Stride Inc (LRN) 2016 Q2 法說會逐字稿

Greetings and welcome to the K12 fiscal 2016 second-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 second-quarter earnings call for fiscal 2016.

Before we begin, I would like to remind you that in addition to historical information, certain comments made during the conference call may be considered forward-looking statements made pursuant to the Safe Harbor provision 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 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 2015 annual report on Form 10-K. These filings can be found in 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, Executive Chairman of the Board, 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?

Thank you, Mike. Good morning and thanks to everyone for joining us on the call today.

Before reviewing the results for the quarter, I wanted to first touch on the announcement we made yesterday naming Stuart Udell as K12's Chief Executive Officer. Stuart comes to K12 with over two decades of experience in the education sector with a specific background in virtual learning. Most recently, he was first CEO and then Executive Chairman of Catapult Learning, a privately held provider of instructional services, professional development, and an operator of schools. Stuart's depth of experience will provide a seamless transition to K12 and allow us to continue executing on the programs and initiatives that we have launched in the last two years. His experience spans curriculum and program development, school operations, educational services and technology innovation. Stuart has also been a leading proponent of providing education solutions for students regardless of their geographic location or socioeconomic background. His principles and his passion clearly align him with K12's mission and our vision for the future of education.

Personally, I will continue to be actively involved in K12 and maintain my role as Executive Chairman of the Board of Directors. In addition to supporting Stuart, I will be focused on public policy and the issues that surround our public policy, we will continue to work closely with our schools and their boards, and additionally I will work with Stuart on strategic direction and acquisition opportunities as they arise.

As you have seen over the past few years since I stepped in from the board to management and with the support of the board, we have worked to strengthen K12's culture by always putting student achievement above everything else.

We have also built a cadre of great teachers and school leaders while simultaneously strengthening the technology and content we provide. During this time, we have also improved our relationship with our boards, changed our marketing to lower costs and to be more focused on students who stay with our program longer and achieve better results. And, finally, we have begun growing our institutional business as a key way to position this Company for future growth.

Perhaps most importantly, we have built depth in our management teams to broaden the skills across many functional areas. This transition to Stuart's leadership is just the next step in that long-term plan initiated in 2013 that will ensure K12 has the right mix of talent to support his growth and maintain a great culture for many years to come. Being able to attract Stuart to our Company caps the effort to bring great talent to K12.

I am really looking forward to working with students to support -- Stuart to support students and families in our schools and deliver the best academic outcomes as possible. We will work together and look for opportunities to introduce Stuart to the investment community in the coming months.

Now turning to results. Revenue for the quarter was $208.8 million, a decline of 9.7% year over year. On a pro forma basis, excluding the impact of the Agora transition, revenue grew 2% from the second quarter of last year. Operating income for the quarter was $14.7 million versus $20.5 million in the prior year. James will be providing more details on the financials in just a few minutes.

Importantly, our revenue, operating income and capital expenditures were within the guidance we provided last quarter. Now, this underlines the predictability and reliability of our results. For the past 12 quarters, we have consistently delivered results that were in line with the guidance we provided on an annual and a quarterly basis.

I also want to highlight our enrollment results for the quarter. Average enrollments for managed programs in the second quarter was 103,751. Now, keep in mind, this was the second quarter figure that was the average. As you would expect, I also look out at weekly operational performance and the reports on enrollment levels every week. Those reports show that we ended the quarter on December 2001 -- from December 31 with enrollments of 105,015. This compares to our count date enrollments of 104,429 in the first quarter. And that is an increase of 586 enrollments or 0.6%.

Now, just to put this in perspective, if I look at the same periods from last year, from our October count date to December 31, enrollments declined 2740 or 2.5%, which is our normal seasonal pattern. But, as I said, this year we increased 586 or 0.6%. That is a great turnaround. Looking historically, I believe this is the first time we have seen this trend in eight years. This means we are retaining more students and having to spend less for marketing expenses.

We believe this significant improvement is the result of our comprehensive companywide approach to address student retention of what we call persistence. This started with providing a streamlined student enrollment experience for families, a process that is much smoother today than several years ago. Once students have enrolled, our teachers and our school leaders implement a set of programs designed to improve student persistence. For example, we expanded our strong start initiative in 18 schools this year. These initiatives are focused on starting students off strong and keeping them on track through various actions. Those actions include programs such as walk to class and our interventions through Family Academic Support teams.

Through the second quarter of the current fiscal year, K12 has improved student retention by 140 basis points compared to the performance through the same period last year. I have got to tell you, I couldn't be more proud of this organization and its response to the challenge to improve in this area. This data gives us confidence that our investments and programs and processes that we have been putting in place now provide a very solid result.

Now, everyone understands that improved student persistence is obviously important to enrollments and revenues. But, more important, it is how it directly correlates the academic outcome. As we outlined previously, students enrolled three or more years in K12 managed programs achieve much higher proficiency compared to students who enroll less than a year: 22% higher in English language arts, 17% higher in mathematics, according to the testing data from school year 2014/2015. And we certainly have a lot more work to do, but I am encouraged by the progress we are seeing.

Moving on, I want to highlight another announcement that we made earlier this month. That is K12's sponsorship in the launch of the foundation for blended and online learning. The mission of this new foundation is to advance the availability and quality of blended and online opportunities across all types of schools. Not only is this a great way to K12 to give back to the community, to students, and to educators, but it will also advance the field of digital and blended learning beyond what K12 is doing itself through its scholarships to students from blended and online programs, be able to support students' post secondary education. It will also support innovation in teaching in the digital and blended learning environment. The foundation will bring key stakeholders together to reinforce why digital learning and digital technology in our schools and even school choice is critical in delivering on great educations to students across the United States.

To give you an idea of the importance of this effort, take a look at that foundation board in our announcement. It includes prominent industry leaders and experts. Each have chosen to participate because of the importance of the foundation's mission. In particular, they all believe in empowering students and parents by giving them choice and availability of digital learning opportunities. I am excited about this effort and the potential impact it will have on digital learning in our country.

Before I hand the call off to James, I wanted to leave you with some thoughts on how K12 is valued in the market today. With where K12's stock has been trading, our market capitalization is about $300 million. This is well below our book value of $535 million. Think about that valuation in light of where we are today. The results in our managed public schools programs are improving. Student persistence, revenue per enrollment and, importantly, academic outcomes have all shown improvement and are increasing the lifetime value per customer.

From a school development point of view, we are working with various school boards to open both new schools in existing states, as well as open up new states that don't yet offer a virtual school program.

Our institutional business continues to hold great potential for future growth. School districts are always reevaluating how they deliver academic programming to meet their ever-growing digital revolution needs. Districts are using digital content to supplement classroom instruction, address their homebound population, and even as replacements for traditional textbooks, and we are well positioned to benefit in this digital education explosion.

We are also expanding our business in new areas. Last year we launched English language learning programs, which met with great interest. This year we are bringing career technical education, or CTE, offerings to the market. These programs allow new students to pursue distinct career paths based on the national career cluster model. We believe CTE has enormous potential to provide quality education for students who might not otherwise be able to obtain one and can significantly add to the skilled trade workforce in the country.

Our technical and our product teams are on schedule to deliver significant upgrades to the curriculum infrastructure on top of what we delivered last year in our new high school experience. I believe our next generation curriculum will enhance our speed to market and the flexibility in providing solutions to schools, to districts, families, and students.

So overall, I hope you can see why I am excited about K12's future growth prospects. I am particularly excited about the improvement in enrollments in our managed programs business. All of this and a new industry leader in Stuart Udell, who can help take K12 even further, tells me that we are beginning to hit on all cylinders.

Thank you so much for your time this morning. I will now hand the call over to James. James?

Thanks, Nate. Good morning, everybody. First, a few words about our reported results.

Revenue for the quarter declined 9.7% from the year ago quarter to $208.8 million. This quarter we posted an operating income of $14.7 million. This compares to $20.5 million in the second quarter of last year.

In order to look at the underlying trends in our business, I want to spend some time discussing revenue and enrollments on a pro forma basis, excluding the impact of Agora transition last year. We believe this approach will provide you with a clearer picture of the underlying trends in our business.

Due to the fact that our infrastructure shared across all of our schools and businesses, we won't extend that approach for operating income or other components of our results. So excluding the impact of Agora, total Company pro forma revenue increased 2%. Revenues for managed school programs would have risen approximately 3.2% year over year, while average enrollments would have declined by 2%. However, as Nate mentioned, our ending quarter enrollments were actually higher than our count date enrollments. We normally have some drop-offs after count dates while the average is lower, but ending at a higher count explains how some of our investments are beginning to pay off for us, as Nate indicated.

Average revenue per enrollment increased more than 5% year over year for managed programs. The revenue for enrollment trends relate to a combination of factors including school mix and improved funding environment in some states.

For our nonmanaged public school programs, excluding the effect of Agora, revenues would have been $15.6 million. Nonmanaged program enrollments grew 2% as we continue to see benefits from new programs launched this year. Offsetting this rise in enrollment, revenue for enrollments declined 7%, largely due to mix.

Our institutional software and services business, which includes core software, technology, professional and other educational services sold by our [field ed] team posted revenues of $12.2 million for the quarter. This is a year-over-year increase of 3.1%. We continue to believe in the opportunities in the institutional market, and as we have previously discussed, we continue to invest in targeted products and distribution in that market. As these products roll out and gain traction, we came to expect institutional to be a growth driver for K12 over the long-term.

Revenue for our private private pay and other businesses was $10.7 million, a reduction of 5.5% from the prior year period. This area is comprised of a number of consumer-related products, as well as our remaining international operations. We continue to evaluate these businesses and look to maximize growth opportunities and profitability here, so we will both invest and prune as we go. Therefore, results in this area will likely be somewhat variable in the coming year as we refine our strategy here.

Gross margins improved steadily from 37.3% last year to 37.9% in the current period. On a full-year basis, we anticipate gross margin to continue to be flattish, plus or minus.

Selling, administrative and other expenses of $61.4 million declined 1.9% on a year-over-year basis. We continue to look to manage these costs tightly and have been largely flat for three consecutive years.

Product development expenses for the quarter were largely flat at $3 million. Operating income for the quarter was $14.7 million compared to $20.5 million in the prior year. Reduction in operating income was predominantly due to the transition of (technical difficulty) contract.

Now turning to some other items, we ended the quarter with cash and cash equivalents of $171.3 million, a $20.4 million increase from the prior quarter. Our cash balance increased approximately $47 million versus the year ago period. That is important to note. Even with the impact of Agora, cash balances have risen. Even if you discount the stock purchases we made last fiscal year, the cash balances are higher by approximately $20 million in the current period.

DSOs have improved by seven days on a year-over-year basis, which is in part due to the improvement made in managing accounts receivable. There are always some timing issues in there, so I would not extrapolate this trend. But clearly we are seeing more discipline.

CapEx, as we've historically defined it, which includes curriculum and software development, computers infrastructure, $27.9 million year to date versus $30 million in the previous year. We also had approximately $2 million in computer-related equipment that falls under our capital lease program. But we expense these so it is not part of our CapEx number I just mentioned.

The $10.1 million decline in this quarter versus last year was a result of lower spending on certain property and equipment, as well as student computers.

Our tax rate for the quarter was 45.8% versus 42% in the year ago quarter. Our guidance for the full year still remains in the range of 39% to 41%. We continue -- now that we are a cash taxpayer, we continue to work on tax strategies to further improve our rate. I will keep you informed if there are any changes in our guidance for the year.

Now turning to our expectations for the third quarter, we expect revenue of $215 million to $225 million, operating income of between $16 million and $20 million, and capital expenditures of $20 million to $25 million.

Looking ahead, I believe we are on track to deliver revenues at the upper half of the guidance range for the full fiscal year. At the same time, we remain confident in the operating income guidance provided for the full year of $17 million to $23 million.

Thank you for your time today, and now I will hand the call back over to Nate. Nate?

Okay. We are completed with our prepared remarks. Operator, we are ready to take questions.

(Operator Instructions) Corey Greendale, First Analysis.

A few questions. First of all, congratulations on the persistent improvement. I realize this may be a little hard to parse, but how much of the improvement do you think is due to the things you have been doing to try to make sure the people that are coming to your school are more likely to succeed in the first place versus things you are doing once they are in school to improve their retention?

It is hard to parse that. I would say it is a little more weighted toward the efforts to retain students after they have joined the program. We call out to those students and to their families to make sure any problems that they've run into are resolved quickly. We make sure we provide a lot more support to them to help them understand what work they have to go through, what the process should be so, and that it really changes their life.

We spend a lot more time trying to make sure that their teachers are in touch with them more frequently. So I think this has a little more impact. And the reason I say that is because the efforts of the new promotional program, it is really new this year. So it has not yet had its full impact because it is a brand-new program. We expect it to have more income impact in the coming years. But the actions to be more in touch with our students and be more in touch with the parents, those actions I think have a little bit more impact than a new market program.

Okay. And in terms of the fact that the end of the corporate enrollment was higher, I know there was a time when you would take students who were not funded, based on the fact that they came in after the account date and then maybe went back. Can you just update us on where you are on that? Are you enrolling students who are not getting funded for this year?

Yes. We still take students who are not going to get funded for the year. A student comes to us and there's two reasons why we do that, by the way. First of all, we want to make sure we provide access to the program to all students. But, secondly, if we can provide great services to those students, they will stay in the program and then that becomes a reimbursable student the next year. So we want to retain them. So yes, we still take students who come in after the count date and state that we may not get funded quickly.

I think, Corey, James, I think the only thing I would just remind you of is we previously talked about how we are changing our acquisition approach to optimizing against students who we think will come in, we won't get funded for them, and leave. That doesn't -- as Nate was mentioning, that doesn't mean that we are not going to take those students, but our acquisition activities are more focused where we are going to generate greater revenue and profit for students.

So it is sort of just a nuance there, but we have never really gone away from taking those students. We are just trying to focus more on those students where we will make sure that we do get funding for them.

In other words, we don't promote to them. But if they come to us, we still take them.

Okay. That helps. And actually, James, on a related point, can you give us some help on how to model revenue per enrollment for both managed and nonmanaged for the rest of the year?

Yes. I mean, I think for managed revenue per enrollment, for the rest of the year, you're going to see year over year, you will continue to see similar declines that you have seen in first half of the year. So the first half of the year, we saw between 2% and 2.5%. Starting to see something similar for the full year, so your back half of the year is going to be something similar. That is for the managed. And, remember, that includes the impact of a quarter.

And as for the nonmanaged, which also, again, includes the impact of Agora, we will likely see something again in a similar range of the first of the year half. We've got some lumpiness quarter over quarter, but I think the full year, you're going to see a similar kind of year-over-year improvement.

Okay. And then one more, then I will turn it over. On the institutional, can you just talk about price versus volume trends? And I think the growth there is a little less than maybe you had talked about earlier, potentially getting this year to what is happening in that business and what you expect for the rest of the year there.

I will talk about that. Number one, the first part of your question, rate versus volume, we see most of the growth coming from volume and not necessarily competitive pricing issues. We are not seeing the competitive pricing issues we saw maybe a year, year and a half ago. But the market has settled in just a little, but it is not like our fees still are not competitive. They are certainly competitive, and there is certainly no pressure. But it is not nearly the pressure we saw a year and a half ago where we saw prices just across the board sort of dropping.

The volume increase -- we are seeing more RFPs from school districts. We are seeing more school districts look for various solutions, not just traditional solutions of supplemental content, but English-language learning content, particularly math specific needs. So we are seeing school districts start to expand a little bit more.

Now, for the second part of your question, you talked about our growth and what does growth look like. Remember that we look at growth for the full year. Even last year, if you looked at last year's quarters, you would see one quarter was 4% growth, other quarters were 30% growth, and another quarter was 16% growth. So it is not consistent across the year because the selling season really varies across the year, and so you are going to see the same thing this year. You're going to see some quarters that are not high growth and others that are high growth.

We also are going to be very much impacted -- and I hope you know -- I think you know this -- by whatever we do in the managed public schools business, when we enroll students in managed public schools, we also get more students enrolling in these full-time programs that the districts are running. Because when we promote in the state, we promote on a broad basis, and it is not just for managed schools. We promote for all the schools.

So generally, when we are up in enrollment for managed schools, we are also going to be up in enrollment for institutionals. And the reverse is also true. So this year, you may see less of these enrollment in these school districts. We think that comes back next year. So overall, it is the quarterly variance that you are probably seeing. We still believe that this is strong growth for the full year.

Jeff Silber, BMO.

It is Henry Chien calling in for Jeff. I wanted to ask about total enrollment. You mentioned it is growing a little bit this quarter. Could you talk a little bit or add more color on that growth? Is it just the broad retention improvement, or are there any schools that you would highlight -- new schools or any trends?

It is primarily a broad -- it is across the board retention efforts that have really driven the growth. It is not like there is some new trend in brand-new enrollment. As a matter of fact, we have sort of gone off the promotional eras. We haven't spent as much money on promotional efforts in the second quarter as we do in the first quarter or as we will do in the fourth quarter of this year.

So it has actually been a relatively period of promotions after October.

So really, improvement comes from turning around the previous year's decline to this year's increase of just maintaining more students. So it really has been that.

Now, relative to which schools, it has sort of been all of the schools that we rolled out these new programs to. We have seen a difference between the retention in schools we rolled out programs to versus the schools that don't have it yet. So which is why we are optimistic about next year because we end up rolling it out to all the other schools next year. Does that help you?

Yes. That is helpful. And just a sort of related question. Can you remind us the difference between your nonmanaged program revenues and institutional revenues? I'm trying to understand how to understand the growth of either of those and whether they are related. Thank you.

Yes. If I understand your question correctly, the nonmanaged revenue versus institutional, the nonmanaged program revenue is really -- those are essentially like the full-time equivalent programs that we manage for district partners. Whereas, in the institutional software and services, that is, in a sense, sort of everything else. Meaning that would include everything from platform solutions, one-off solutions that will provide professional development, as well as course enrollment that are not like these full-time program -- district programs that we manage for them. So it is sort of everything else in that institutional software services.

Got it. And are these usually in the same schools are you seeing? I am just trying to understand this new add business is (multiple speakers).

Generically, I think that you are asking, the nonmanaged enrollments are generally distinct from the programs in the institutional software and services.

But the customer relationship -- James is right. The distinct programs and actually a different marketing way we market to them, but the customers tend to be related. What I mean by that is that if we develop a good relationship with a school district and once you develop a good relationship, not only are you running the programs for them, but you are also delivering the software and the content to that same customer. So there is a relationship there. Relation building. The more we build a relationship with a big customer, the better off we are not only running the program, but also providing software services.

(Operator Instructions) Okay. Gentlemen, we have no further questions at this time. Would you like to make any additional or closing comments?

No additional closing comments, other than one point I guess we didn't talk about and people didn't ask about was what is our new business development activities. We announced in Alabama last year, we expect to see more students in Alabama. We have got programs that we are working on in places like West Virginia and Nebraska, Missouri, Connecticut. None of these are firm programs approved yet, but these are all places where there are conversations going on, and there are expansions going on in places like New Mexico, Texas, Wisconsin, Nevada and Virginia. So there is a lot in the business development activity that we think over the next couple of years we should benefit from as well.

So I appreciate everybody's time today, and thank you for the time, and I guess we're done, operator.

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