school analytics, improved the efficiency of school management solutions and addressed upgrades and improvements for the existing learning management solutions, including the ability to publish new mobile-compatible content for our middle school students.

In addition, we successfully migrated our software development and reporting hardware environment to increase performance, stability and future scalability needs. Going forward, we expect to be able to accelerate our software deployment capabilities through the use of new automated software-building deploy capabilities developed by the team in this quarter.

I want to note here that we are especially excited to end this year with over 6,000 students graduating from K12 partner schools. This is a 50% increase over last year, and therefore, we'll have to replace some 2,000 more students than we did the previous year.

Those K12 graduates are going onto schools and universities of all types, including names like Boston University, New York University, George Washington University, Texas A&M, Georgia Tech and the University of North Carolina, just to name a few. Graduates are also going into the military or vocational training or directly into the workforce. We're very proud of each and every one and excited about their accomplishments and wish them well in their next endeavor.

Finally, let me note that we launched four new schools this quarter will be open for the school year starting in the fall. The Insight School of Oklahoma; the Insight Schools of California, one in Los Angeles and one in San Diego; and the Hill House Passport Academy in Pittsburgh.

These schools will specifically support at-risk students and those behind grade level, with a comprehensive set of support programs in addition to academic courses. These schools represent the best of what we do, serving students across the learning spectrum.

It's especially gratifying to recognize K12's very positive impact on students and families that need that extra support to achieve success. We are excited about the challenges we have before us and keenly focused on our students and our schools.

Thanks very much. Let me now hand the call over to James.

Thanks, Tim. Good morning, everybody. As Nate already mentioned, we posted revenues of $919.6 million for the year and an operating income of $55.1 million, excluding the impact of the $32 million of charges we posted in the second quarter.

The operating income is right in the middle of the range we had been providing and revenues came in a bit above the range we last provided in Q3. We achieved our financial goals this year while continuing to make investments in our business, as Nate previously mentioned. Our primary investments this year have been to improve academic outcomes and that will continue into next year.

It's worth noting that while we expand investments in our key academic initiatives, we were also able to more than double free cash flow to $50 million, from $20 million we posted last year. We began the year indicating we were going to be disciplined in our investment approach, and I think we demonstrated our ability to do so.

Now, let me take you through some details of our quarter and the full year. Revenue for the quarter was $232 million, an increase of 14% over the year-ago quarter. For the full year, revenue at $919.6 million was an 8.4% increase over the prior year.

The growth in the quarter was largely driven by a 17% increase in our Managed Public Schools revenue. A combination of factors impacted revenue in the quarter, including timing, revenue capture and year-end planning adjustments, among other variables. We don't see this revenue increase as a structural trend carrying into next year.

The full-year revenue increase in our Managed Public Schools, at 10%, was in line with our expectations. Keeping in mind that we've told you that our phasing of revenue through the year was going to be more evenly spread than the prior year.

Institutional sales revenue decreased $0.5 million or 3.1% from the prior year and rose sequentially almost 23%. As we previously discussed, we see this business in transition heading into next year.

In addition, for this fiscal year, we recorded approximately $4 million of institutional sales that were related to divested businesses in June of this year. The year-over-year comparison next year will need to consider the divested amount.

Our International and Private Pay Schools revenue was flat on a year-over-year basis. The year-over-year comparison was also impacted by the business that we divested toward the end of the year. For the full year, the divested businesses contributed almost $13 million of revenue.

On a full-year basis, the International Private Pay business grew almost 10%. Gross margins increased from 36.4% last year to 38.8%, due to higher revenue in the quarter and came in line plus or minus where we expected to be for the year.

Selling and administrative and other expenses increased 13% to $74.8 million on a year-over-year basis. As we previously indicated, we ramped up some of our promotional activities earlier in the season as compared to last season.

Product development expenses for the quarter was $2.3 million compared to $6.3 million in the prior year. This is consistent with the trend we've been seeing throughout the year. Operating income was $12.8 million for the quarter versus $1.4 million last year.

Let's turn to some other items. We ended the quarter with cash and cash equivalents of $196.1 million, which represents an increase of $14.6 million from the prior year. Net cash provided by operating activities was $123.5 million, which is an increase of $28 million from the year-ago period, largely as a result of improvements in network and capital, somewhat offset by the lower starting net income.

Accounts receivable rose 4.4% to $194.7 million, largely in line with the enrollment group for the year. Our DSO was also marginally better this quarter compared to last year.

The Company continued to repurchase shares in the quarter, investing $21.9 million to purchase 953,000 shares of common stock. We had $26.5 million remaining available under authorization as of June 30.

CapEx, as we've historically defined it, which includes curriculum and software development, computers and infrastructure, was $18.3 million for the quarter. Or, basically flat on a year-over-year basis.

On a full-year basis, CapEx came in at $73.5 million. Which, on the same basis, is marginally lower than either FY13 or FY12, which were in the $75 million to $76 million range.

We indicated earlier in the year we would be between $75 million and $85 million of CapEx, but that we would also be disciplined in our spend. We are going to continue to invest in key areas, whether that's for platforms or content, consistent with what we've been saying all year.

Our tax rate for the quarter and for the year came in better than we previously indicated, at approximately 38%. We drove some better discipline in our tax planning compliance, which has helped our effective tax rate for the year.

As previously announced, we closed the sale of select businesses during the first half of June. Those businesses had revenues of $16.9 million for this fiscal year and are close to breakeven on an operating income basis. We also recorded a gain on the sale of $6.4 million, or about $0.11 per share.

I've already provided you the split between our Institutional sales and International Private Pay business. Please be mindful of that as we discuss our results for those businesses next year. With that, I'll hand the call over back to Nate.

Thank you, James. Before we move to Q&A, I want to remind everyone that we are in the midst of the enrollment season. And therefore we are unable to address questions regarding FY14 enrollment and revenue guidance.

I know everyone is keenly interested in our progress, but I ask you to refrain from asking questions that attempt to get at specific revenue or specific enrollment guidance that we'll be giving in October.

Now, let's move to Q&A. Operator, who's our first question from?

(Operator Instructions)

Corey Greendale, First Analysis.

Nate, I will honor your request, but I did have a couple of more specific questions. Is there any update on Agora? And either the timing or any feedback you've heard on that?

They had one Board meeting. Agora did have one Board meeting where they made some decisions and indicated a clear interest to be a self-managed organization.

Beyond that, we don't really know, because we're not going to hear until the next board meeting, which is August 25, I believe. After that Board meeting, I'm sure we'll hear more. There really isn't much to update you on other than the next Board meaning is August 25 and we will learn more then.

Okay, did you expect that there would be some decision and a press-releasable event?

As of August 25, are you asking about that date?

Yes.

I think they will make a decision. I don't think they will issue a press release. We probably won't until they talk to us and explain the decisions they made.

Of course, we will be at the meeting. We will be talking to them, but there will be conversations right after that. I think you should not expect on August 26 there will be a press release. But you should expect in the coming weeks, as soon as we understand whatever decisions they make, we will then issue a press release.

Okay. You were nice enough to give us some sense of the impact from Tennessee. Could you help us get our heads around the potential Colorado impact? Like just what the number was last year?

Well, we don't give by-school enrollment numbers. I gave you Tennessee because it's actually in the public domain. I will tell you that Colorado, I think, is not in the same size as Tennessee. It's smaller than that impact. But other than that, I try not to give state-by-state enrollment projections, for obvious reasons.

Okay. Tim somewhat gave part of this. But, could you help -- I understand you're trying to set reasonable expectations. Just tick off a few of the offsets. What are some of the positives that could help drive growth, offsetting some of the things you pointed out?

I'll take a little bit of t hat. Tim, you do some as well. We talked about the operational improvements we put in place. And I think those operational improvements are allowing us to get greater conversion from leads into ERs.

It's easier for parents to get into the parent portal, to get their documents uploaded, to become a completed application. We are also seeing, because we put more money into the promotional activities earlier in the year, we saw greater lead volumes early in the year.

However, I want to temper all of that by saying I think the big issues that I gave you as trends, big states like Ohio and Pennsylvania, where we traditionally got a lot of growth, those states are slowing down. We've had some offsets. More leads but less conversion in states like Pennsylvania, Ohio and Arizona, that are offsetting each other. You want to add anything, Tim?

Yes, I would just say we are a couple of weeks earlier this year having this conversation than we were last year. So we still have more of the enrollment season in front of us. All the operational improvements that Nate just alluded to, we've got a good six weeks ahead of us to see the impact of those.

The other thing I would add is, in terms of the new schools that I noted that are opening this coming season, each of those will get started in a small way. But they are targeted in the 100 to 200 per students school range, Hill House Passport Academy, the Insight School of Oklahoma, et cetera. We do expect some positive benefit there and more in the future.

Okay, that helps. James, you characterized the marketing spend as being pulled forward. Does that suggest that we would expect a lesser growth rate in Q1 because it was pulled forward into Q4 2014? Or is it more likely to be up at a similar rate year over year in Q1, as it was in Q4?

Correct. I apologize. If I said pulled forward, I actually -- I didn't think I said pulled forward. I think we started a little bit earlier this year in this season.

We are monitoring our commercial spend very closely. I'm not going to give guidance yet on what we're going to end the year with. We are going to continue to invest in promotional activities throughout the course of this season that's going to end in early October.

Okay, you are correct. I interpreted the earlier start as pull forward, but thanks for the clarification.

One more on the cost side. The things that you talked about, about providing more teachers, more hybrid learning environments, that all sounds like it grows the market opportunity and improves outcomes. It also could change the margin profile. Could you comment on the impact on the cost side from doing those things?

I do believe that it will increase costs in the coming fiscal year. It's the right investment, we think, to make. It's primarily focused on student outcome more than it is market opportunity. It's really the student outcomes we're focused on.

So, yes, I think, teachers cost money. And to the extent that we add teachers, we will incur some of that cost. The boards and their own funding sources from the state, will incur some of that.

So it's not like 100% of that hits our P&L. Some will actually come out of their surpluses or come out of funding sources they'll get from the state. Certainly, it will change our cost structure a bit, and we'll have a little higher costs on the instructor side.

Just a little more context for you, Corey. We discussed this a couple of quarters ago. We indicated that we probably would have some gross margin contraction during the course of this year.

We experienced about 80 basis point contraction during the course of this year relative to last year. As Nate indicated, we are going to continue to invest. I think you would expect some continued contraction.

We'll give you a little more color as we get into next year and provide some guidance for the year. I think that we are going to continue to invest. Just from that pure metric, you'll expect a little more contraction, I think.

So James is giving you the numbers. Let me give you one quick statement about why. We believe it's really important to make sure that we give every effort to making sure that students have the right teacher support and getting the right academic support. Because that keeps schools open, that keeps boards happy, and that's what keeps us in business. This is a critical investment we have to make.

That is all very helpful. Thank you.

That was a number of questions, Corey. Operator, who is next?

Jeff Meuler, Robert W. Baird.

Let me ask you about your Choice Awards. Nate, you were using the phase -- growth trends -- directionally. Are you trying to indicate that you would still expect this fall next year to be an enrollment growth year?

You know, over multiple years, I would say yes, we expect them to grow. The volume of growth is something that is very difficult for us to project.

As we go through the season we are learning more. We learned in the bigger, older, more higher-penetrated states, we're going to get less growth and in the newer states we get more growth. The offset for those, I really can't tell you at this point.

But, do I expect some positive growth? I do expect it. But, I just can't tell you how much.

Okay, that's helpful. Can you talk about how the competitive landscape tends to evolve over the first 10 years after a state opens up to online schools? I'm asking from the standpoint like, is it more that you and your large for-profit competitor tend to be the main players in a state for the first five years?

And then once there's a certain level of market demand, you tend to see the state-hosted offerings coming into the market? Trying to figure out if you are largely funding the investment for the first however many years, and once there's critical mass on the market, if that's when you see the state-sponsored entities come into the market?

This has changed over time. The answer to your question is, today, yes. What generally happens is that we and the largest competitor tend to be the first two in.

And we tend to spend the most on the process of getting approvals and getting authorization and getting the state to adapt the laws. Nationalize the charter schools also helps, so there's a number of parties that participate on that process.

Once the first set of applications come along in this current environment, we tend to be the two large players that come in at first. However, in previous years, in the early years of this industry, there were other players who were significant players, especially when you look at Ohio and Pennsylvania.

They had schools that were sponsored by other parties. Some of those parties have gotten themselves in some trouble legally and have gone away. Others are still there.

If you look at the large schools in Ohio and the large schools in Pennsylvania, it's not just us and Pearson. There are a couple of large players.

We think going forward, there will be even more competition for the big schools in big states. We think we will always be the leader, but there's no doubt about it, more people have looked at this market and said, wow, there's attractive market there and I want to be in it.

Okay. Finally, on how to think about the expense year and kudos to you for coming in to your guidance. I will call myself out that I was skeptical entering the year. Kudos on hitting the EBIT guidance.

How should I think about the expense management? I'm asking that from the standpoint that during the call, I think that you referenced being more disciplined around how you think about what investments you should fund and things along those lines.

But, my recollection was that in the past, James, that you've also cautioned that in the year-ago period that you're comping against, you had some investments in anticipation of a big enrollment year. Just trying to think about how expenses will trend going forward, how we should think about incremental margins.

Yes, Jeff, thanks for the call. I do remember your skepticism earlier in the year. I think that as we think about the business, Nate and Tim and I, we are really focused on academic outcomes, primarily. When we think about investments, whether their CapEx, whether there will be instructional costs we mentioned earlier, even when we think about our promotional activities, we are considering investments that will improve academic outcomes.

So, I mentioned that there's probably a little bit of contraction in the gross margin side because of some of the educational investment that we're going to make that Nate referenced. I think that if you look at the trajectory of the product expenses, we have tightened up on those from an OpEx perspective. However, we are going to continue investing in product and curriculum.

So, if you just look year-over-year, this year to last year, the P&L got, I think, some benefit from it. But you should expect some continued investment in curriculum and product.

Similarly, on things like software investments and things like that, our platform investments, and Nate mentioned in his prepared remarks, investments in the PEAK platform for our Institutional side of the business. Those will continue.

I can't give you -- some of that, there's a mix of CapEx versus OpEx in that. I'm not going to give you exact guidance, but in the long term, we do think that there's margin growth in this business over the long term. It might be a little bit choppy over the shorter term.

Okay, thanks, guys.

Jerry Herman, Stifel.

Nate, I want to start with a high-level question. You were helpful in terms of explaining some of the changes and transitions and shifts in the business.

There's been a couple of examples where your partner has talked about taking some of the services that you provide in-house, i.e. Kansas City, Pennsylvania. Do you see that as a developing trend in some way? If so, how do you think it impacts the business model over time?

Very interesting. I think some positives and some negatives from that. I don't know that I can say it's a trend, but I will just give you some facts.

It was May of 2006, I believe, when PABCS decided that they were going to be self managed and go in-house. At the same time, we established another school that we were working with, called Agora. And Agora has grown dramatically and PABCS has been a good school, staying at the same size.

Since that time, yes, we've disclosed, Colorado and Hawaii have done the same thing. But we've got other schools in Colorado.

So, I think you will see that we continue to pursue second and third schools in the state, both for academic at-risk and for other reasons, including CTE. So, when you look at that, there's some balance.

In terms of the business model and how it changes the business model, remember that there's a lot of expense associated with managing a school. If the Board decides to take that work on themselves, that expense comes out of our P&L. We were the curriculum provider for PABCS. We hope to be the curriculum provider for Colorado. And we hope to be the curriculum for anybody who decides to go self-managed.

The strength of our program is in our curriculum. We think that's one of the great assets we have. So, I think there will be some change where costs come out of the P&L, revenue comes out of P&L, but we still continue what I consider to be a very good margin curriculum business. And that's how I think it changes.

Great, thanks. One for James, and all of you, for that matter. Your cash balance is obviously very healthy. You've taken action to buy some shares.

Again, given the sum of the transitions in the market, how do you look at the portfolio right now? And what role might acquisitions and M&A take in terms of business positioning and use of cash going forward?

We've been asked that question many times. If you look at the cash we have, why don't you dividend it to shareholders, why don't use it to buy back more shares? We did it to the tune of an authorization program of $75 million. But we didn't do bigger, higher numbers because the Board believes and I believe that this is a growth market and an opportunity.

We do look, that as we got the core business more better managed, we do look at opportunities to do acquisitions. We've looked at a couple in the last six months. Neither one actually came about, but we are looking at more out in the marketplace.

As you know, the multiples are very high in many of the businesses that are out in the marketplace. So we try to be very smart about it. Some people have been frustrated because we are sitting on the money. But it's not we are not looking at opportunities, it's simply we're trying to make sure we make right investment.

I think you will see more acquisitive activity going forward. Not in the core business, but in those adjacent businesses, especially in the institutional area, that give us an opportunity to keep growing and participating in that market.

Great. Thanks very much, guys. I'll turn it over.

Jeff Lee, Wells Fargo.

I just want to get a little more background about Agora. Do think you can give us some color on the parent (technical difficulty) or teacher satisfaction scores of Agora relative to the national average? Also, maybe some color on state test scores at Agora and what sort of either improvement of decline they've showed recently?

Let me comment on state test scores and then Tim can comment on parent satisfaction scores. On state test scores, they have not yet been released for this year. So I don't know where they stand, at this point in time.

The state is a little slow in getting its data out. I don't think they are slower than their normal average, but slower than some others. I don't really know where it stands.

We don't expect a dramatic improvement or decline. We expect Agora to get slightly better and that's our expectation. I haven't seen the stats yet.

Jeff, we can refer you back to the K12 annual academic report that was published earlier this year, where you can see the historical Agora results against all the other schools that we support as well. In terms of the parent satisfaction results, we don't typically disclose how they compare between one school and another. As Nate said, we see trends there that are consistent with past years in Agora.

We are just now collecting and processing those results across all of our schools. It's a little early to draw any firm conclusions just yet.

You asked also about teacher satisfaction. I'll remind you that teachers work for Agora, they don't work for K12.

And Agora did go through significant discussion about unionization, multiple times, multiple years. The board has been working with us to make sure that we satisfy teachers as best we can, Because we don't think that unions could do a better job than us.

So, there are some concerns among a set of teachers. There's also some very strong support for teachers who don't believe a union should be in between them and their board. So, there's some, I would say, mixed results on teacher satisfaction at the Agora School.

Okay. One more for me. I know you made disclosures about Agora revenue in your 10-K. I was wondering if you could give us some color on EBITDA contribution from Agora?

Well, we don't report on a segment or school basis, as you know. So we can't. But, it's pretty obvious to everybody that Agora has a higher reimbursement rate because the State of Pennsylvania does. I think it a good margin business. I don't think we can disclose any more than that.

You also have to remember that most of our cost, or many of our costs, except for those direct costs like teachers, are structural costs across our network. Things like our platforms and things like that, are not school-specific often.

Sometimes we do school-specific things and we make school-specific adjustments, but a lot of our curriculum is across our network, et cetera. You don't really get to a contribution margin type of line for any school. You'd never get to EBITDA anyway.

Remember, in Pennsylvania, I'll go back to one other thing that's very, very important to remember. That is the teachers are on the payroll of the school. So, it's the cost associated with that this a direct cost that the school incurs on teachers. While there's a high reimbursement rate, there's also a teacher cost the school really deals with.

Okay. Thank you.

Jeff Silber, BMO Capital Markets.

It's Henry Chien calling in for Jeff. I wanted to ask a little bit about the increases in revenue per student. I know you mentioned some of it was due to shifts in the calendar. Is there anything else driving that in the quarter?

Henry, it's James. Every quarter there's a number of puts and takes. The year-over-year comp is a little bit -- we mentioned earlier in the year that the way that the timing of the revenue is going to come in this year would be a little bit different.

Some of the quarterly year-over-year comp is driven by that phasing during the course of the year. This year is different than last year. We have everything from capture, as I mentioned, which we are continually trying to improve. There's some timing issues.

We do get some adjustments in some quarters, either from state audits or things like that. A lot of puts and takes, so we really don't go into detail. As I said, the quarterly year-over-year result is not really going to be a trend going forward.

The year-over-year total -- this is Nate speaking, Henry -- the year-over-year total revenue per student is affected by some rate increases. There were these two states last year that had rate increases.

I think I mentioned in previous calls that as the economy gets better, the educational community fights for its portion of the state budget. We want a good portion of the money, the tax money that gets collected, to go back into education and local schools.

We are a public school. For that reason, we end up with some positive rate variances in good economic times. I don't think that's going to be 5% to 10%; it's going to be in the very low single-digits. But we did get some of that benefit this year.

Got it. In terms of the low single-digits, if you could clarify, is that trending upwards? Is it flat in terms of year over year for 2015? I know you're not giving guidance.

We want to be careful. What Nat's referencing is the funding environment overall looks to be trending favorably.

How that translates to K12 revenue, isn't always direct one for one. It depends on our student mix, which again, we are very early in the enrollment season. Funding rates can vary pretty widely.

Our capture rates vary wildly. The way that we capture revenue through enrollments in every state is different. We have single count date, double count date, et cetera.

So, until we get through our enrollment season and we know the mix of states and how we count them, et cetera, our revenue picture growth across rates, specifically, we won't know until October. The general funding environment we see overall is improving.

I know the funding environment, I don't see a change in it from year to year. I think it will be positive. But, I don't think it's going to be more positive in FY15 than it was in FY14.

I'm not sure, Henry, exactly your question. If you're asking do I see even more rate increases coming on a funding level, then I saw last year? No. I think we will see some, but I don't think it will be any bigger than we got last year.

Got it, that's very helpful. Thank you.

Operator, I think that was the last question on the board. So, if we don't have any more questions, Nate, I don't know if you want to take some closing remarks.

I don't have any closing remarks. I appreciate everybody's time this morning and thank you for signing on.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.