Stride Inc (LRN) 2015 Q3 法說會逐字稿

Greetings and welcome to the K12 fiscal 2015 third-quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mike Kraft, Vice President of Finance for K12. Thank you. Mr. Kraft, you may now begin.

Thank you and good morning. Welcome to K12's third-quarter earnings call for fiscal year 2015. 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 that are 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 reflect 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 operating 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 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'd like to now turn the call over to Nate. Nate?

Thank you, Mike, and good morning everyone. Thanks for joining us on the call today.

Let me start by highlighting a few results for the quarter. Revenue was $244.6 million, up 4% year-over-year. Excluding the businesses we sold last year, revenue rose 6.4% year-over-year.

This quarter, we delivered growth across the board. We recorded gains in both managed and non-managed public school programs as well as our international and private pay schools. We also continued strong growth in the institutional business.

Operating income for the quarter was $27.4 million, which was flat compared to the prior year. Excluding the businesses we sold last year, operating income rose 1.9%. Both revenue and operating income came in ahead of guidance we provided last quarter. And our business trends going into the fourth quarter remain solid. We are therefore tightening and slightly improving our full-year guidance.

For fiscal year 2015, we are forecasting revenues of $938 million to $948 million, operating income of $39 million to $42 million, and capital expenditures of $75 million to $78 million. While FY 2015 business trends are better than we expected, only actual results from the upcoming enrollment season will allow us to accurately issue FY 2016 guidance. We will provide FY 2016 guidance once the new enrollment season is complete in October.

Now, let me turn to some commentary on the current quarter. First, on business development, I talked last quarter about new schools in both North Carolina and Colorado. In North Carolina, we are on track to open a new Virtual Academy in partnership with the North Carolina Learns Group. We project first-year enrollment of up to 1,500 students and over the next four years expect that to double to 3,000 students.

In Colorado, we opened a new school in partnership with Colorado Digital. The new school name will be Pikes Peak Online School, and it's specifically designed for at-risk students in grades 9 through 12. While this is our sixth partner school in the state of Colorado, we think there is considerable room for growth in this market.

Second, let me turn to two businesses we don't talk enough about. Let's start with our private pay business. This business contributes over $30 million in annual revenue, and on a year-to-date basis revenues are up 12%. K12 private schools are parent paid tuition, and they include Keystone, K12 International Academy, and the George Washington University High School. These schools have partnerships with such prestigious institutions as the Joffrey Ballet Academy, Everett Tennis Academy, Domestic Conservatory of the Arts, the Rock School and the Office School of Performing Visual Arts.

In sum, we serve over 35,000 full and part-time private school students across 50 states and 80 countries around the world. Each private school serves a different student population according to their needs and their specific objectives. Overall, K12 private school students have strong academic records with solid GPAs as well as strong AP and SAT scores. Approximately 90% go on to college, and that's well above the national average. K12 private school graduates have gone on to Harvard, MIT, the University of Virginia, and a host of other prestigious schools.

Notably, K12's greater flexibility uniquely accommodates the learning and scheduling needs of the nontypical student such as athletes and performers.

Now let me cite just a few examples of the types of unique students that this business serves. We serve member of the School of the American Ballet who recently performed at Lincoln Center in New York City. We serve a student inventor that took his invention that he called Define Bottle on Shark Tank and generated $1 million in revenue. We serve and I Academy freshman who is working with the United Nations to bring peace, food and water to other countries through the Gen UN program and has been invited to speak at the UN. This is just to name a few, but there are so many unique stories that inspire us. We're very proud of what we've built in our private pay business, and we're targeting continued double-digit gains consistent with our year-to-date results for this business going forward. In addition, we are pursuing new partnerships to establish additional private schools that we hope we can announce next year.

Now let me switch to a discussion on our sales and institution like our public school district partners. Last quarter, we said that K12's growth would continue all year. And again, this business delivered another strong quarter. Non-managed program revenues increased 37.8% year-over-year. And institutional software and services revenue rose 34.8% year-over-year adjusted for the sale of the businesses last year.

Enrollments in our Peak platform are up 25% year-to-date. Peak enrollment growth was the result of higher usage of programs or courses per student with our existing district partner. And also this quarter, [Fuelette] began selling a new solution to support the growing population of English-language learners, or ELL students. The demand for ELL solutions is growing. Today the market for ELL products in grades K to 12 is approximately $900 million and growing at a double-digit pace. By 2025, it's forecasted that 25% of the students in K-12 will require some sort of ELL remediation. And the solution we rolled out this quarter supports academic success at the late elementary and middle school students. It's designed to align with common core and many other state standards. Early interest is very promising. In only a few months of preselling, we have a sales pipeline of over $2 million. Beginning next month, we will continue our controlled roll out and provide our customers with access to ELL through Peak.

So we see a number of positive trends that are driving in the school led business. Going forward, we expect to see modest double-digit gains as districts and schools continue to adopt digital learning.

Switching to managed schools, we made progress this quarter, in particular in two key areas, streamlining the enrollment process and a new high school experience that is based on the installation of a new learning management system we license from our partner, Desire to Learn. This quarter, we kicked off the enrollment season for the new school year and we brought a number of changes online. We changed our marketing program to be more targeted than in previous years. We believe our strategy will be more effective in attracting students who will be successful within the K12 model. We are promoting schools to very few specific channels that are more directly going to speak to students and their families who want to be in this program.

For example, we are employing more local execution in more local events and more digital acquisitions, including viral and social campaigns. We also refined our messaging based on specific needs and integrated that down to the state level. In fact, we have eliminated most national media, which would also allow us to lower the marketing costs for enrollment over time. All of these programs are intended to attract students who are best fit for the K12 program. As I've said on numerous occasions, if students are a good fit, they will stay longer in the program and succeed academically more often.

In addition, to further streamline the enrollment process, we have enhanced our parent portal. This portal is very user-friendly and clearly guides students and parents through all the steps necessary to enroll in a K12 partner school. Importantly, this redesign removes unnecessary steps and documents that may have frustrated families in previous years.

The key to all of these changes is customer satisfaction. We want to ensure that families have a positive experience from the beginning with K12 and that students starts the school year with enrollment requirements all completed and behind them.

We also made progress this year on the integration of new learning management systems and our high school students are based on a new partnership with Desire to Learn. I mentioned that a few minutes ago. We've been talking about this in our discussions for some time and we finally near completion. As you may recall, we launched a pilot with four our schools in January. These pilots have been successful and we will launch the full system with all of our schools in July. This new high school learning experience provides a more robust platform. It unifies the student experience by aggregating key resources for their experience all in one place, and it allows greater personalization of the student learning experience, which bolsters academic success. The platform also provides a new dashboard that makes it easier to gauge performance, so a student, a parent and the teachers can all easily see and evaluate the student's progress all in one place and identify where additional work may be needed.

Importantly, the new learning management platform is a major step toward providing K12 mobile solutions. That can be anytime, anywhere.

And finally, this new platform will be the basis for the next generation of content and a new engaging user experience. Some of this work will take some time to complete, but we've started the process we've turned the system up in July. You can expect to see progress in these areas in coming quarters and in coming years.

In summary, our business is in great shape. Our institutional business grew 35% in revenue this quarter on an adjusted basis. We introduced a major new product, ELL, that will help grow in the future. And I didn't even talk about a new math product called LearnBop that kicks off this next school year.

Our private schools grew at 8% this quarter on a year-over-year basis and 12% for the nine months year-to-date. New schools continue to open in the managed public schools area. Our academic results, which will be published next week, show our education programs are making a positive difference in students' lives and our cash position is very strong at $143 million, which will allow us to look for strategic opportunities to drive even a stronger business. I'm very proud of what we've built now and I believe you'll see more positive in the next year.

And finally, let me remind everyone that our investor meeting will be on August 6 at the New York Stock Exchange. I look forward to seeing everyone at the meeting. Please reach out to Mike Kraft to learn more about this event.

Thank you very much for your time this morning and now I'll hand the call over to James Rhyu. James?

Thank you, Nate, and good morning, everybody.

First, a few words on our reported results. We ended the quarter with revenue of $244.6 million, up 4% from the year-ago quarter. Operating income was $27.4 million, which was flat with the third quarter of last year, and total managed and unmanaged enrollments were also largely flat with year-ago quarter. Growth in non-managed programs rose 38.1%, offset by the 4.6% decline in managed programs.

I'm going to focus the remainder of my remarks this morning on the pro forma results, excluding the businesses sold in 2014, to ensure we look at the results on a comparable basis. For the quarter, we reported revenues of $244.6 million, which represents an increase of 6.4% over the pro forma Q2 results last year, $229.9 million.

We saw growth in all lines of our business. Revenues for public school programs rose 4.6% year-over-year. While enrollments were flat, managed program revenue rose 3.5% year-over-year. This was in contrast to an enrollment decline of 4.6% on a year-over-year basis.

As we've been seeing for the past year or so, the positive revenue per enrollment trends relates to a combination of factors, including school mix, an improved overall funding environment in some states, and other variables. We expect the positive rate environment to continue through Q4 and sequentially to be about flat to Q3.

Non-managed program revenue rose 37.8% to $9.3 million. Non-managed program enrollments rose 38.1% with revenue per enrollment largely flat year-over-year. While revenue per enrollment trends may fluctuate on a quarterly basis due to school mix and seasonality, we would expect Q3 trends to largely continue through Q4 of this year.

Institutional software and services, which includes our core software technology, professional and other educational services sold by our Fuelette team posted revenues of $11 million for the quarter. This is an increase of $2.8 million or 34.8% on a year-over-year basis. We are beginning to see product investments we've made in our institutional business that Nate mentioned starting to pay off.

The year-over-year growth also benefited from a lower comp in Q3 of last year. However, the sequential trend from Q2 remains strong during a historically low seasonal quarter. We believe we will continue to see this business grow into next year with the addition of additional products and deeper penetration into existing clients.

Our international private pay school revenue rose $2 million or 22.4% on a year-over-year basis. This increase was due to the continued strong performance at our Keystone and I Academy private schools. This posted year-over-year gains of 14% and 13% respectively as well as gains internationally in our schools in the UK.

Gross margin declined 39.8% last -- gross margins declined from 39.8% last year to 39.1% in the current period. Margin pressure is directly relates to our investment in teachers that I previously highlighted.

Selling, administrative, and other expenses increased $2.9 million or 4.7% year-over-year to $64.9 million. SG&A expense actually fell as a percentage of revenue from 27% to 26.5%.

For the fourth quarter, we would expect to see some seasonal increase in expenses as we start to spend on marketing related to our enrollment. However, we expect a slightly more moderate increase sequentially this year versus last year.

Product development expenses for the quarter were $3.3 million, an increase of approximately $500,000 over last year. The sequential trend of product development expenses has been consistent with the past couple of quarters and we will likely see fairly flat sequential spend in Q4.

Operating income for the quarter was $27.4 million, which is 1.9% higher than last year and $3.4 million higher than the upper range of our guidance for the quarter.

Now let's turn to some other items. We ended the quarter with cash and cash equivalents of $142.9 million, an $18.7 million increase from the prior quarter. We ended the quarter with a higher DSO of approximately 12 days, largely due to the timing of collections of some large accounts. This also increased our AR balance sequentially from the prior quarter. We believe we'll have those schools caught up by the end of the year and bring the Accounts Receivables down more in line with historical trends.

CapEx, as we have historically explained it, which includes curriculum and software development, computers and infrastructure, was $19.4 million for the quarter and $57.4 million year-to-date versus $14.3 million and $55.2 million respectively last year. So year-to-date, we are a couple million dollars up and we're trending right within our guidance range.

Our tax rate for the quarter was 39% versus 43% in the year-ago quarter and our guidance for the full year remains in the range of 38% to 40%.

Turning to our expectations for the fourth quarter, we expect revenue of $225 million to $230 million, operating income of between $4 million and $7 million. I think the press release this morning said $4 million to $6 million, but it will be $4 million to $7 million -- and capital expenditures of $18 million to $21 million. That translates into full-year guidance of revenues of $938 million to $948 million, which is at the upper end of our previous guidance, operating income in the range of $39 million to $42 million, which is above the previous guidance, and CapEx of $75 million to $78 million, which is at the lower end of our previous guidance.

Thank you for your time today. And now I'll turn the call back over to Nate.

Thanks James. Mike?

Manny, we are ready to take the first call.

(Operator Instructions). Jeff Silber, BMO Capital Markets.

Thank you so much. In looking back on the quarter that just ended, I'm just curious if you could pin point where you thought the upside was versus your guidance, both from a revenue and operating income perspective.

This is James. We had a little bit more rate favorability than I think we had anticipated. We also -- I think we managed our costs a little bit tighter than we had previously thought. But that's really the main differences.

Okay, great. Now, I know you're not going to give specific color on upcoming enrollment trends for next year, but I'm just curious versus this time last year how you think things are tracking for the upcoming school year?

I'm optimistic because the changes we put in place, I talked about some of them in the enrollment process that made it easier to make it through the process for students. I also think there is marketing segmentation work that we've done that looks more specifically at what message speaks to each type of student and how do we reach them in a more viral, or more social networking, or more local event way. So I think I am optimistic that we will see better results. And right now, I am seeing some results that indicate maybe we were right, but this is very, very early in the season and so it's hard to predict. But it's early in the season, and we are pretty pleased with where we are.

Okay. Fair enough. And if I can just ask one more question about your cash position which you highlighted. What minimum cash do you need to run the business? And you mentioned maybe some strategic acquisitions. I'm just curious what holes you think are in your current portfolio.

Why don't I take the first half of the question and then Nate will take the second half. So you may know that we need cash predominantly for our first quarter. Our first quarter is sort of our largest cash usage quarter. So we know we will have some sequential decline in Q1 of fiscal year 2016 in our cash balance.

We don't really provide guidance of exactly how much cash we need, but if you look historically I think to last year, we had cash that fell, excluding the share repurchase, in the range of $50 million or so. So that is probably not a bad proxy of at least the minimum net amount of cash we need for Q1. We also think our cash balance will grow a little bit in Q4 as well as the historical time has proven.

Relative to the scale that we need in the institutional business, I think that's a place where I look for strategic opportunities. The managed public school business I think actually has all the content it needs. There is always more we could do, but we think we will do some of that through internal development.

Through strategic partnerships, and acquisition opportunities and other joint marketing relationships, I think we want more reach per school district. We need greater distribution. Our sales force is just not large enough to reach all the schools. We've got such great products in ELL and in Peak and in Mathbot but the problem is you've got to get to all these school districts. So, I want to get to greater distribution.

I also think there's opportunity in the area of career readiness. Career readiness is -- if I talk to governors and legislatures around the state, every state struggles with the issue that these students are going on to college and the degrees they're getting in college are not really helping them fulfill the jobs that are open. And they want more career readiness, whether it's in networking or it's in the professional fields, so places like nursing. And they want to see more high schools deal with that problem. So we believe that there is an opportunity to have more career readiness content as well. And those of are areas -- I think there's one or two others, but that's the top priorities for us.

Great. Thank you so much.

(Operator Instructions). Jerry Herman, Stifel.

Thanks. Good morning everybody. Nate, I was wondering if you could give a little color on the pipeline inclusive of some of the other states you mentioned last quarter such as Texas, Michigan, Georgia, Minnesota, and likewise maybe just an update or a progress report on Agora, if anything is new or different there.

The pipeline for new states has not changed dramatically from last quarter. These things take a while to build up. Although there is one new development, and that is in the state of Alabama. There's a new law which we think will open up opportunities. I don't think it will open up an opportunity for this coming school year, but the school year afterwards, we think there may be an opportunity to open the school in Alabama. There's a lot of work to be done there. But the states that we mentioned before are all still the states that we believe are opportunities.

We do think that second schools and third schools within a state is likely the higher growth pattern in brand-new states, although there's one or two brand-new states. The larger pattern is going to be second and third schools within a state.

And building out counties in the state of Florida, that's another one that we still think is an opportunity to grow. We know that Florida -- we won't be opening schools this year but we will have at least two maybe three schools that we think will open in Florida in the following school year, school years 2016/2017. So I think second schools in the state as well as schools that are dedicated to this career readiness concept that I talked about as well as schools that are dedicated to at-risk students are all going to be opportunities for us which will allow each school to be more focused on what its particular niche is. So that's what we see coming in the area of new business development.

Tim is going to address the Agora question for you.

On Agora, we continue to work very closely with the team there to ensure continuity for the coming school year. The systems integrations work that was necessary for our systems to be able to hand off data to theirs has been completed. We are working to transition the enrollment process when our contract comes to the end on June 30 that there is a seamless process to continue enrollment. We continue to perform marketing for Agora up through June 30 as well. So we are committed to their success going forward and to being a customer of ours in terms of their consumption of our curriculum and other support services.

And the financial metrics on that transition look similar to previously described in terms of the impact, the negative impact, on 2016.

Yes. I think, as we previously talked about, the only real unknown is the level of enrollment that the Agora school will ultimately have. But yes, the overall economics are as we previously described, yes.

And then just one quick follow-up, if I may. The institutional software and services business per the release shows a 16% increase. I guess sort of a two-part question. I know that you guys have transitioned the sort of revenue model in that business, and it's been let's call it dilutive to growth. Can you talk about if that is now normalized and what is sort of the run rate on that business?

Let me take the first part of that and James may jump in as well. Historically, as we reported the institutional business, it was a combination of what we are now reporting as software and services. It also included our full-time student programs. Those full-time student programs, as you have suggested, have been now -- are being reported under this category called non-managed schools. So the results have normalized as both Nate and James commented on the 34.8% growth is looking purely at the software and services growth this year versus last year. The FTS business obviously is growing at a slightly less rate, but still -- FTS being our full-time students program, is still growing in the double digits range.

I think the only thing I would add to what Tim said is I do think that we are now -- we sort of lack some of the transitions that we've previously talked about in I think last year and the year before. And so I think the run rate you see in that line item is pretty indicative of sort of a normalized run rate.

Great. Thanks guys.

Operator, are there any other questions?

We have no further questions at this time.

Okay. I appreciate everybody's time this morning, and hope you guys have all the information you needed to understand our results. And again, we are very pleased with our results and I thank everybody for your time. Operator, I think we're finished.

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