K12 Management Discusses Q4 2013 Results – Earnings Call Transcript

Executives

Christina L. Parker – Vice President of Investor Relations

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

Timothy L. Murray – President and Chief Operating Officer

Ronald J. Packard – Founder, Chief Executive Officer and Director

James Rhyu – Chief Financial Officer and Executive Vice President

Analysts

Sara Gubins – BofA Merrill Lynch, Research Division

Suzanne E. Stein – Morgan Stanley, Research Division

Jeffrey P. Meuler – Robert W. Baird & Co. Incorporated, Research Division

David Warner

Jerry R. Herman – Stifel, Nicolaus & Co., Inc., Research Division

Jeffrey M. Silber – BMO Capital Markets U.S.

Trace A. Urdan – Wells Fargo Securities, LLC, Research Division

K12 (LRN ) Q4 2013 Earnings Call August 29, 2013 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the K12, Inc. Fourth Quarter and Full Year 2013 Earnings Conference Call. My name is Mark, and I will be your operator for today’s call. [Operator Instructions] And as a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Christi Parker, Vice President of Investor Relations. Please proceed, ma’am.

Christina L. Parker – Vice President of Investor Relations

Thank you, and good morning. Welcome to K12’s Fourth Quarter Fiscal 2013 Earnings Conference Call.

Before we begin, the company would like to remind you that statements made during this conference call that are not historical facts may be considered forward-looking statements made pursuant to the Safe Harbor provisions of the Private

Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied.

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

For further information concerning issues that could materially affect financial performance related to forward-looking statements, please refer to our filings with the SEC. These filings can be found on the Investor Relations section of our website at www.k12.com.

In addition to disclosing results in accordance with generally accepted accounting principles in the United States, 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. This call will be available for replay on our website for 60 days.

With me on today’s call is Nate Davis, Executive Chairman; Ron Packard, Founder and Chief Executive Officer; 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 now like to turn the call over to Nate.

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

Good morning, and thanks for joining us on the call today. I’d like to start things off by first welcoming all of our students, dedicated teachers and school administrators, back to school. I’m very excited about the start of this new school year, and we’ll share with you this morning some of the innovative programs we are launching this fall to further demonstrate our commitment to academic excellence. I’m also very proud of the financial accomplishments of our team over the past fiscal year. Here’s a quick summary of those results.

Revenue growth of $139.8 million or 19.7%; net income grew by $12 million or 60.6%; EBITDA grew to $111.4 million or 28%; operating income grew to $45.7 million or 57.6%; and our cash balance increased to $181.5 million, which is a growth of almost $37 million.

As our new CFO, James Rhyu will discuss in further detail later on this call, we’ve seen improvement in operating income, margins and cash this year, expanding operating income margin by more than 1.3%. Our focus on improving operating efficiencies, improving margins and cash flow was really starting to demonstrate some tangible results. As these numbers will show, we’re committed to earning a return for our investors, but we’re equally committed to our mission of improving academic performance for every child, including students who come to us behind grade level. These 2 goals continue to be – to go hand-in-hand, because the better our students perform, the more demand there will be for K12 education. In fact, this year, we will be evaluating and paying our entire senior management team on both operating income and improved academic outcomes in the schools we manage. Our goal is aligned with our various school boards, the state boards of education and our investors. We strongly believe in harnessing the power of technology to create an individualized education for every student we serve. To that end, we are launching a broad array of new pilot programs.

For example, this fall, we are conducting 2 new trials for mathematics technology tools. These tools will allow students to engage in mathematics learning 24/7. We’re also introducing diagnostic assessments, which will Ron will further discuss in more detail on this call. We’ve expanded our on-boarding process, which we call Strong Start. This program is focused on ensuring every student goes through a thorough introduction of how to use our systems, of how to interact with our school administrators as early as possible in the school year, and on proper development of their individual learning plan.

Every superintendent, every principal, every teacher and counsel in the United States public education system is working hard to improve our educational model. We understand and empathize the difficulties that these folks around the country face everyday. We’re all working to achieve the same goal, academic success for all students. Quite simply, that is the future of our country. All of us are working diligently to engage students and help parents and coaches understand their children, understand their learning styles and to cope with the reality that technology is such a pervasive part of our children’s lives.

We believe that technology, and especially, interactive online learning, presents a special opportunity to individualize education because each student has individual talents and needs. This is also why we believe so strongly every teacher in the brick-and-mortar classroom will benefit in the long term from the products that we sell in our Institutional Sales team.

So on our call today, we’ve divided it into the normal 3 segments. Tim will provide an overview of the operational performance, including this Institutional Sales team I’ve talked about. Tim will also address what changes we have implemented related to the on-boarding and retention of students we serve. After that, Ron will provide you an update of our business development efforts at the state level and what we’re doing to grow our business. Ron will also expand on my comments about exciting new pilots that we’re launching as we strive to improve academic performance. And naturally, James Rhyu will provide you with a discussion on the fourth quarter and fiscal year 2013 financial results.

As for me, I continue to spend my time driving for a company-wide culture of high academic standards, improving the quality and the skills of the team at every level of this organization, and working on ways to realize the vision, the long-term vision, of individualized and adaptive education products. I’m extraordinarily proud of our culture as it’s one of professionalism, transparency, accountability and the highest level of integrity at every level of our organization. Coupled with our existing culture to service the community as outstanding educators, we remain committed to meeting the challenge of educating youth in our country in innovative and effective ways.

I want to thank you for your time today. And with that introduction, I’d like to turn the call over to Tim Murray, our President and Chief Operating Officer. Tim?

Timothy L. Murray – President and Chief Operating Officer

Thanks, Nate, and good morning, everyone. I’m pleased to report that our annual results reflect continued progress, improving our financial and operational performance as we strive to increase both academic excellence and operational excellence. Let me start with our all-important school results.

Average student enrollments in our Managed Public Schools grew 12.7% during fiscal 2013, as compared to revenue growth of 22.6% for those schools. These results reflect the impact of rate improvements, fewer unfunded enrollments, improved revenue capture and mix changes across states, schools, grade levels and student types.

In our International and Private Pay schools, revenue increased 12.9%, while total semester course enrollments grew by 12% – I’m sorry, 2%. This is primarily as a result of the mix shift to more full-time students, particularly in the higher-priced iAcademy school and the George Washington University Online High School.

As Nate said, throughout the year, we are focused on improving our student retention rates. Our internally tracked in-year withdrawal rates for Managed Public Schools in fiscal 2013 decreased 1% compared to the prior year, and by an even greater amount on a full-year basis. We also see a correlation between student tenure and academic growth. We had a very focused effort in all of our schools to reregister students for the 2014 school year. We’ve implemented a number of measures to increase it.

Further, we want to help prospective students better understand our offerings and the fit with their needs and unique situations. We are piloting preenrollment approval diagnostic tests in several states. This is an online experience that helps the family of our students sample online learning, while also providing us valuable input into the individual learning plan for the student, should they choose to enroll.

In addition, working with our nonprofit boards and district sponsors, we have expanded the number of schools using face-to-face interviews in the enrollment process for the school year.

Commenting now on marketing, our cost per acquisition for the fourth quarter was down 8.5% compared to the prior-year. And looking ahead, I would remind you that we generally see higher cost in Q1 due to seasonality. We continue to evaluate our channel mix, focus on SEO and the SEM improvements to improve our marketing science, our efficiency and our yield.

Let me now comment on our Institutional Sales results. Recall, in this market, we sell digital curriculum, instruction and professional development services, and technology solutions to enable school districts to launch and manage a range of online and blended learning programs. We are seeing the market adoption for these solutions and services accelerate as districts partner with K12 to address a variety of academic needs and personalize learning for their students. The key drivers for our growth in this segment are the breadth of our catalog, now ranging from Pre-K to 12th grade, instructional capabilities, and the ability to simplify a district’s management of multiple digital programs and vendors to our technology platform, K12.

As noted previously, revenue growth in Institutional Sales continue to be impacted by our shift away from the large and lumpy all-you-can-eat lifetime perpetual software license sales in favor of recurring revenue sales. Total revenue year-over-year was flat. However, excluding the decline in perpetual license sales, revenue grew 15.4% year-over-year, driving higher quality revenues as more of our sales come from recurring revenue solutions.

We see our strategy working as our contract volumes are up year-over-year and our average value per contract has come down. Revenue contribution from retained customers has improved and we’re very focused on working with those customers to increase consumption and usage.

Now, back to our managed schools. Throughout fiscal 2013, we’ve made significant investments in our technology and systems to increase availability and reliability, as well as to improve the student and user experience. Our student-facing systems averaged 99.8% availability on a 7x24x365 day basis. We also work with our key vendors and partners to improve their performance levels as well.

This, along with improved customer self-help capabilities, has reduced overall customer service call volumes to the lowest levels we have seen in the past 5 years, down 28% on a per student basis, as compared to last fiscal year. As of this week, almost 75% of our managed schools are now open, representing tens of thousands of students and learning coaches. Our investments in our team, processes and infrastructure have resulted in a much smoother ramp in on-boarding experience this year as compared to last year. K12 systems have performed very well.

During the fourth quarter of fiscal 2013, we also completed our largest learning management system software release in several years. It delivered significant new functionality to our K through 8 programs in the areas of enhanced online assessments, homeroom progress visibility, file sharing and social networking. All features intended to improve the academic experience and academic outcomes.

To improve communications and collaboration within and across our schools, we completed the migration of 80% of our schools to Microsoft Exchange, providing a rich set of collaboration capabilities. I expect the balance of schools will be completed by September.

Over the past year, we have also focused on procurement and logistics to improve operating leverage. Our materials and computer costs as a percent of revenue are down 15% compared to the prior-year, reflecting unit cost improvements, as well as mix and timing differences.

We’re often asked about our ongoing capital investments in curriculum. During the past fiscal year, our product development team delivered 14 advanced placement exam review courses and completed 23 core courses. Recognizing that the timelines and state decisions for Common Core adoption continue to be in flux, we also completed 20 state customizations across the K12 Aventa and A+ portfolios for delivery in the ’13, ’14 school year. In addition, we delivered 8 new mobile learning apps, bringing the total to 21.

The success of our products is reflected in our high levels of student and parent satisfaction, as well as industry recognition we received, again, in fiscal 2013, including for our Pre-K program, embarK12, which was the winner of the 2013 Parents’ Choice award; was named the 2013 finalist for the Cool Tool Award, EdTech Digest; as well as the 2013 Golden Lamp Award. K12 also received another AEP Distinguished Achievement Award for our second generation, second grade language arts program.

Overall, I’m very pleased with the performance our team to impact academic growth, while also delivering improved financial performance. We have a great team at K12 and I know our students first focus, combined with greater fiscal and operating discipline, will continue to make us even more effective in executing our mission.

With that, I’d now like to turn the call over to our founder and Chief Executive Officer, Ron Packard.

Ronald J. Packard – Founder, Chief Executive Officer and Director

Good morning. As we begin the 2014 school year, I would like to take a moment to reflect on one of my fondest memories of this past year, the graduation of the first students to complete their entire K through 12 education in one of our Managed Public schools. I had the honor of speaking at the graduation of the Colorado Virtual Academy in May and was impressed with the accomplishments and dedication of the students, especially the 4 graduates who had attended our schools since kindergarten. Hearing their success stories and how online education have made such a difference in their lives was truly inspirational and reminded me of what all of us at K12 are dedicated to, offering a high-quality, individualized education for all students.

When one realizes that these students were born about the time the Internet was commercialized, it’s remarkable to think that they began their education 5 years later and completed their entire education online. Hearing from these graduates first hand how we changed their lives, makes all the hard work over the past 13 years worthwhile.

As Nate mentioned, we have launched several exciting pilots this fall as we strive to continually improve academic performance. Together with our educational advisory committee, we are developing a blueprint on how to improve our academic results, and those plans are already being implemented in schools this fall.

For example, we are piloting a diagnostic assessment tool that allows us to develop Individualized Learning Plans, or known as ILPs, for new students who often start school with us before their academic records arrive. We are working towards introducing ILPs for every student, with a specific focus on high school students, where we believe these ILPs will have a significant impact as we prepare these students for college and careers. In many ways, technology-based education is simply a tool to allow individual – allows individualized child education and engage the student more effectively. Our academic plans for the 2014 school year is focused on using these assessment results to drive effective instruction.

We continue to prepare for Common Core and are quite excited about it. Our curriculum already aligns relatively well with the Common Core standards and having more homogeneity among the states will allow us to invest more in our core content as we will not have to do with many individual state customizations.

I am also particularly pleased to report on an extraordinary business development year. First and foremost, we had an unprecedented year with regard to cap expansion. Between Michigan, Arkansas, Georgia and Texas, we secured cap expansions of close to 17,000 additional enrollment slots. While we do not expect to fill all these slots this fall, it speaks to the growth opportunities in future years. It is also note – important to note the magnitude of cap expansions in some of these states offer enrollment potential comparable to entering into a new state.

Second, we are opening 10 new schools this year. We currently have assigned management contracts in place with each of these charter schools and all the charter contracts are either completed or we are currently assisting the nonprofit boards in negotiating the charter contracts for the applicable school district.

Florida is particularly exciting as we are adding new schools in Palm Beach, Broward, Pasco and Duval counties, and we hope to launch Pinellas, next school year. Some of these counties have more children than a small state.

Additionally, we have added new charters in Kansas, Michigan and South Carolina, and also added new Insight School in Ohio.

Finally, we are launching the Colorado Preparatory Academy this fall, the third public school we are managing in Colorado this school year. I am especially excited by the opening of the Texas Online Preparatory School. This is our second school in Texas and it significantly expands our capacity in what might be the largest market in the country for K12. Having begun work in Texas in 2001, it’s especially gratifying this year to be able to enroll all families in grade 3 through 12 who are eligible to enroll and wish to enroll.

We continue to renew our contracts with our current partners. In fiscal 2013, we renewed our long-term management contracts with more than 20 schools.

There’s also a favorable news report with regard to per-pupil funding, which has been a significant challenge the past several years as a result of the recession. For this school year, we remain optimistic about the state funding levels and expected many states will have improved funding levels over last year.

Public school funding will always vary depending on the economy and each state’s fiscal health. For the next few years, it appears that many states may put more money into education and public charter schools should benefit from that change. The prospect of increased funding, unprecedented cap expansion and the continued mainstream of online education allow us to remain sanguine that fiscal 2014 is shaping up to be an excellent year and a solid growth foundation is being built for the next fiscal year.

Now I will turn it over to James to discuss our financial results and detail for the quarter and the fiscal year.

James Rhyu – Chief Financial Officer and Executive Vice President

Thank you, Ron. Good morning, everybody. This morning, I’m pleased to report a strong fiscal ’13 that was at the upper end of our most recent guidance range. As a reminder, last quarter, we guided to $840 million to $850 million of revenue, $108 million to $112 million in EBITDA, $43 million to $47 million in operating income. And as Nate mentioned earlier, we ended fiscal year 2013 with revenue of $848.2 million, an increase of $139.8 million or almost 20%; EBITDA of $111.4 million, an increase of $24.4 million or 28%; operating income of $45.7 million, an increase of $16.7 million or up 57.6%; net income of $28.1 million, an increase of $12 million or 60.6%; and diluted EPS of $0.72, an improvement of $0.27 or 60%.

And for our seasonally low fourth quarter, we have revenues increasing $32.7 million, or 19.2%, to $203 million; EBITDA increased $1.2 million, or 7%, to $19 million; and operating income came in at $1.3 million, which was down a little over $0.5 million from the prior year. Net income increased $0.5 million, or 27.8%, to $2.3 million; and diluted EPS increased 20% to $0.06 a share.

Let me give you a little color on our full-year results. We had healthy revenue growth close to $140 million or 20%. In 2013, our revenue growth was driven primarily by our Managed Public Schools. We saw an increase of almost $135 million or 22.6%. This was a result of a 12.7% increase in average enrollments, combined with an 8% increase in average rate. Enrollment growth is primarily from existing states, demonstrating our ability to grow revenue organically. The increased rates were a combination of higher revenue capture and some mix shifts, as Tim noted earlier.

Our Institutional business was flat for the year. However, Q4 was up 4% year-over-year and continues to show progress. Our International and Private Pay business grew 12.9% for the year and 20% in Q4 over the prior year, primarily as a result of higher average rates.

EBITDA grew by more than $24 million or 28%, and operating income grew by nearly $17 million or 58%. This represents an expansion of EBITDA margin from 12.3% in fiscal year ’12 to 13.1% in fiscal year ’13, and an expansion in the operating income margin from 4.1% in fiscal year ’12 to 5.4% in fiscal year ’13. Our Instructional costs and services grew by almost 22%, which is higher than our revenue growth and reflects some investments we are making in instruction at the schools, as well as some shifts in our mix.

Our selling and administrative expenses grew by 15%, less than the rate of revenue growth. Our product development expenses decreased by 4.5% or almost 18%. And on a cash basis, the costs were down approximately $2 million or almost 5%. We ended up with an effective tax rate of 43%, which was slightly above our most recent guidance of 41% to [ph] 42% and this was driven mainly by higher-than-anticipated impact of taxes [indiscernible] foreign jurisdiction – foreign operations.

These results show how we’re making progress in expanding our margins. And in the few months since I’ve joined, I see ongoing opportunities to expand these margins through tight cost control, more efficient customer acquisition, additional discipline in our investment approach to capital expenditures, and by looking for ways to continue diversifying our revenue base and leveraging our assets.

Another important development in fiscal 2013 was the stabilization of our capital expenditures, which were relatively unchanged from the prior year. Capital expenditures, plus capital leases for fiscal 2013 was $74.7 million, a 1.4% decrease from the prior year. As a result, our liquidity profile has improved year-over-year. Cash from operations for the fiscal year was $95.3 million as compared to $33 million a year ago, and this has helped our cash balance at fiscal year-end improve by more than $36 million to $181 million compared to the balance at the end of fiscal year 2012, even as we continue to make investments in software and curriculum.

A few other items to note. This year, our depreciation and amortization expense was $65.7 million, representing a 13.3% increase over last year. This is higher than our previous guidance of $65 million, due to some depreciation on projects that began earlier in the second half of the fiscal year than we previously anticipated. Separately, our China investment in a company called Web provide us the right to put back our interest to them and if we exercise that put, they would pay us interest on our original investment. During Q4, we decided to exercise our put right. As a result, we recorded $2 million in interest income and $12 million as a receivable on the principal. This would show up in other assets in our balance sheet.

I also want to provide you an update on AR aging and collections. Our year-end balance was $186.5 million, and that represents a 3.5% improvement on DSOs and a 15% increase year-over-year in our account receivable balance, compared to a 20% revenue growth rate.

Now, I want to provide you with some insight regarding our intentions related to fiscal 2014 guidance. As was the case last year, we plan to issue full-year guidance after reviewing fall enrollment data, likely the week of October 14. We also intend to update our guidance and measures to include enhanced guidance down to net income. I’ll also be providing quarterly guidance, 1 quarter in advance, as has been our practice this past year. And while we are not issuing guidance on the call today, we are comfortable with the fiscal 2014 estimates posted to first call through yesterday as follows: Revenue of $986.8 million, EBITDA of $133.5 million, EBIT of $62.8 million, net income of $36.2 million and EPS of $0.95 a share. As you know, these estimates and our ability to achieve these figures are contingent on our final enrollment numbers, which will not be available until October.

At this point, I would like to turn the call back over to Nate.

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

Thank you, James. Before I turn the call over for Q&A, I want to thank all of our dedicated employees and partners for a very solid year. I’m very proud of the organization and proud of all the partners. Operator, at this time, we would like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from the line of Sara Gubins of Bank of America.

Sara Gubins – BofA Merrill Lynch, Research Division

Do you think that the additional enrollment slots that you’re getting in the Managed Schools, I’m wondering if that would be enough to be able to give you accelerating enrollment growth next year, particularly given your comment that – about being comfortable with consensus revenue, which would suggest a slower revenue growth rate?

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

Sara, this is Nate Davis speaking. Welcome to the call this morning. And what you’re asking is a question that requires us to project that we’re going to be better than some of the estimates out there. I think we ought to be smart and cautious right now and say, the answer to that question would be no. That doesn’t mean we’re not working on it. We have a significant marketing effort going on right now to try to capture many of these new enrollments, particularly in spaces like Michigan and Texas and in Florida. But it would be wrong of me to try to project it that we’re going to accelerate enrollment growth on the basis of those things. I think it’s going to allow us to stay on track from where we were.

Sara Gubins – BofA Merrill Lynch, Research Division

Okay. And then you mentioned 10 new schools this year, should we think of that as being maybe 500 students per school?

Ronald J. Packard – Founder, Chief Executive Officer and Director

I wouldn’t think of it that way. A lot of these schools are second schools in existing – in the existing states like Insight Schools opening. So I wouldn’t necessarily take those new schools to be a significant increase in enrollment growth necessarily.

Sara Gubins – BofA Merrill Lynch, Research Division

Okay. And then you benefited quite a bit in revenue per student this year given the change in the approach around unfunded students. Could you maybe just tell us how many or what percentage of your students in fiscal ’13 were unfunded? And how you’re thinking about that for next year?

Timothy L. Murray – President and Chief Operating Officer

Sara, I don’t think we’ve been – this is Tim Murray. I don’t think we’ve been explicit about the numbers of unfunded students in the past. But we saw a significant – we put significant focus, as we came into this year, on managing that to a lower number. As we look at 2014, we don’t see any change in terms of the level of unfunded students, so the pick up, if you will, that we saw in 2013, we are not projecting for 2014. We’re holding where we’re at in terms of the mix of unfunded versus funded students.

Operator

Next question comes from the line of Suzi Stein of Morgan Stanley.

Suzanne E. Stein – Morgan Stanley, Research Division

You talked about the success that you had in renewing contracts, can you just talk about the kinds of changes that you’re seeing in these contracts as they come up for renewal?

Ronald J. Packard – Founder, Chief Executive Officer and Director

Sure. You want to go, Tim[ph]?

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

Let me just make sure, Suzi, we’re talking about – are we talking about the renewal contracts for Managed Schools, not...?

Suzanne E. Stein – Morgan Stanley, Research Division

Yes, exactly, for Managed Schools.

Ronald J. Packard – Founder, Chief Executive Officer and Director

I think we’re renewing the contracts on terms that are not that different than they were before. So we’re not seeing a significant shift in terms of the contracts. They’re usually between 5 and 10 years and we’re not seeing much of a change.

Suzanne E. Stein – Morgan Stanley, Research Division

Okay, great. And can you just talk about who your biggest competitors are in the Institutional business? And has there been any change there competitively?

Timothy L. Murray – President and Chief Operating Officer

Suzi, it’s Tim again. No, there really hasn’t been any change competitively. This is a market that doesn’t have very many very large players. The largest, as you know, is a publicly-traded company who also competes with us in the Managed Public Schools space. The textbook providers are all trying to sell digital solutions, so they are large competitors. And I prefer not to name specific smaller competitors, but there are many, many, many small competitors providing point solutions across the provision of remediation solutions, individual curriculum solutions. But overall, very fragmented market. That’s why we see opportunity in it, quite frankly.

Suzanne E. Stein – Morgan Stanley, Research Division

Okay. And I know you’re not giving guidance yet, although that was very helpful kind of talking around consensus. Can you just maybe talk about what your expectation is for the tax rate for fiscal ’14?

James Rhyu – Chief Financial Officer and Executive Vice President

Suzi, it’s James. We’re not giving guidance on the tax rate yet, but I would think about it in a range that was similar to fiscal 2013.

Operator

Next question comes from the line of Jeff Meuler of Baird.

Jeffrey P. Meuler – Robert W. Baird & Co. Incorporated, Research Division

I guess just a follow-up on that first question around if new or if total enrollment growth should accelerate. If we look at the cap increases, and I know you’re not expecting to fill them all, but they’re still meaningfully greater than last year. It sounds like all of the commentary on retention and reregistration and what you’re doing there, is positive. I guess, if you could just help us kind of think about what are the offsetting factors. I know graduates is a bigger number this year or, I guess, last spring, graduates were a bigger number, and you have some schools that are maybe maturing in terms of enrollment growth in uncap states that have been around for a while. But could you just help us think about what are all the offsetting factors that should lead it not to accelerate, given all of the positive commentary on retention, cap expansion, et cetera?

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

Well, this is Nate speaking, and I think Tim and Ron will also have some comments on this. First of all, I want to make sure you get an impression and understanding, we are optimistic that we will do a great job with enrollment. It’s not that we’re pessimistic and we think it’s going to decline, it’s just that I don’t want to get out in front of our headlights and try to signal that we’re going to be accelerating growth when we really haven’t gotten to finish through the enrollment season yet. Some of the things, as you already know, is we didn’t – we’re not going to opening up any brand-new large state. Even though we’re opening up a significant number of new schools and new cap expansions in existing states, we’re not getting new states. And so that’ll be a little bit of an offset. I think that retention, as you mentioned, retention will be slightly better. I think that the re-enrollment process will be slightly better. But one of the things we are seeing is a little competitiveness in the price of the, and as Tim talked a little bit about this, the cost of enrollments. So when we get out there and where we got search terms with Google and we’re trying to do a lot of digital marketing, we’re seeing the cost of that be a little higher. And so we have a choice at that point. Do we put more money into it to try to continue to drive high enrollment, or do we maintain a focus on profitability? And as we make that decision, that might cause us to be a little bit more conservative on the amount of growth, but driving it to be more profitable growth and talk about enrollment growth. So those are some of the factors we think about. Not new states. We think about the competitiveness of the search terms, and those things cause us not to – I don’t want to get too optimistic yet. So that’s my view. Tim and Ron, you have ...

Timothy L. Murray – President and Chief Operating Officer

Yes, I would just add the other macro issue here is we really are working hard to work with our prospective families and students to look at goodness of fit of our solution with their needs. We want the right students to come to us, so the students that have the greatest chances of success. And so we are doing more face-to-face interviews as part of the enrollment process. We are doing various pilots of efforts or changes in our enrollment process to improve the way students can decide whether they want to enroll or not. So we’re willing to gamble some growth in enrollments to be able to have students that have a greater likelihood of actually being successful with us.

Jeffrey P. Meuler – Robert W. Baird & Co. Incorporated, Research Division

Okay. And on the SEM rates, is that being driven up more by your large national competitor, or is it more the state-run schools in some of your largest states that are driving that up?

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

We can’t tell for sure exactly who it is. I think I know who it is, but I can’t tell you for sure. I think I know who it is. And by the way, it’s not across-the-board. It’s in a couple of states where I know we’re highly competing for some of the same students in those states. So it’s not across-the-board. But there are a couple of states I know where the rates have gone up some.

Jeffrey P. Meuler – Robert W. Baird & Co. Incorporated, Research Division

Got it. And then finally, Ron, obviously, kudos on the big business development year. Can you just talk about what the pipeline looks like for business development activities over the next 12 months? And what I’m wondering is, did you work through a lot of the pipeline in 2013? Or is it just kind of continually expanding and there’s a chance for another similar size business development year?

Ronald J. Packard – Founder, Chief Executive Officer and Director

Well, the next 12 months, I mean, obviously, particularly with regard to cap expansion, this year was just unbelievably successful. When I look at some of the states like Texas, which is the largest market in the country and having to work there for 12 years, it was gratifying. I think what I’m looking at going forward is, I don’t know if you’ll see the same kind of cap expansion because like I said, Michigan and Texas are so large, it’s tough to duplicate a feat like that. What I do think you’ll see though is an increased – is hopefully, more states, right? This year was – we had got very close in a few places and didn’t get it over the finish line, so I’m hoping in the coming year, we can get several more states over the finish line and we have a large queue of new states in process. So you never know for certain you’ll get those or when that’ll happen, but I think I would expect to see probably less success with regard to cap expansion and more success with regard to new states. I also think we continue the addition of more counties in Florida because these counties often have 200,000-plus children in them. So continually getting more coverage in Florida will be a big boost that will happen for years to come. So I think we’re looking good, but again it’s always very hard to predict these things.

Operator

The next question comes from the line of Corey Greendale of First Analysis.

David Warner

This is David Warner for Corey. I was wondering if you could comment a bit on your margin expectations for 2014? Maybe some areas where you think you have the opportunity for leverage on some of the expected growth. Maybe specifically talk about S&A since you mentioned that you’ve seen some higher admission costs there.

James Rhyu – Chief Financial Officer and Executive Vice President

Yes, I mean, I think – again, we’re not really going to give some guidance today. But I think we all believe there’s continued growth expansion opportunities in our margins. And I think we’re going to try to modulate some of these S&A costs as we go forward. So I think you’re going to see continued improvement in the margin.

David Warner

Okay. But you wouldn’t…?

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

David, there’s one other thing that Ron talked about a little bit in his call – in his comments and I know his mentioned in – publicly before and I think it’s important to factor in. Looking at the difference between what student enrollment rates have done in previous years versus where they are, the stabilization and slight increases to enrollment rates will also affect margins. And so that’s – we’re optimistic about that. The states are not under the same kind of pressure they were 3 or 4 years ago when budgets were tight and the economy was tight. And so what happens is parents go and say, “Hey, I want you to improve my education.” We are a public school and when those funds go to public schools, they come to us as well. So we see some margin expansion from that.

David Warner

Okay. And you had quite a bit a fluctuation in the revenue per student over the past couple of years, would you expect that to normalize? Or is there any specific headwind that you see in 2014 that would affect that – that would really affect that either way? Or can we model maybe just something along the lines of overall state allocation funding growth? Or is there any...?

Ronald J. Packard – Founder, Chief Executive Officer and Director

We would expect it to be more normalized, because what you’ve seen in the past is, in the past 4 to 5 years, we’ve had the large headwind, obviously, from the state budgets, and we also had the unfunded students. So given that we now see rates stabilizing to slightly increasing and we have a, really, a constant percentage of unfunded students, barring any unforeseen changes, I would expect that to become much more normalized. Also as your portfolio of states gets much larger, the impact of new states mix becomes smaller on it, so you should see an increased stabilization in that rate.

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

Last year, FY ’12 over ’11, we were down – rates were down in the neighborhood of 6%. And then looking at this year, the reimbursement rates were, I think James mentioned, they were up like almost 8%. We don’t expect that kind of improvement, but we expect it not to go back to the negative. So I would think a number, positive, but not nearly where we were this year.

Operator

The next question comes from Jerry Herman of Stifel.

Jerry R. Herman – Stifel, Nicolaus & Co., Inc., Research Division

Just a follow-up on that, Nate, you said that the rates last year were up 8% as a component of your RPS change, is that – did I hear that correctly?

James Rhyu – Chief Financial Officer and Executive Vice President

That’s right. Rates were up about 8% year-over-year. Average rates were up 8% year-over-year in our Managed Public Schools business.

Jerry R. Herman – Stifel, Nicolaus & Co., Inc., Research Division

Great. And what about the impact of the unfunded students, if you will, which should now, I guess, normalize? What was the impact of that, or is that encapsulized in the rate?

James Rhyu – Chief Financial Officer and Executive Vice President

That’s really encapsulized in the rate.

Ronald J. Packard – Founder, Chief Executive Officer and Director

Yes, the number you’re quoting of the 8% number, that includes all of the various functions unfunded students per pupil increases. So that’s just a mathematical calculation. It’s not the per funding per child in states, which is different, which is a small component of that.

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

It means our rates are up, total – reimbursed. Everything we do together.

Jerry R. Herman – Stifel, Nicolaus & Co., Inc., Research Division

Okay. And can you quantify the impact of the unfunded students in that 8%?

Ronald J. Packard – Founder, Chief Executive Officer and Director

It would be a larger part of it than the per pupil funding, I can tell you that much.

Jerry R. Herman – Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. Very helpful. And Tim, question for you with regard to the Institutional business, and as you transition there. When should that normalize, if you will? When should the numbers that you report become more reflective of what’s really going on as you transition to a sub-model?

Timothy L. Murray – President and Chief Operating Officer

Sure. I think we’re starting to see that now. 2013 was our first full year post the acquisitions of KCDL and AEC. So we’ve made great progress, I think, in terms of rationalizing our sales model, how we go to market. As we’ve noted, we’ve seen the percentage of, or the proportion of perpetual revenues decrease substantially from where they were 2 years ago and 1 year ago. So I think we’ll continue to feel the effects this year of the continued decline in perpetuals, and next year, I think that will be much less of an effect than what we’ve seen. So we feel good about how the sales team is focused. We feel good about the changes we’re making to enhance our product suite, adding additional content of K12 content, as well as third-party content. And we also feel good about the work we’re doing in the back-office to simplify and integrate some of the billing and fulfillment capabilities. So it continues to get better each quarter.

Jerry R. Herman – Stifel, Nicolaus & Co., Inc., Research Division

Great. And James, as – I realize you guys are going to give guidance because of the unknowns in enrollment, but can you give us some guidance on some of the things that are known, like D&A and your estimate of stock comp and CapEx and capitalized software curriculum development for this year?

James Rhyu – Chief Financial Officer and Executive Vice President

Yes, I mean I think we’d rather hold off and give a complete suite of guidance in October. But I think we’re going to hold off and wait until that time.

Ronald J. Packard – Founder, Chief Executive Officer and Director

It’s only 6 weeks.

Jerry R. Herman – Stifel, Nicolaus & Co., Inc., Research Division

We just can’t wait, I guess. And then my last – last question and I’ll turn it over. Again, how do you guys think about the long-term margin potential of this business, again, given all the dynamics that go into that? What do you think is reasonable over the longer-term?

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

We won’t give you a number. But if you ask the question, how do we think about it, I look at every line item in the business and ask the question, what do we think happens with reimbursement rates? What do we think happens with how well we do in retention? Can we improve retention and re-enrollment? If we look at the marketing cost, can we be more and more efficient? As we get larger, is there a better scale? Do we have better referral of students from the existing students we have through our reputation? If I look at going behind – beyond EBITDA margins, going all the way down, if I look at how we deploy capital, I think that we’re going to get more cost-efficient. I think we’re going to get better retention. And I do think that there will be less pressure than in previous years on rates. Now I’m not going to give you a number, but I’m giving you, directionally, how we think about it. When we look at all of those positive factors over the long run, margins continue to have some ability to grow. But I can’t tell you the numbers going to be, instead of 13.5% EBITDA margin, it goes to x margin. But I can tell you that I think that margin continues to increase over a multi-year period. And then lastly, I do believe that while the Institutional business is still young and growing, it’s a market that is developing, long run, that is a market that’s going to have higher margins than the current markets that we’re in, because that’s a softer market, it has higher leverage. That’s some reason we want to be in that market, is that is another reason why our margins will get better. So I’m optimistic that margins will continue to improve over a multi-year period.

Operator

The next question comes from the line of Jeff Silber of BMO Capital Markets.

Jeffrey M. Silber – BMO Capital Markets U.S.

Just some numbers-related question and just going back to the quarter that you just reported. If I remember correctly, you expected SG&A in the quarter to be sizably higher, and I know it came in below our expectations. Were there any costs that were deferred from the fourth quarter into the first quarter of this year?

James Rhyu – Chief Financial Officer and Executive Vice President

There are always – there’s always some timing-related cost, but I don’t think there’s anything that significant that was deferred specifically from the fourth quarter into the first quarter.

Jeffrey M. Silber – BMO Capital Markets U.S.

Okay. And then looking at gross margins, just taking a look at the impact of instructional costs and services, gross margins went down pretty significantly year-over-year compared to what we saw in prior quarters this year. You may have explained it at the beginning and I might have missed it, but if you can go that over again, I’d appreciate it.

James Rhyu – Chief Financial Officer and Executive Vice President

Well, our gross margins, we had – we made some investments, I think, in our instructional costs, which are pressuring some of our gross margins. Those are investments that we think we’re going to improve academic performance. But I don’t see those – I don’t see that rate of investment increasing in any way. So I don’t think that you’re going to see continued pressure downward over a longer period of time.

Jeffrey M. Silber – BMO Capital Markets U.S.

Okay, great. And then the share count was a bit higher than I had modeled. Was it the impact of the put back with the Chinese investment?

James Rhyu – Chief Financial Officer and Executive Vice President

No. The put with Chinese investment’s unrelated to the share count. The share count is really just a function of new issuances of grants for various management personnel.

Jeffrey M. Silber – BMO Capital Markets U.S.

And should this be the starting point we should use for next year?

James Rhyu – Chief Financial Officer and Executive Vice President

Yes, that’s a good starting point for the [indiscernible].

Jeffrey M. Silber – BMO Capital Markets U.S.

Okay, great. And then just finally, one more. I know you gave your managed enrollments for the year, is it possible to get the average enrollments in the Managed Public Schools for the quarter?

James Rhyu – Chief Financial Officer and Executive Vice President

Managed enrollments, is that something we disclose?

Christina L. Parker – Vice President of Investor Relations

We can certainly provide that.

Ronald J. Packard – Founder, Chief Executive Officer and Director

Yes, we can provide that [indiscernible].

Jeffrey M. Silber – BMO Capital Markets U.S.

Okay. I guess, I’ll get that when I follow up.

Operator

Next question comes from the line of Trace Urdan of Wells Fargo Securities.

Trace A. Urdan – Wells Fargo Securities, LLC, Research Division

I wondered if you could take a few – just a couple minutes and talk about the Insight Schools strategy, sort of the long-term goals for that? How you feel it’s progressing? And do you ultimately see sort of an Insight School option available as commonly as a K12 academy option for the student areas that you’re serving?

Ronald J. Packard – Founder, Chief Executive Officer and Director

The answer is yes. So the Insight strategy is moving along nicely, and we’re excited to be opening the Insight in Ohio. And we’re putting a lot of human brain capital into developing the right model for academically at-risk kids. And the beautiful thing about the Insight model and the strategy is we want to have schools whose entire culture, from the teachers to administration to the curriculum, is built around taking children who are behind grade level and bring them up to grade level, taking students who are coming to high school, credit deficient who would likely be high school dropouts and graduating them from high school. So it’s a very different culture that you would have than what we traditionally had originally in our virtual academy. So the idea is absolutely to have 1 school of each type in every single state we operate in and make sure that students find the right option for them.

Trace A. Urdan – Wells Fargo Securities, LLC, Research Division

And Ron, in those areas where you have an Insight school as an option right now, I mean, how does it work out in terms of trying to, I don’t know, gently persuade or redirect students into the school that’s right for them? Are you having success with that?

Ronald J. Packard – Founder, Chief Executive Officer and Director

The answer is, it’s working very well where the model’s now full up and gear. And it really isn’t persuading or dissuading. What it really is, is explaining to prospective students what each school is. And our observation is, 90% of the students will choose the right school for them, and we take everyone who wants to come in either school. But our observation is the people will choose the right school for them. They know where they are and what they need. So if presented properly, we don’t need to do any persuasion or dissuasion, they’ll choose the school that’s right for them. And if they choose the wrong one, there’s nothing we can do about it but it seems to be working.

Operator

The next question comes from the line of Jeff Meuler of Baird.

Jeffrey P. Meuler – Robert W. Baird & Co. Incorporated, Research Division

You guys have not been as acquisitions – or acquisitive over the last year as you were prior to that. Obviously, you have a great balance sheet and you’ve been the slope of the curve in terms of CapEx expense. Nate, how are you thinking about the usage of that balance sheet?

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

I believe there’s – well, first of all, you always like to have a lot of liquidity and flexibility, and so I think the company is in a great financial position to have that. But there’s no doubt about the fact that we believe, long-term, that we should go back to acquisitions. Now the question is when and what type and what companies and what profiles would they have. I’m not adverse to it. As a matter of fact, we believe that we should do some acquisitions. I don’t want to sit here and talk about M&A strategy at this point, but I would say I think about the balance sheet as a strong balance sheet that allows us to do acquisitions. But as you know, the key for our businesses in the last 18 months, 12 months, has been, we need to make sure the core business is running well. We need to make sure the academics are strong. We need to sure the management team is as strong as possible, so when we do an acquisition, we don’t distract ourselves and our core business. And that’s why we’ve held off in acquisitions for a while. That does not mean long-term we won’t do it. Building a strong balance sheet, I think, will allow us to be in a great position to do that.

Jeffrey P. Meuler – Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just a follow up on the Individualized Learning Plans. I guess, what’s the process for teacher, call it, training and management to kind of shift increasingly towards the ILP type of model? And what are the implications for teacher-to-student ratios, if any, of having that type of model?

Timothy L. Murray – President and Chief Operating Officer

Jeff, it’s Tim. We’ve been doing ILPs for a number of years across K through 8, as well as high school. The changes we’ve made this year is to have looked at what we think is best practice and trying to standardize on that nationally. We have a stated goal that we measure all of our schools against 100% ILPs this year. It’s the first time we’ve ever have that as a measured goal. So we’re trying to, first of all, just execute more effectively. In order to do that, it’s required setting clear expectations, measuring the organization, but also giving them the tools to be able to create these ILPs, and we don’t see it at this point in time, as having an effect on student-teacher ratios. We’ll be assessing that as we go forward, of course. And we’re – as both Ron and I mentioned, we’re doing some preenrollment exercises with prospective students that provides us input to those ILPs, where in many cases, we are delayed in getting transcripts and other school records for our student until they’re 4, 5, 6, 7, even 8 weeks into the school year at some time – in some cases, and we’d really like to have that ILP set at the beginning of the year.

Jeffrey P. Meuler – Robert W. Baird & Co. Incorporated, Research Division

Okay. And then for the preenrollment exercises, can you give us any sort of rough order of magnitude of what percentage of prospective students are self-screening out when they go through those exercises?

Timothy L. Murray – President and Chief Operating Officer

I can’t. I can tell you that – well...

Ronald J. Packard – Founder, Chief Executive Officer and Director

It’s really hard to isolate that data, because you never really know what is doing it. You can only look at changes and a chain of small changes, so I don’t think we could answer that question. I don’t believe data’s precise enough.

Nathaniel Alonzo Davis – Executive Chairman, Member of Audit Committee and Member of Compensation Committee

Before we get another question, we’d like to go back and make sure we provide an answer to, I think it was Jeff who asked the question. James?

James Rhyu – Chief Financial Officer and Executive Vice President

Yes. So I think the question about the Q4 Managed Public School enrollments number, we had for – you need to remember that because of the seasonality of the quarter, the enrollments will go down a little bit in each Q4 and it hasn’t in each of the past couple of years by about the same percentage. So you’ll see our Q4 enrollments were just a hair above 111,000 on average for Q4. And again, I think that’s consistent with what you would have seen in previous years.

Operator

You have no further questions at this time.

Ronald J. Packard – Founder, Chief Executive Officer and Director

Great. Well, before I wrap up, I’d like to mention that on September 4, we will be participating in the Barrington Research Growth Conference in Chicago. And on September 12, we will be presenting at the BMO Capital Market Back-to-School Conference in New York. So with that, I want to thank you for your time today. I look forward to meeting most of you and speaking more in detail in the upcoming months. So thanks, again, for your time this morning.

Operator

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

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K12 4Q results beat analysts’ expectations

The Associated Press

Published: Thursday, Aug. 29, 2013 – 3:55 am

HERNDON, Va. – Online educational provider K12 said Thursday that its fiscal fourth-quarter net income climbed 28 percent, helped by interest income.

The company earned $2.3 million, or 6 cents per share, for the three months ended June 30. That compares with $1.8 million, or 5 cents per share, a year earlier.

Analysts surveyed by FactSet expected earnings of 3 cents per share.

The latest quarter included $1.7 million in interest income, while the prior-year period included an interest expense of $267,000.

Revenue rose 19 percent to $203.1 million from $170.4 million, topping Wall Street’s estimate of $201.4 million.

For the year, K12 Inc. earned $28.1 million, or 72 cents per share. A year earlier it earned $17.5 million, or 45 cents per share. Annual revenue climbed 20 percent to $848.2 million from $708.4 million.

Average student enrollments increased 12.7 percent. There was also a rise in the average revenue per student in the managed public schools business.

K12 shares finished at $31.96 on Wednesday after hitting a 52-week high of $32.40 earlier in the day.

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press release

Aug. 29, 2013, 6:00 a.m. EDT

K12 Inc. Reports Full Fiscal Year 2013 Financial Results

EPS Increases 60.0% to $0.72 on Revenue Growth of Nearly 20.0% to $848.2 Million

http://thetruthaboutk12.com//wp-content/uploads/2015/09/

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HERNDON, Va., Aug 29, 2013 (BUSINESS WIRE) –K12 Inc. LRN +2.14% , a leading provider of proprietary, technology-based curriculum, software and education services created for individualized learning for students primarily in kindergarten through 12th grade, today announced its results for the fourth fiscal quarter and full fiscal year ended June 30, 2013.

Financial Highlights for the Fiscal Year Ended June 30, 2013

– Revenues for the fiscal year ended June 30, 2013 grew 19.7% to $848.2 million, primarily due to a 12.7% increase in average student enrollments and an increase in average revenue per student in our managed public schools business.

– EBITDA, a non-GAAP measure (see reconciliation below), for the fiscal year ended June 30, 2013 increased 28.0% to $111.4 million and EBITDA margin grew to 13.1%.

– Operating income grew 57.6% to $45.7 million.

– Net income attributable to common and Series A stockholders grew by 60.6% to $28.1 million.

– Diluted net income attributable to common stockholders per share, which reflects a pro rata allocation of net income to Series A stockholders, grew 60.0% to $0.72.

Financial Highlights for the Three Months Ended June 30, 2013 (Fourth Quarter Fiscal Year 2013)

– Revenues for the fourth quarter of FY 2013 increased 19.2% to $203.1 million, primarily due to organic revenue growth of 20.8% in our core Managed Public Schools business.

– EBITDA, a non-GAAP measure (see reconciliation below), for the fourth quarter of FY 2013 grew 7.3% to $19.0 million.

– Operating income decreased 30.0% to $1.4 million.

– Net income attributable to common and Series A stockholders grew by 27.8% to $2.3 million.

– Diluted net income attributable to common stockholders per share, which reflects a pro rata allocation of net income to Series A stockholders, grew by 20.0% to $0.06.

Comments from Management

Nate Davis, Executive Chairman of the Board, commented: “I am very pleased with the financial results K12 delivered in fiscal 2013. We remain intensely focused on improving academics and, to that end, we have introduced innovative academic pilots to improve our learning model and have launched new diagnostic assessment tools. We are excited about the new school year and grateful to have the opportunity to offer an individualized and adaptive education to students around the world.”

Cash, Capital Expenditures and Capital Leases

As of June 30, 2013, the Company had cash and cash equivalents of $181.5 million, reflecting an increase of $36.8 million from June 30, 2012.

Capital expenditures for the fiscal year ended June 30, 2013 were $50.3 million, reflecting an increase of $1.7 million, and was comprised of:

– $8.3 million for property and equipment,

– $23.4 million for capitalized software development, and

– $18.6 million for capitalized curriculum.

Capital leases financed additional purchases of $24.7 million during the fiscal year ended June 30, 2013, primarily for computers and software for students.

Revenue and Enrollment Data

Revenue by Business Line

The following table sets forth revenue for the Company’s three lines of business – Managed Public Schools (turn-key management services provided to public schools), Institutional Sales (educational products and services provided to school districts, public schools and other educational institutions that it does not manage), and International and Private Pay Schools (private schools for which it charges student tuition and makes direct consumer sales) – for the periods indicated:

                                                                                                                                                                                                                                                                                                                                                         Year Ended June 30,                                                                                                     2013 / 2012                                                                              2012 / 2011                                                                    ————————————————————————————————————————-                             ——————————————————-                          ———————————————————————–        ($ in thousands)                                                        2013                           2012                                              2011                                             Change               Change %                                 Change                       Change %        ————————————–                      —————————                       —————————                       —————————                       —————————                       ——–                       —————————                       ————————        Managed Public Schools                                                         $ 730,800                                         $ 596,142                                         $ 454,001                                         $ 134,658                      22.6 %                                            $ 142,141                      31.3 %        Institutional Business                                                            73,269                                            73,150                                            46,756                                               119                       0.2 %                                               26,394                      56.5 %        International and Private Pay Business                         44,151                         39,115                         21,677                          5,036                      12.9 %                            17,438                      80.4 %                                                                    ——————– ——-                      ——————– ——-                      ——————– ——-                      ——————– ——-                                                     ——————– ——-        Total                                                                          $ 848,220                                         $ 708,407                                         $ 522,434                                         $ 139,813                      19.7 %                                            $ 185,973                      35.6 %                                                                    ==================== =======                      ==================== =======                      ==================== =======                      ==================== =======                                                     ==================== =======                                                                                                                                                                                                                                                                                                                                                                           

Enrollment Data

The following table sets forth average enrollment data for students in Managed Public Schools and total enrollment data for students in the International and Private Pay Schools for the periods indicated. These figures exclude enrollments from classroom pilot programs and consumer programs.

                                                                                                                                                                                                                                      Year Ended June 30,                                                            2013 / 2012                                                       2012 / 2011                                                          —————————————————————–                     ——————————————                     ————————————————-                                                            2013      2012     2011                         Change      Change %                      Change         Change %                                                          ——-                      ——-                      ——                      ———                       ——–                       ——                      ——————-        Average Student Enrollments*                      117,563                      104,289                      74,755                      13,274                          12.7 %                         29,534                            39.5 %                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         Year Ended June 30,                                                            2013 / 2012                                                       2012 / 2011                                                          —————————————————————–                     ——————————————                     ————————————————-                                                            2013                         2012                        2011                         Change                         Change %                      Change                            Change %                                                          ——-                      ——-                      ——                      ———                       ——–                       ——                      ——————-        Student Enrollments                                31,619                       31,830                      28,777                        (211)                        -0.7 %                          3,053                            10.6 %        Semester Course Enrollments                        84,642                       83,519                      68,230                       1,123                           1.3 %                         15,289                            22.4 %                                                                                                                                                                                                                                                    * The Managed Public Schools average student enrollments include        enrollments for which we received no public funding.                 

Fiscal Year 2014 Outlook

The Company intends to issue guidance for the current fiscal year in mid-October 2013.

Special Note on Forward-Looking Statements

This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have tried, whenever possible, to identify these forward-looking statements using words such as “anticipates,” “believes,” “estimates,” “continues,” “likely,” “may,” “opportunity,” “potential,” “projects,” “will,” “expects,” “plans,” “intends” and similar expressions to identify forward looking statements, whether in the negative or the affirmative. These statements reflect our current beliefs and are based upon information currently available to us. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties, factors and contingencies include, but are not limited to: our potential inability to further develop, maintain and enhance our products and brands; the reduction of per pupil funding amounts at the schools we serve; reputation harm resulting from poor performance or misconduct by operators in any school in our industry and in any school in which we operate; challenges from virtual public school or hybrid school opponents; failure of the schools we serve to comply with regulations resulting in a loss of funding or an obligation to repay funds previously received; discrepancies in interpretation of legislation by regulatory agencies that may lead to payment or funding disputes; termination of our contracts with schools due to a loss of authorizing charter; failure to enter into new contracts or renew existing contracts with schools; risks associated with entering into and executing mergers, acquisitions and joint ventures; failure to successfully integrate mergers, acquisitions and joint ventures; inability to recruit, train and retain quality teachers and employees; uncertainty regarding our ability to protect our proprietary technologies; risks of new, changing and competitive technologies; increased competition in our industry; and other risks and uncertainties associated with our business described in the Company’s filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All information in this release is as of August 29, 2013, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations.

Conference Call

The Company will discuss its fourth quarter 2013 financial results during a conference call scheduled for Thursday, August 29, 2013 at 8:30 a.m. eastern time (ET).

The conference call will be webcast and available on the K(12) web site at www.k12.com through the Investor Relations link. Please access the web site at least 15 minutes prior to the start of the call to register and download and install any necessary software.

To participate in the live call, investors and analysts should dial (866) 825-1709 (domestic) or (617) 213-8060 at 8:20 a.m. (ET). The participant pass code is 82179632. A replay of the call will be available starting on August 29, 2013, through September 5, 2013, at (888) 286-8010 (domestic) or (617) 801-6888 (international) pass code 35861153. It will also be archived at www.k12.com in the Investor Relations section for 60 days.

Financial Statements

The financial statements set forth below are not the complete set of K12 Inc.’s financial statements for the quarter and year and are presented below without footnotes. Readers are encouraged to obtain and carefully review K12 Inc.’s Annual Report on Form 10-K for the year ended June 30, 2013, including all financial statements contained therein and the footnotes thereto, filed with the SEC. The Form 10-K may be retrieved from the SEC’s website at www.sec.gov or from K12 Inc.’s website at www.k12.com.

                                                                                                                                                                                                                                                 K12 INC.                                                                                                     CONSOLIDATED BALANCE SHEETS                                                                                                                                                                                                                                                                                                                                       June 30,                                                                                                   ————————————————————————————————————————–                                                                                                                          2013                                                                   2012                                                                                                                        ——-                                                                ——–                                                                                                                                         (In thousands, except share and per share data)                                        ASSETS        Current assets           Cash and cash equivalents                                                                                  $ 181,480                                                              $  144,652           Restricted cash and cash equivalents                                                                               -                                                                   1,501                                                                                                                        186,459                                                                 160,922           Accounts receivable, net of allowance of $2,560 and $1,624 at June           30, 2013 and June 30, 2012, respectively           Inventories, net                                                                                              44,395                                                                  37,853           Current portion of deferred tax asset                                                                         11,368                                                                  16,140           Prepaid expenses                                                                                              10,331                                                                  11,173           Other current assets                                                                       23,916                            14,598                                                                                                   ——————– ——- ——————–                      ——————– ——– ——————–              Total current assets                                                                                      457,949                                                                 386,839        Property and equipment, net                                                                                      56,142                                                                  55,903        Capitalized software, net                                                                                        43,504                                                                  34,709        Capitalized curriculum development costs, net                                                                    64,599                                                                  60,345        Intangible assets, net                                                                                           32,139                                                                  36,736        Goodwill                                                                                                         61,413                                                                  61,619        Investment in Web International                                                                                       -                                                                  10,000        Deposits and other assets                                                                      3,150                             2,684                                                                                                   ——————– ——- ——————–                      ——————– ——– ——————–              Total assets                                                                                            $ 718,896                                           $  648,835                                                                                                   ==================== ======= ====================                      ==================== ======== ====================                                                                                                                                                                                         LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY        Current liabilities           Accounts payable                                                                                           $  21,838                                                              $   23,951           Accrued liabilities                                                                                           17,027                                                                  13,802           Accrued compensation and benefits                                                                             21,970                                                                  17,355           Deferred revenue                                                                                              28,567                                                                  25,410           Current portion of capital lease obligations                                                                  19,395                                                                  15,950           Current portion of note payable                                                               390                             1,145                                                                                                   ——————– ——- ——————–                      ——————– ——– ——————–              Total current liabilities                                                                                 109,187                                                                  97,613        Deferred rent, net of current portion                                                                             8,833                                                                   6,974        Capital lease obligations, net of current portion                                                                16,107                                                                  15,124        Note payable, net of current portion                                                                                  -                                                                     777        Deferred tax liability                                                                                           33,299                                                                  31,591        Other long term liabilities                                                                    2,512                             1,908                                                                                                   ——————– ——- ——————–                      ——————– ——– ——————–           Total liabilities                                                                         169,938                           153,987                                                                                                   ——————– ——- ——————–                      ——————– ——– ——————–        Commitments and contingencies                                                                                         -                                                                       -        Redeemable noncontrolling interest                                                            15,200                            17,200                                                                                                   ——————– ——- ——————–                      ——————– ——– ——————–        Equity:        K12 Inc. stockholders' equity        Common stock, par value $0.0001; 100,000,000 shares authorized;                                                       4                                                                       4        37,440,662 and 36,436,933 shares issued and outstanding at June        30, 2013 and June 30, 2012, respectively        Additional paid-in capital                                                                                      548,390                                                                 519,439        Series A Special Stock, par value $0.0001; 2,750,000 shares issued                                               63,112                                                                  63,112        and outstanding at June 30, 2013 and 2012        Accumulated Other Comprehensive Income (Loss)                                                                      (294)                                                                   100        Accumulated deficit                                                                          (81,050)                                           (109,161)                                                                                                   ——————– ——- ——————–                      ——————– ——– ——————–        Total K12 Inc. stockholders' equity                                                  530,162                                                                 473,494        Noncontrolling interest                                                                        3,596                             4,154                                                                                                   ——————– ——- ——————–                      ——————– ——– ——————–        Total equity                                                                                 533,758                           477,648                                                                                                   ——————– ——- ——————–                      ——————– ——– ——————–        Total liabilities, redeemable noncontrolling interest and equity                                              $ 718,896                                           $  648,835                                                                                                   ==================== ======= ====================                      ==================== ======== ====================        
                                                                                                                                                                                                 K12 INC.                                                                                                                                                                          CONSOLIDATED STATEMENTS OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                               Three Months Ended June 30,                                                                                                                             Year Ended June 30,                                                                                              ——————————————————————————————————————————-                     ——————————————————————————————————————————-                                                                                                   2013                                2012                                2013                                2012                                                                                                   ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–                                                                                                                                                                                                                (In thousands, except share and per share data)        Revenues                                                                                                 $    203,087                                           $    170,402                                           $    848,220                                           $    708,407                                                                                              ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–        Cost and expenses           Instructional costs and services                                                                           129,192                                                                   102,617                                                                   498,398                                                                   408,560           Selling, administrative and other operating expenses                                                        66,206                                                                    60,970                                                                   283,032                                                                   245,274           Product development expenses                                                              6,268                               4,783                              21,084                              25,593                                                                                              ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–        Total costs and expenses                                                                   201,666                             168,370                             802,514                             679,427                                                                                              ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–        Income from operations                                                                                          1,421                                                                     2,032                                                                    45,706                                                                    28,980        Interest income (expense), net                                                               1,657                                (267)                                                  851                                (989)                                                                                              ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–        Income before income tax expense and noncontrolling interest                                                    3,078                                                                     1,765                                                                    46,557                                                                    27,991        Income tax expense                                                                          (1,828)                                                 (571)                                              (20,023)                                              (11,882)                                                                                              ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–        Net income                                                                                                      1,250                                                                     1,194                                                                    26,534                                                                    16,109        Add net loss attributable to noncontrolling interest                                         1,018                                 607                               1,577                               1,434                                                                                              ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–                      ——————– ———- ——————–                                                                                                                                                                                                                                                                                                                                                                     Net income attributable to common stockholders, including Series                                         $      2,268                                           $      1,801                                           $     28,111                                           $     17,543        A stockholders                                                                                              ==================== ========== ====================                      ==================== ========== ====================                      ==================== ========== ====================                      ==================== ========== ====================                                                                                                                                                                                                                                                                                                                                     Net income attributable to common stockholders per share,        excluding Series A stockholders:           Basic                                                                                                 $       0.06                                           $       0.05                                           $       0.72                                           $       0.46                                                                                              ==================== ========== ====================                      ==================== ========== ====================                      ==================== ========== ====================                      ==================== ========== ====================           Diluted                                                                                               $       0.06                                           $       0.05                                           $       0.72                                           $       0.45                                                                                              ==================== ========== ====================                      ==================== ========== ====================                      ==================== ========== ====================                      ==================== ========== ====================        Weighted average shares used in computing per share amounts:           Basic                                                                                36,642,685                          35,952,162                          36,267,345                          35,802,678                                                                                              ==================== ========== ====================                      ==================== ========== ====================                      ==================== ========== ====================                      ==================== ========== ====================           Diluted                                                                              39,475,382                          38,723,316                          39,017,345                          38,740,863                                                                                              ==================== ========== ====================                      ==================== ========== ====================                      ==================== ========== ====================                      ==================== ========== ====================        
                                                                                                                                                                                                                                                                                                                                               K12 INC.                                                                                                                               CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                                                                                                                                                                                                                                                                                                                                                            Year Ended June 30,                                                                                           ————————————————————————————————————————————————-		———————————————–                                                                                                                  2013                                                2012                                                                   2011                                                                                                                ——-                                                                ——-                                                                ——-                                                                                                                                                (In thousands)        Cash flows from operating activities        Net income                                                                                            $  26,534                                                              $  16,109                                                              $  11,665        Adjustments to reconcile net income to net cash provided by        operating activities:        Depreciation and amortization expense                                                                    65,737                                                                 58,033                                                                 42,934        Stock based compensation expense                                                                         14,374                                                                 10,067                                                                  9,466        Excess tax (benefit) expense from stock based compensation                                               (8,889)                                                                3,122                                                                 (4,954)        Deferred income taxes                                                                                    15,770                                                                 10,297                                                                 10,978        Provision for doubtful accounts                                                                           2,070                                                                    204                                                                  1,472        Provision for inventory obsolescence                                                                        387                                                                  1,618                                                                  1,060        Provision for student computer shrinkage and obsolescence                                                   482                                                                  1,038                                                                    219        Changes in assets and liabilities:           Accounts receivable                                                                                  (27,708)                                                              (64,270)                                                              (15,810)           Inventories                                                                                           (6,929)                                                               (8,918)                                                               (4,621)           Prepaid expenses                                                                                         843                                                                   (784)                                                                  363           Other current assets                                                                                     682                                                                 (5,260)                                                               (1,825)           Deposits and other assets                                                                               (466)                                                                  764                                                                 (1,037)           Accounts payable                                                                                      (2,115)                                                                2,794                                                                  2,726           Accrued liabilities                                                                                    3,226                                                                   (292)                                                                  615           Accrued compensation and benefits                                                                      4,616                                                                  4,275                                                                  1,976           Deferred revenue                                                                                       3,119                                                                  3,351                                                                  6,760           Restricted cash                                                                                        1,501                                                                      -                                                                  1,842           Deferred rent and other liabilities                                                 2,059                              843                            3,384                                                                                           ——————– ——- ——————–                      ——————– ——- ——————–                      ——————– ——- ——————–        Net cash provided by operating activities                                             95,293                           32,991                           67,213                                                                                           ——————– ——- ——————–                      ——————– ——- ——————–                      ——————– ——- ——————–                                                                                                                                                                                                                                                  Cash flows from investing activities           Purchase of property and equipment                                                                    (8,339)                                                              (10,483)                                                              (19,616)           Capitalized software development costs                                                               (23,446)                                                              (21,994)                                                               (9,947)           Capitalized curriculum development costs                                                             (18,560)                                                              (16,123)                                                              (18,086)           Purchase of Kaplan                                                                                         -                                                                (12,641)                                                                    -           Purchase of AEC, net of cash acquired of $3,841                                                            -                                                                      -                                                                (24,543)           Purchase of IS Berne, net of cash acquired of $1,563                                                       -                                                                      -                                                                   (839)           Cash advanced for AEC performance escrow                                                                   -                                                                      -                                                                 (6,825)           Cash returned for AEC performance escrow                                                                   -                                                                      -                                                                  6,825           Cash paid for investment in Web                                                         -                                -                          (10,000)                                                                                           ——————– ——- ——————–                      ——————– ——- ——————–                      ——————– ——- ——————–        Net cash used in investing activities                                                (50,345)                                           (61,241)                                           (83,031)                                                                                           ——————– ——- ——————–                      ——————– ——- ——————–                      ——————– ——- ——————–                                                                                                                                                                                                                                                  Cash flows from financing activities           Proceeds from issuance of common stock                                                                     -                                                                      -                                                                125,619           Repayments on capital lease obligations                                                              (20,275)                                                              (16,600)                                                              (15,135)           Repayments on notes payable                                                                           (1,533)                                                               (1,820)                                                               (1,969)           Proceeds from notes payable                                                                                -                                                                      -                                                                  1,932           Borrowings from line of credit                                                                             -                                                                      -                                                                 15,000           Repayments under the line of credit                                                                        -                                                                      -                                                                (15,000)           Proceeds from exercise of stock options                                                                7,253                                                                  3,380                                                                 13,364           Payment of stock registration expense                                                                      -                                                                   (313)                                                                    -           Excess tax (benefit) expense from stock based compensation                                             8,889                                                                 (3,122)                                                                4,954           Repurchase of restricted stock for income tax withholding                          (2,546)                                            (1,292)                                            (1,627)                                                                                           ——————– ——- ——————–                      ——————– ——- ——————–                      ——————– ——- ——————–        Net cash provided by (used in) financing activities                                   (8,212)                                           (19,767)                                           127,138                                                                                           ——————– ——- ——————–                      ——————– ——- ——————–                      ——————– ——- ——————–                                                                                                                                                                                                                                                                               Effect of foreign exchange rate changes on cash and cash                                  92                             (430)                                                28        equivalents                                                                                           ——————– ——- ——————–                      ——————– ——- ——————–                      ——————– ——- ——————–                                                                                                                                                                                                                                                                               Net change in cash and cash equivalents                                                                  36,828                                                                (48,447)                                                              111,348        Cash and cash equivalents, beginning of year                                         144,652                          193,099                           81,751                                                                                           ——————– ——- ——————–                      ——————– ——- ——————–                      ——————– ——- ——————–        Cash and cash equivalents, end of year                                                                $ 181,480                                           $ 144,652                                           $ 193,099                                                                                           ==================== ======= ====================                      ==================== ======= ====================                      ==================== ======= ====================                                                                                                                                                                                                                                                                               

Non-GAAP Financial Measures

EBITDA

EBITDA consists of net income (loss), plus net interest expense, plus income tax expense, minus income tax benefit, plus depreciation and amortization and noncontrolling interest charges. Interest expense primarily consists of interest expense for capital leases and long-term and short-term borrowings. We use EBITDA in addition to income from operations and net income as a measure of operating performance. However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net income (loss) as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not consider certain cash requirements such as capital expenditures, tax payments, interest payments, or other working capital.

We believe EBITDA is useful to an investor in evaluating our operating performance because it is widely used to measure a company’s operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of our capital structure and the method by which assets were acquired. Our management uses EBITDA:

– as an additional measurement of operating performance because it assists us in comparing our performance on a consistent basis;

– in presentations to the members of our Board of Directors to enable our Board to have the same measurement basis of operating performance as is used by management to compare our current operating results with corresponding prior periods and with the results of other companies in our industry; and

– on an adjusted basis in determining compliance with the terms of our credit agreement.

The following tables provide a reconciliation of net income to EBITDA.

                                                                                                                                                                                                                                                                         Three Months Ended June 30,                                                                                                                      Year Ended June 30,                                                           ———————————————————————————————————————–                     ————————————————————————————————————————                                                                                 2013                                               2012                                                                   2013                                               2012                                                                                ——                                                                ——                                                                ——-                                                                ——                                                                            (In thousands)        Net income                                                            $  2,268                                                              $  1,801                                                              $  28,111                                                              $ 17,543        Interest expense, net                                                   (1,657)                                                                 267                                                                   (851)                                                                 989        Income tax expense                                                       1,828                                                                   571                                                                 20,023                                                                11,882        Depreciation and amortization                                           17,562                                                                15,708                                                                 65,737                                                                58,033        Noncontrolling interest                              (1,018)                                             (607)                                            (1,577)                                           (1,434)                                                           ——————– —— ——————–                      ——————– —— ——————–                      ——————– ——- ——————–                      ——————– —— ——————–        EBITDA                                                                $ 18,983                                           $ 17,740                                           $ 111,443                                           $ 87,013                                                           ==================== ====== ====================                      ==================== ====== ====================                      ==================== ======= ====================                      ==================== ====== ====================                                                                                                                                                                                                                                                                                       

About K12 Inc.

K12 Inc. LRN +2.14% is leading the transformation to individualized learning as the nation’s foremost provider of technology-powered online solutions for students in pre-kindergarten through high school. K12 has worked with over 2,000 school districts and has delivered more than four million courses over the past decade. K12 provides curricula, academic services, and learning solutions to public schools and districts, traditional classrooms, blended school programs, and families. K12’s curriculum is rooted in decades of research combined with 21st-century technology by cognitive scientists, interactive designers and teachers. K12’s portfolio of more than 550 unique courses and titles–the most extensive in the technology-based education industry–covers every core subject and four academic levels for high school including Honors and AP. K12 offers credit recovery courses, career-building electives, remediation support, six world languages and a deep STEM offering. The K12 program is offered through K12 partner public schools in more than two-thirds of the states and the District of Columbia, and through private schools serving students in all 50 states and more than 100 countries. More information can be found at K12.com.

SOURCE: K12 Inc.

                K12 Inc.         Investor Contact:         Christina L. Parker, 703-483-7077         VP Investor Relations         chparker@k12.com         or         Press Contact:         Jeff Kwitowski, 703-483-7281         SVP Corporate Communications         jkwitowski@k12.com