Thank you, Assemblywoman Susan Bonilla, for writing a bill to ban for-profit operators of virtual schools.

The bill, Assembly Bill 1084, “would prevent charter schools that do more than 80 percent of their teaching online from being operated by for-profit companies or hiring them to facilitate instruction. If passed and signed into law by Gov. Jerry Brown, the legislation would effectively put companies like K12 out of business in the Golden State.

“Our taxpayer dollars should be spent in the classroom to help our students, not used to enrich a company’s shareholders or drive up its profits,” Bonilla said in an interview.

But K12 spokesman Mike Kraft railed against the proposal, calling it “another cynical effort to take away the rights of parents to choose the way their kids are educated.”

How cynical are those “special interests” who want to take away K12 Inc.’s ability to profit while providing inferior education!?

That company is K12 Inc., a publicly traded Virginia firm that allows students who spend as little as one minute during a school day logged onto its software to be counted as “present,” as it reaps tens of millions of dollars annually in state funding while graduating fewer than half of its high school students. Students who live almost anywhere south of Humboldt County may sign up for one of the company’s schools.

Assemblywoman Bonilla was acting in response to a brilliant series of articles by Jessica Calefati in the San Jose Mercury News, exposing the profitable but educationally bankrupt K12 Inc., the corporation founded by the Milken brothers and publicly traded on the New York Stock Exchange.

I hope Assemblywoman Bonilla and the media will review the abundant research on K12 Inc, such as the Credo study or the NEPC study. What she will learn is that students in online charter schools lose ground and fall behind their peers in real schools.

If California chooses to waste millions of taxpayer dollars on bad schools to enrich the stockholders and the Milken family, shame on the legislators and the governor.

via Diane Ravitch’s blog

http://ift.tt/1UowL7f

Investigation: Founder cashed in on Wellington’s Eagle Arts charter

Updated: 4:31 p.m. Thursday, July 9, 2015Posted: 4:31 p.m. Thursday, July 9, 2015

By Andrew Marra


Palm Beach Post Staff Writer

WELLINGTON —

Eagle Arts Academy, one of Palm Beach County’s largest charter schools, opened last August with the goal of establishing a performing arts mecca for children on a sprawling campus in the heart of Wellington.

But while the publicly funded school ran up hundreds of thousands of dollars in debt and struggled to put in place its arts-infused curriculum, a Palm Beach Post investigation has found that it served a very different purpose: filling the bank accounts of its founder’s private businesses.

As the K-8 school opened last year, Eagle Arts Academy required its roughly 680 students to buy high-priced uniform shirts from a company set up by founder Gregory James Blount, a former model and events producer.

Though Blount’s company marketed itself to parents and the county school board as a “foundation” to support Eagle Arts, The Post found that the company is not a federally recognized nonprofit and that little of its revenue from uniform sales went to the school.

Blount’s company also offered after-school courses to students but charged them for the classes and kept the profits, Blount admitted. Though his business operated on school grounds for three months, records and interviews show it did so with no lease and paid no rent, an arrangement that a school district administrator called “unusual.”

While that company drew tens of thousands of dollars from Eagle Art’s students, another of Blount’s companies made more than $125,000 in taxpayer dollars from the school through a contract he obtained while serving as the school’s volunteer chairman.

Blount, 46, won the money by arranging for his company to receive a contract to create the school’s arts-infused curriculum, despite the fact that he had no education background and had never designed a curriculum.

Little oversight

on finances

Though Eagle Arts is a nonprofit school, Blount’s efforts to steer parents’ cash and public tax dollars toward his own businesses offer a glimpse into the ways that charters, which are operated with public money but little independent oversight, can become profit centers for their managers and founders.

Florida’s lax charter school regulations let people with little education experience open schools that draw millions of taxpayer dollars if enough students enroll. Too often, critics say, weak oversight sets the stage for financial self-dealing.

“Do we like it? No,” said Jim Pegg, who oversees the county’s charter schools for the Palm Beach County School District. “Is it legal? Yes.”

Blount’s money-making didn’t stop with those two companies. Records show he drew an additional $7,500 from the school through a third business, Sound Tree Entertainment, for consulting services. Sound Tree is also poised to earn thousands of dollars in interest from Eagle Arts after loaning it nearly $39,000 at a 7.5 percent compound interest rate, school records show.

Founder concedes:

I made mistakes

Eagle Arts’ charter with the school board prohibits its board members from profiting from the school, stating that “no member of the school’s governing board shall receive compensation, directly or indirectly, from the school’s operations.”

But Pegg said that Blount avoided any violation of the school’s charter by resigning as chairman in the weeks before the charter went into effect, then resuming his position after his business relationships with the school had ended.

In an interview, Blount told The Post that he “made mistakes” while getting the school started. But he said he broke no laws, and that everything he did was in the interest of opening the school quickly and transforming the educational experience of its students.

“It’s not like I was ever out there saying, ‘How does Greg make money off this every step of the way?’” he said.

Instead, Blount blamed his business arrangements on bad advice from the school’s management company and logistical problems that he said required him to offer up his own businesses as solutions.

“I worked 80-hour work weeks from March 2014 to August 2014 to open the school,” he said. He added that “we opened the school a year early.”

With the school’s first year completed, many parents defend Blount, saying that his financial dealings don’t detract from his leadership.

“Gregory is a revolutionist, and I have no worries in regards to the financial future of Eagle Arts,” said Amy Ackerman, who enrolled her daughter in second grade at the school last year. “I believe that they are paving the way to a much brighter education in Wellington and the surrounding areas.”

But even in Blount’s telling, the prospect of making money in Florida’s booming charter school industry was on his mind from the beginning. More than $1.5 billion a year in state money flows into Florida’s charter schools, which are spreading quickly across the state and now total more than 650.

Blount said he became interested in starting a charter school after emerging from personal bankruptcy in 2010 and operating a small business that gave acting and modeling classes.

His motives, he said, were two-fold: to create a new learning style that teaches traditional subjects through technology and arts, and to build a business selling it.

Curriculum expert,

founder clash

To open the school and run it, Blount enlisted Liz Knowles, a longtime educator and former administrator at the private Pine Crest School in Fort Lauderdale. It was Knowles who would have run the school and designed the curriculum, which Blount named “Artademics.”

But Knowles told The Post that she and Blount soon clashed. One of the final straws, she said, was when she learned he had started a company and named it after their curriculum, Artademics, without telling her.

When she confronted him about it, she recalled, he sought to put her at ease.

“He said, ‘Don’t worry, Liz. You’ll be rich,’” Knowles recalled. Blount denied making the comment.

But Knowles decided she couldn’t work with him and left shortly before the school year began, taking her draft of the school’s new curriculum with her.

By then, Blount’s company had obtained the contract to write what the school already was touting as its signature curriculum. With Knowles gone, he undertook the project himself.

Blount said that “I don’t claim to be an educator.” But he hired people with teaching backgrounds to help him, including, he said, a teacher on the school’s staff.

Starting in September, Blount’s company pulled in more than $127,000 from school coffers during a seven-month period, records show. The money was steered to the company through the school’s management company, iSchools, which contracted with Artademics at the board of directors’ request.

Yet months passed without the curriculum making an appearance at Eagle Arts.

After protests from parents and the departure of dozens of students, the school’s management company warned him in November that he would be in breach of his contract if he didn’t deliver the curriculum soon. He turned in the first installment weeks later.

A copy of the curriculum reviewed by The Post shows that it calls for students to read classic children’s books like Peter Pan and Alice in Wonderland and do reading- or math-based exercises afterward, such as counting balloons, inventing additional characters or creating paper cut-outs of Victorian homes.

Blount pointed out that he did not keep all of the money that Artademics earned.

“The money that went to Artademics LLC did not go directly to me,” he said. “It went to my company, which has consultants working to develop the curriculum.”

‘Foundation’ profited

from uniforms, classes

While Blount pulled payments from the school through Artademics, his “foundation” sold the school’s roughly 680 students their mandatory uniform shirts and provided after-hours lessons — all at a markup.

Blount declined to provide specifics about his company’s uniform sales. But a sales receipt shows his company charged $24 for polo shirts, 50 percent more than some other area charter schools charge. Students at the Somerset Academy and the Renaissance Charter School chains, for instance, pay about $16 for similar shirts.

Blount defended his prices, saying that they included the cost of stitching on the school’s eagle logo, to which Blount said he owns the copyright.

“The cost and quality of the uniform tops are comparable to other schools and uniform stores,” he said.

Thais Gonzalez, a parent who has been critical of the school’s management, said the shirt prices seemed high when she ordered four last year for her two enrolled children. But she said she didn’t mind because she thought the money was going to a nonprofit foundation supporting Eagle Arts.

“I was happy to do it because it was supporting my children’s school,” she said.

But while Blount said his company, EMPPAC Foundation, bought some equipment for students to use at the school, he admitted that his company kept nearly all of the money, with most of it going to his fiancée’s salary.

Blount initially told The Post that EMPPAC donated only a few cameras to the school. But on Thursday, he said that it had also provided other services, including lighting equipment, the use of a phone and website design.

“The foundation incurred thousands of dollars in expenses on behalf of the school,” he said.

He also said Thursday that “there was a check from the EMPPAC foundation to the school.” But a spokeswoman for Eagle Arts, responding to a public records request, said previously in a statement that the school had no official record of any donations from the company.

Though Eagle Arts billed Blount’s company as a “foundation” to the county school board, IRS records show the company is not a federally recognized foundation or other nonprofit. While the company lists itself as a nonprofit on state corporate filings, Blount said the company pays federal taxes and effectively operates as a for-profit business under federal law.

He said his company intends to apply to the IRS for non-profit status.

Even so, records and interviews show Eagle Arts allowed EMPPAC to sell its after-school courses to students on campus for three months without signing a lease or paying the school for the use of its space. Blount said he requested a lease from the school but was never given one.

Pegg called the arrangement “unusual” but said that giving a company free access to its campus was the school’s prerogative.

‘At some point I’ve

got to make a living’

EMPPAC’s money-making activities at the school stopped in January, Blount said, and Artademics stopped drawing payments in April as the school separated from its private management company, which oversaw Artademics’ contract.

Blount resumed his position as chairman of the school’s board of directors in May, barring him or his companies from profiting from the school. Records show, though, that one of Blount’s companies, Sound Tree Entertainment, still stands to collect thousands of dollars in interest from its loan to the school.

Blount said that the payments to Sound Tree are intended to compensate him for costs he incurred in drawing up the school’s 130-page application to the school board.

“As for Sound Tree, the school would not be in existence if I did not spend the thousands of hours to write and then re-write the charter application,” he said.

He added that he “rented space in Delray Beach to work from at $2,600 a month and yet did not charge the school for the years of shared rent during the charter-writing process.”

Though he acknowledged missteps, Blount said he devoted countless hours to setting up Eagle Arts. The school opened a year earlier than initially planned, he said, causing a rush to get things arranged last summer.

“If I’d had this last year, I wouldn’t have made those mistakes,” he said.

He said he is still designing a curriculum for the school but will now donate his work.

Still, although board members serve as volunteers, Blount argued he was entitled to compensation for his work.

“What you’re missing is the thousand-plus hours I spent at this school,” he said. “At some point I’ve got to make a living.”

Maria Ironstone, the school’s parent liaison, said that the school has had “challenges” but that Blount has the support of parents.

“I have worked with many amazing people in my career, but never one as dedicated to the cause as Mr. Blount,” she said in an email. “Since he became chairman of the board we are back on track with our vision.”

The school district said that the school has run up hundreds of thousands of dollars in debts to its management company and a contractor, raising worries about its financial future and setting the stage for possible litigation.

But Eagle Arts plans to open this August with what Blount says he hopes will be an even larger enrollment.

“Did we make mistakes? Yes. What company doesn’t make mistakes?” Blount said. “We’re intent on fixing them and moving forward.”

Staff researcher Melanie Mena contributed to this story.

Governor Brown has until October 11 to sign or veto legislation that would ban for-profit charter schools in California. it is outrageous to squander taxpayer dollars on profits for investors and outrageous executive salaries. This bill should be a slam dunk for Governor Brown, a man with a keen sense of justice. Now I hope the legislature tightens oversight of nonprofit charter schools and reviews their executive salaries to be sure that they really are nonprofit. And while they are at it, they should ban charter schools in affluent communities, which violate the spirit if the charter movement, which wassupposedto help the neediest kids, not to enable rich parents to create a publicly-funded private school for their children.

Here is the legislation awaiting Governor Brown’s signature:

“For-profit charter schools: Charter schools run by for-profit corporations would not be allowed in California under the terms of AB 787, authored by Assemblyman Roger Hernández, D-West Covina, which passed the Legislature. Six for-profit charter schools operate in the state, and California Virtual Academies, managed by the for-profit K12 Inc., is the largest. The bill’s author noted that K12 paid its top six executives a total of nearly $11 million in 2011-12, while the average California Virtual Academies teacher’s salary was $36,150, about half of the average teacher pay in the state. The author raised the question of whether a for-profit corporation would try to limit services to students to increase profits.”

via Diane Ravitch’s blog http://ift.tt/1PNH93t

Governor Brown has until October 11 to sign or veto legislation that would ban for-profit charter schools in California. it is outrageous to squander taxpayer dollars on profits for investors and outrageous executive salaries. This bill should be a slam dunk for Governor Brown, a man with a keen sense of justice. Now I hope the legislature tightens oversight of nonprofit charter schools and reviews their executive salaries to be sure that they really are nonprofit. And while they are at it, they should ban charter schools in affluent communities, which violate the spirit if the charter movement, which wassupposedto help the neediest kids, not to enable rich parents to create a publicly-funded private school for their children.

Here is the legislation awaiting Governor Brown’s signature:

“For-profit charter schools: Charter schools run by for-profit corporations would not be allowed in California under the terms of AB 787, authored by Assemblyman Roger Hernández, D-West Covina, which passed the Legislature. Six for-profit charter schools operate in the state, and California Virtual Academies, managed by the for-profit K12 Inc., is the largest. The bill’s author noted that K12 paid its top six executives a total of nearly $11 million in 2011-12, while the average California Virtual Academies teacher’s salary was $36,150, about half of the average teacher pay in the state. The author raised the question of whether a for-profit corporation would try to limit services to students to increase profits.”

via Diane Ravitch’s blog http://ift.tt/1PNH93t

Governor Brown has until October 11 to sign or veto legislation that would ban for-profit charter schools in California. it is outrageous to squander taxpayer dollars on profits for investors and outrageous executive salaries. This bill should be a slam dunk for Governor Brown, a man with a keen sense of justice. Now I hope the legislature tightens oversight of nonprofit charter schools and reviews their executive salaries to be sure that they really are nonprofit. And while they are at it, they should ban charter schools in affluent communities, which violate the spirit if the charter movement, which wassupposedto help the neediest kids, not to enable rich parents to create a publicly-funded private school for their children.

Here is the legislation awaiting Governor Brown’s signature:

“For-profit charter schools: Charter schools run by for-profit corporations would not be allowed in California under the terms of AB 787, authored by Assemblyman Roger Hernández, D-West Covina, which passed the Legislature. Six for-profit charter schools operate in the state, and California Virtual Academies, managed by the for-profit K12 Inc., is the largest. The bill’s author noted that K12 paid its top six executives a total of nearly $11 million in 2011-12, while the average California Virtual Academies teacher’s salary was $36,150, about half of the average teacher pay in the state. The author raised the question of whether a for-profit corporation would try to limit services to students to increase profits.”

via Diane Ravitch’s blog http://ift.tt/1PNH93t

Governor Brown has until October 11 to sign or veto legislation that would ban for-profit charter schools in California. it is outrageous to squander taxpayer dollars on profits for investors and outrageous executive salaries. This bill should be a slam dunk for Governor Brown, a man with a keen sense of justice. Now I hope the legislature tightens oversight of nonprofit charter schools and reviews their executive salaries to be sure that they really are nonprofit. And while they are at it, they should ban charter schools in affluent communities, which violate the spirit if the charter movement, which wassupposedto help the neediest kids, not to enable rich parents to create a publicly-funded private school for their children.

Here is the legislation awaiting Governor Brown’s signature:

“For-profit charter schools: Charter schools run by for-profit corporations would not be allowed in California under the terms of AB 787, authored by Assemblyman Roger Hernández, D-West Covina, which passed the Legislature. Six for-profit charter schools operate in the state, and California Virtual Academies, managed by the for-profit K12 Inc., is the largest. The bill’s author noted that K12 paid its top six executives a total of nearly $11 million in 2011-12, while the average California Virtual Academies teacher’s salary was $36,150, about half of the average teacher pay in the state. The author raised the question of whether a for-profit corporation would try to limit services to students to increase profits.”

via Diane Ravitch’s blog http://ift.tt/1PNH93t

Governor Brown has until October 11 to sign or veto legislation that would ban for-profit charter schools in California. it is outrageous to squander taxpayer dollars on profits for investors and outrageous executive salaries. This bill should be a slam dunk for Governor Brown, a man with a keen sense of justice. Now I hope the legislature tightens oversight of nonprofit charter schools and reviews their executive salaries to be sure that they really are nonprofit. And while they are at it, they should ban charter schools in affluent communities, which violate the spirit if the charter movement, which wassupposedto help the neediest kids, not to enable rich parents to create a publicly-funded private school for their children.

Here is the legislation awaiting Governor Brown’s signature:

“For-profit charter schools: Charter schools run by for-profit corporations would not be allowed in California under the terms of AB 787, authored by Assemblyman Roger Hernández, D-West Covina, which passed the Legislature. Six for-profit charter schools operate in the state, and California Virtual Academies, managed by the for-profit K12 Inc., is the largest. The bill’s author noted that K12 paid its top six executives a total of nearly $11 million in 2011-12, while the average California Virtual Academies teacher’s salary was $36,150, about half of the average teacher pay in the state. The author raised the question of whether a for-profit corporation would try to limit services to students to increase profits.”

via Diane Ravitch’s blog http://ift.tt/1PNH93t

Governor Brown has until October 11 to sign or veto legislation that would ban for-profit charter schools in California. it is outrageous to squander taxpayer dollars on profits for investors and outrageous executive salaries. This bill should be a slam dunk for Governor Brown, a man with a keen sense of justice. Now I hope the legislature tightens oversight of nonprofit charter schools and reviews their executive salaries to be sure that they really are nonprofit. And while they are at it, they should ban charter schools in affluent communities, which violate the spirit if the charter movement, which wassupposedto help the neediest kids, not to enable rich parents to create a publicly-funded private school for their children.

Here is the legislation awaiting Governor Brown’s signature:

“For-profit charter schools: Charter schools run by for-profit corporations would not be allowed in California under the terms of AB 787, authored by Assemblyman Roger Hernández, D-West Covina, which passed the Legislature. Six for-profit charter schools operate in the state, and California Virtual Academies, managed by the for-profit K12 Inc., is the largest. The bill’s author noted that K12 paid its top six executives a total of nearly $11 million in 2011-12, while the average California Virtual Academies teacher’s salary was $36,150, about half of the average teacher pay in the state. The author raised the question of whether a for-profit corporation would try to limit services to students to increase profits.”

via Diane Ravitch’s blog http://ift.tt/1PNH93t

Governor Brown has until October 11 to sign or veto legislation that would ban for-profit charter schools in California. it is outrageous to squander taxpayer dollars on profits for investors and outrageous executive salaries. This bill should be a slam dunk for Governor Brown, a man with a keen sense of justice. Now I hope the legislature tightens oversight of nonprofit charter schools and reviews their executive salaries to be sure that they really are nonprofit. And while they are at it, they should ban charter schools in affluent communities, which violate the spirit if the charter movement, which wassupposedto help the neediest kids, not to enable rich parents to create a publicly-funded private school for their children.

Here is the legislation awaiting Governor Brown’s signature:

“For-profit charter schools: Charter schools run by for-profit corporations would not be allowed in California under the terms of AB 787, authored by Assemblyman Roger Hernández, D-West Covina, which passed the Legislature. Six for-profit charter schools operate in the state, and California Virtual Academies, managed by the for-profit K12 Inc., is the largest. The bill’s author noted that K12 paid its top six executives a total of nearly $11 million in 2011-12, while the average California Virtual Academies teacher’s salary was $36,150, about half of the average teacher pay in the state. The author raised the question of whether a for-profit corporation would try to limit services to students to increase profits.”

via Diane Ravitch’s blog http://ift.tt/1PNH93t

K12 Inc. is a for-profit virtual charter school chain that trades on the New York Stock Exchange. It was founded by Michael Milken and Lloyd Milken. It is funded with taxpayer dollars. It advertises and recruits heavily to keep enrollment up. It has a high attrition rate.


Its cash-cow operation is the Ohio Virtual Academy. Look for significant lobbying in New Jersey, Illinois, Connecticut, Kentucky and New York, according to the investor conference call.


I don’t know about you, but I had a hard time reading this transcript. They might just as well have been discussing a corporation that sells tires, toothpaste, bundled mortgages, or manure. These guys are profiting from taxpayer dollars that are supposed. To pay for public schools, for bands, for nurses, for guidance counselors, for reduced class sizes, for libraries. They are taking money away from real instruction, real children, real schools. Have they no sense of shame? Would any of the investors on this call put their own children in a K12 virtual charter school? Bet not. Bet their kids are in really nice suburban schools or elite private schools.Not sitting in front of a computer and calling it a “school.” It’s not. It’s a business, and the kids it recruits don’t get an education.


http://investors.k12.com/phoenix.zhtml?c=214389&p=irol-reportsannual


RISK FACTORS (Page 33-48)


Page 42


“We generate significant revenues from two virtual public schools, and the termination, revocation, expiration or modification of our contracts with these virtual public schools could adversely affect our business, financial condition and results of operation.


“In fiscal year 2013, we derived approximately 11% and 14% of our revenues, respectively, from the Ohio Virtual Academy and the Agora Cyber Charter School in Pennsylvania. In aggregate, these schools accounted for approximately 25% of our total revenues. If our contracts with either of these virtual public schools are terminated, the charters to operate either of these schools are not renewed or are revoked, enrollments decline substantially, funding is reduced, or more restrictive legislation is enacted, our business, financial condition and results of operations could be adversely affected.


“Note at a k12, inc investor conference call on 10/9 the company addressed the loss of the management agreement for Agora Cyber Charter School in PA. http://www.huffingtonpost.com/2014/10/01/charter-schools-k12_n_5914580.html


“The school will continue to use the k12, inc curriculum, but will self-manage.

http://www.marketwatch.com/story/k12-inc-awarded-contract-to-be-curriculum-provider-for-agora-cyber-charter-school-2014-10-09″


Here is the transcript of the investor conference call. Grab your vomit bag.


http://seekingalpha.com/article/2559155-k12-inc-2015-guidance-update-call-oct-09-2014?part=single


K12, Inc., 2015 Guidance/Update Call, Oct 09, 2014


Oct. 9, 2014 3:30 PM ET | About: K12 Inc. (LRN)


K12 Inc. (NYSE:LRN)


October 09, 2014 8:30 am ET


Executives


Mike Kraft – Vice President of Investor Relations


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


James J. Rhyu – Chief Financial Officer and Executive Vice President


Timothy L. Murray – President and Chief Operating Officer


Analysts

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

Corey Greendale – First Analysis Securities Corporation, Research Division

Jason P. Anderson – Stifel, Nicolaus & Company, Incorporated, Research Division

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

Sou Chien – BMO Capital Markets Canada


Operator


Greetings, and welcome to the K12 Inc. Guidance Conference Call for Fiscal Year 2015. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mike Kraft, Vice President of Finance. Please go ahead, sir.


Mike Kraft – Vice President of Investor Relations


Thank you, and good morning. Welcome to K12’s Fiscal Year 2015 Guidance Conference Call. Before we begin, I would like to remind you that in addition to historical information, certain comments made during this conference call may be considered forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and should be considered in conjunction with cautionary statements contained in our guidance release in the company’s periodic filings with the SEC.


Forward-looking statements involve risks and uncertainties that may cause actual performance or results to differ materially from those expressed or implied by such statements.


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


For further information concerning risks and uncertainties that could materially affect financial and operating performance and results, please refer to our reports filed with the SEC, including, without limitation, cautionary statements made in K12’s 2014 Annual Report on Form 10-K. These filings can be found on the Investor Relations section of our website at http://www.k12.com.


This call is open to the public and is being webcast. The call will be available for replay on our website for 60 days.


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

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


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


Thank you, Mike. Good morning, everyone. Thanks for joining us on the call today. We wanted to provide you with an update on our fiscal year 2015 count date enrollment as well as a guidance for the first quarter and for the full year.


Today’s guidance is a reflection of the trends in the markets that I outlined during our fourth quarter earnings call. Specifically, we saw a couple of our charter schools deciding to self manage their online learning programs. We’re also seeing more traditional school districts offering their own full-time online programs, along with supplemental learning options and online summer courses.

Education is evolving for the better, and families today have more choices in choosing full-time or part time virtual programs for their child. We believe that overall demand for virtual options in education is increasing, and this is translated into stronger demand for our institutional group, Fuel Education or FuelEd, which provides content and curriculum to school districts as well as private and charter school operators. At the same time, these market dynamics have also created a challenge to enrolling students in our traditional managed programs. And to help you understand this transition, we’re providing new guidance on student enrollment and revenue to clearly outline how K12 is participating in the growth of online learning use in public school classrooms.


Student enrollment and revenue data will now be provided for Managed and Non-managed Programs. Managed Programs are where K12 provides substantially all of the administration and education program management for an online program. Non-managed Programs include schools where K12 is the primary provider of content and technology and we may even provide instruction, management or other educational services, but K12 is not providing primary administrative oversight for the virtual school program.

And as you can see from the data we provided in this morning’s release, the 4.7% reduction in student enrollment from managed schools reflects this new market dynamic. It also reflects the events in Tennessee, where the state imposed an arbitrary enrollment cap midway through the enrollment season; and in Colorado, where our school partner took longer than expected to finalize their charter and subsequently, the curriculum contract with K12. We believe that enrollment in these 2 states were impacted by over 4,000 students this season. Also, this year, K12, in collaboration with the school boards we serve, made a concerted effort to keep students enrolled only if they were truly engaged and ready to learn, which also affected Managed Program enrollments.


Our partners are serious about running high-quality charter schools, with students who realize this is hard work. And they want to succeed by putting in the work. And while this is slow to growth in the near term, it better matches students to our core curriculum strengths and improves our reputation as a firm who is serious about providing high-quality education.


Even with the market evolution that’s beginning to unfold, we continue to see strong demand in Managed Public Schools. This year, we saw solid growth in select markets, including Texas, Michigan, Florida and Georgia. And at some point, we believe states like New Jersey, Illinois, Connecticut, Kentucky and New York will become states that allow online charter schools, although these states could take quite some time before opening up.


We will also attempt to be one of the educational management organizations chosen in North Carolina as that market commences an online charter trial next year.


Now on Managed Public Schools, we will continue to work closely with the schools to improve academic outcomes for our students. Our students first program, which we started 18 months ago, is focused on curriculum, programs, teaching approaches and other activities to enhance academic performance. While this program has somewhat affected enrollment growth, we are excited about the improvements in academic outcomes we now see. Because we have school data faster this year, we will be able to discuss specific evidence of the improvement in our student outcomes on our first quarter earnings call.


In Non-managed Programs enrollments, we saw an increase of more than 39%, which is in line with the broader participation by school districts and online programs. You should note that some of these gains were due to the Managed Programs transitioning from the Non-managed Programs in Colorado and Hawaii. However, excluding the reclassification of these schools, the year-over-year growth in this category of enrollment was 24%.


Now let’s turn to our financial guidance for the full year. For fiscal year 2015, we expect revenues in the range of $925 million to $950 million. This is about a 1% to 3% increase versus our reported revenues for fiscal year 2014. Excluding the sale of select businesses completed last year, revenues are anticipated to climb 2.5% to 3 — to 5%. I’m sorry, 2.5% to 5% for fiscal year 2015.


We would look for Managed Program revenues to increase 1.5% to 3%. And while enrollments have declined this year, we believe overall revenue per student will increase on a year-over-year basis. This is resulting from a combination of factors, including school mix, an improved funding environment in some states and other variables.


At the same time, we look for Non-managed Program revenues to increase 10% to 25%, largely as a result of enrollment gains this year. We already mentioned the 2 schools moved from a managed to a nonmanaged relationship, which contributes to these gains.

In addition to the increase in Non-managed Program enrollment, our institutional business, FuelEd, is seeing an increase in school districts for other educational software and services. We believe this demand will translate into high single to low double-digit revenue gains year-over-year as compared to our fiscal 2014 performance, which was a double-digit decline.


All of our comments exclude the sale of the select businesses we’ve mentioned.


In total, even with the headwinds we’re facing in managed public programs, we are looking at the emergence of FuelEd as being one key growth driver for K12 over the long term. To support FuelEd’s growth, we will make targeted investments in people, systems and product capabilities over multiple years to position this business for long-term success.


Now turning to operating income. We expect operating income in the range of $30 million to $40 million. This reduction in both operating income and operating margin reflects our commitment to academic outcomes and a structured multiyear investment to enhance our systems and other infrastructure as well as to hire teachers earlier for better training and even more focus on academic results.


As I mentioned in our fourth quarter earnings call, these expenditures will be focused in 3 areas. First, we have been and will continue this year to invest in the effectiveness of our teachers and our school leaders. Second, we will continue the development of new instructional approaches that increase student and parental involvement. In particular, we will implement some hybrid school models and activities that support the families to which we provide services. And third, we will enhance our curriculum and systems architecture. This includes improving core systems with an eye toward mobility, more information for teachers about students’ progress, greater accessibility for students with disabilities and updating our content as state standards and state assessments change. Please do not view this increase in investment as a reflection of lax expense management. In fact, it’s quite the contrary. K12, as a whole, continues to improve its efficiency in resource utilization, and we are keenly aware we need to make every dollar count.

From a capital perspective or CapEx, as we have historically defined it, we would expect to invest in the range of $75 million to $85 million. This would include curriculum and software developments, student computers and infrastructure costs. The year-over-year increase results from investments relating to compliance requirements, specifically improving accessibility for other — our services, as I mentioned, and the previously announced implementation of a new learning management platform for our high school students.

And lastly, our tax rate is expected to be approximately 38% to 40%, which is in line with our effective rate for fiscal year ’14.

I also want to note that in conjunction with announcing our first quarter results later this month, we will provide fiscal year 2014 revenue and enrollment data by quarter in a new reporting format to help you better understand and track the trends in our business.

In closing, I want to be clear that our #1 mission will always be improving the economic outcomes for all the students we serve, and I’m extremely proud that our investments are now showing returns in academic results. And we can discuss that in our first quarter call.


We continue to support our independent school boards in their quest to build great schools, while, at the same time, working with public school districts to offer them new educational choices for their students. K12 will make ongoing investments to ensure teachers have the best tools, students have the best curriculum and we’re continuing to drive innovative pathways for educating students across the nation.


Thanks very much, and I’ll now move to Q&A. Operator, who’s our first question from?


Question-and-Answer Session


Operator


[Operator Instructions] Our first question today is coming from Jeff Meuler from Robert W. Baird.


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


I guess, just — can you provide us some sort of framework? Obviously, you’re investing a lot in terms of driving student outcomes, and that’s your #1 priority. After fiscal ’15 and adjusted for the change in the Agora contract, how should we think about incremental or decremental margins on revenue growth past that point?


James J. Rhyu – Chief Financial Officer and Executive Vice President


Jeff, it’s James. So in fiscal ’16, when the first year of the Agora contract comes into play, we’ll obviously provide more color as we get closer to fiscal ’16. But directionally, you’re going to see, obviously, I think a fairly significant decline in revenue. And if you look at our release from earlier today, we kind of indicated that we’ve got about 75% of the revenue is going to largely go away as we reported for that specific contract. But we will retain a disproportionate amount of the profit margin. So structurally, long term, it’ll actually work to improve structural margins, but decrease revenues fairly significantly.


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


Yes. I guess I’m trying to access the Agora impact. And I’m just saying if we come up with our assumptions for what revenue or enrollment are going to do in the out years, how should we think about incremental margins? And I’m asking that from the standpoint that this year, revenue is still expected to be slightly up, EBIT’s down meaningfully. And I’m just trying to figure out how much of it is a kind of a onetime step up in investment. I think there was a phrase called structured multiyear investment.


James J. Rhyu – Chief Financial Officer and Executive Vice President


Yes. So sorry, let me see if I can clear that up and maybe Nate can jump in. But — so I think, structurally, long term — longer term, we do I think see — this year, we do have a little, but we have a bit of a dip in our margin. I think as you model that longer term, we do think we have some expansion opportunities. And so again, without putting an exact expansion range, I — we will get some structural increases in margins in the outer years for sure.


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


I think you’re looking at — and it’s hard to put a specific date and time on it because we haven’t done a detailed capital plan for 2 years out, but I think we’re looking at no more than about 24 months of investment. I’m thinking about that because I know that we are going to put Desire2Learn in the high school level next year. The year after that, we’ll put it at the — most likely at the kindergarten to eighth grade level. The changes we’re doing with hiring more teachers and changing the student-teacher ratio is not a — that’s something. Once you step it up, then you stay at that level. So I don’t think we’re looking at more than 18 to 24 months worth of increased investment, and then I think you’ll start to see margins get better from that perspective.


James J. Rhyu – Chief Financial Officer and Executive Vice President


I’ll also remind you, Jeff, that in — a lot of these investments are really focused in these — in the managed business. So for those Managed Programs, we are making these significant investments. As the FuelEd piece of the business grows, and we’ve been talking about this, those structural margins are higher. And so as that business scales, we think that’s going to give us some margin improvement in the outer years as well.


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


One last thing — okay. Go ahead.


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


So this is a related big-picture question. I mean, you’re framing it up that mission #1 is always improving academic outcomes, which — it’s the good and noble thing to do, absolutely, no disagreement there. But I’m just wondering, is your view that — you guys are deploying a lot of capital. Is this a business that is capable, while investing in academics at the necessary level, that you can return — generate returns on capital in excess of your cost of capital? I just — if you could comment on how you’re thinking about that as you deploy a lot of capital and as you invest in academic outcomes.


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


Yes. I think there’s — the answer to your question is yes. I think we can generate that kind of return and will. And here’s what I think about the capital and the future investments in the business. Number one, as I mentioned, a significant portion of the capital is the fixed infrastructure that we didn’t invest in, in certain steady years where we’ve grown really fast. So we have some catch-up to do, and that catch-up will take us another couple of years. And I think that it starts to slow down after that. Number two, remember that a significant portion of our capital sits in the category of student computers. And the cost of computers and the type of computers is changing. Cost of computers, while it’s not declining the way it used to, it’s still declining. And as we go to mobility, we’ll see more tablets and other devices as opposed to desktop computers, which were more expensive. So I expect to see some change in that over the long run. And then finally, the other portion of CapEx is in the product development category. And as I think about product development, we have a significant focus on trying to look at can we license for and build less ourselves? We have a curriculum that is very broad, from kindergarten to eighth grade. We’re very proud of that. We think we’re actually the only one that has done it as broad as we have. However, clearly, there are some portions which are more critical than others. And I’d like to spend our capital in the critical areas. And for those areas that are not as critical to the core, maybe I can license those more. So you’re going to see us over the next few years we’re doing more licensing and less CapEx spend. So I think you’ll see those changes. We think cloud services are something we’ve not taken advantage of in this company, and we’ll be doing more of that as well and that should reduce our need for capital and hardware. So I think that there’s a number of opportunity areas for us over the next couple of years.


James J. Rhyu – Chief Financial Officer and Executive Vice President


Jeff, I’ll just — maybe to put a slightly different point on it as well. I think in 2013 to 2014, we almost doubled our return on invested capital year-over-year. That will obviously decline this year. I think that, again, structurally, longer term, whether we approach our cost of capital and exceed it, I think structurally, long term, we will do a much better job of getting closer to the — to our capital structure cost. So we’re — obviously, we’re in a couple of year transition period here, as Nate mentioned, and I think it’s going to be tough in those years to return at the levels even at last year maybe, but I think, structurally, long term, we’re going to get back there.


Operator


Our next question today is coming from Corey Greendale from First Analysis.


Corey Greendale – First Analysis Securities Corporation, Research Division


So first, I have just kind of a mechanical question, which is — and I apologize if I’m the only one missing this. But I’m not sure I understand what’s the pro forma enrollment that you gave, why the Q1 of fiscal ’15 Managed Public School enrollment is different in the pro forma that it is in the new disclosure.


James J. Rhyu – Chief Financial Officer and Executive Vice President


I’ll chime in. It’s — in total, they’re the same. Some of the enrollments that were shown last year in the old formats are now classified as Non-managed Programs, so…


Corey Greendale – First Analysis Securities Corporation, Research Division


I understand that. I don’t understand why the — this year, enrollment number is different in the pro forma than in the actual.


James J. Rhyu – Chief Financial Officer and Executive Vice President


Sorry, Corey, this is James. Just — can you — which numbers are you referring to specifically just so I make sure I understand the question?


Corey Greendale – First Analysis Securities Corporation, Research Division


Yes. I’m talking about in the release, where you can see pro forma at the previous disclosure, Managed Public School student enrollment for Q1 fiscal ’15 is 124,563. Why is that number different from the 118,609? [indiscernible]


James J. Rhyu – Chief Financial Officer and Executive Vice President


Okay. We got it. So sorry. So in the lower number, where it says the previous disclosure, that 124, what we wanted to do is we wanted to give everybody just for the sake of an apples-to-apples comparison a view of if we counted everything the exact same way year-over-year, what would the number look like. And then in the upper number, in the — where it’s a nondisclosure Managed Programs, the 118,609, that’s newly defined, as Nate mentioned in his comments, a school like COVA or HTA, which now actually is being defined as a nonmanaged program because the way that we service that school is kind of in a nonmanaged — power-defining nonmanaged. So it’s — up top, it’s actually in the 20,630 number. So it’s a little bit of a reclassification. But just for consistency’s sake, we wanted to be able to show that 128,550 from last year’s count date on an apples-to-apples basis to this year to be transparent.


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


To make that simple for you, about 6,000 of the 20,000 is in those schools, and it would move into the Managed Programs. So the 118,000 would be at 124,000. That’s the portion of that 20,630 that actually in previous years would have been counted in the Managed Programs category.


Corey Greendale – First Analysis Securities Corporation, Research Division


Okay, that helps me. And relative to the prior classification, it’s — is it the 118,609 number that would drive the Managed Public School enrollmentManaged Public Schools revenue segment, segment revenue or…


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


Yes. Yes, so that’s the more comparable number to the — to how the revenue gets driven in the previous — how we previously disclose it, yes.


Corey Greendale – First Analysis Securities Corporation, Research Division


Okay, that helps me. Next question is on the enrollment. So I understand there were specific issues in Tennessee and Colorado. Beyond that, is there anything specific you can point to? And I’m also wondering whether Agora enrollment this year would hit it all as a result of the various kind of press reports and publicity around the renewal.


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


No. I don’t believe that the — well, first of all, the process that Agora went through was late in the enrollment season. I think they had their first board meeting on the RFP in August — no, the decision in the August time frame. And so we were heavy into the enrollment season. I don’t think it really had any impact on parents and enrollment at that time. However, we do see a different factor that’s going on in Pennsylvania, Ohio and the more mature states, including Arizona. And that is that the mature states that have greater penetration, there appears to be less market growth. And I’m not just talking K12. I’m talking about less growth and demand in those mature states. The penetration gets heavier. We see less growth and demand. And so yes, Pennsylvania was hit from that perspective. But when we look at last year’s numbers and what we see this year, we think that’s an overall market growth. Now as I mentioned, Texas and Florida and Michigan and Georgia and the states that have only been around for 3 or 4 years, those states have greater growth. But the more mature has slower growth, and that’s how you would have seen — that’s why you see Pennsylvania impacted.


Corey Greendale – First Analysis Securities Corporation, Research Division


And then, Nate, a little longer term. Since there’s a — what appears to be a macro trend for more schools providing more options on their own and at least, for this year, that seems to be outweighing the trend toward fully Managed Public School growth, is there any reason to think that trend reverses? Or if you think we’re kind of in this long-term secular shift, where there’s going to be growth — more growth in the institutional side and continuing declines in the managed public school enrollments, excluding new states, improving?


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


I think the dynamics really changed by state. So the answer I think in a state like Pennsylvania and Ohio is very different than an answer in a newer state and in states that haven’t grown yet. So if you’re looking at a brand-new state, there’s North Carolina, I think you’re going to see a greater demand for Managed Public Schools than you will see for options in an existing public school district because they’re just starting their cycle. In a state like, again, I’ll use Pennsylvania and Ohio, but there are others, Colorado, the ones that have been in the charter school moving for a longer period of time, I think you will see slower growth because the school districts are now starting to respond with their own programs. So it really depends on what state of the market that particular state is in, and that’s going to determine what’s going to happen. I’ll put them in 3 categories: mature, those have been around 3 to 4 years and those have not yet opened.


Corey Greendale – First Analysis Securities Corporation, Research Division


Okay, that helps. Just one last quick one and I’ll turn it over. James, I appreciate the guidance in the press release about the Agora impacts relative to Agora. I was hoping you might give us the impacts relative to the overall company, what you expect the revenue and operating income hit to be on a dollar basis in fiscal ’15.


James J. Rhyu – Chief Financial Officer and Executive Vice President


Yes. Why don’t we take that up in the first quarter conference call? I think we’re trying to make sure we think through all the public disclosure implications of how we describe that, so…


Operator


Our next question today is coming from Jason Anderson from Stifel.


Jason P. Anderson – Stifel, Nicolaus & Company, Incorporated, Research Division


On the — I know you talked about the investments, you laid those out, increasing some of the expense structure. How much — is there any increase in your — in the selling function, I guess, kind of — I don’t know if you can break it down more further into that. But is there — is that having an impact in 1Q as it typically does? Or is it purely the other investments you highlighted?


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


No. Yes, it does. We spent more on the promotional efforts this year than we had in previous years, and so that increase, I don’t expect to continue. I think that we will continue to try to move to a more targeted marketing efforts, so I think this is probably the last year that we’ll see an increase in the marketing expenses the way we did FY ’15 over FY ’14. I think FY ’16 will be a slightly different pattern. I can’t predict the specifics yet because we haven’t gone through that planning cycle yet. But trend-wise, I can tell you that, yes, we spent more in marketing this year than we did last year and I don’t expect us to continue to do that.


James J. Rhyu – Chief Financial Officer and Executive Vice President


Yes. Structurally, — sorry, structurally, I think some ways — the way to think about it in last year, fiscal ’14, we obviously had some operational issues. In some ways, I think, we tried to overcompensate this year just to make sure that we didn’t have some of those issues. And I think we’ll leave them out in subsequent years. So I do think that you’re going to see a benefit in some — in the future years in that quarter.


Jason P. Anderson – Stifel, Nicolaus & Company, Incorporated, Research Division


Okay. And then I know you highlighted some of the headwinds on the enrollment side. Was there any — just from a pure attrition standpoint, not including a higher level of graduates, was there any degradation in attrition from prior year to the fall?


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


We are seeing less on a percentage basis, and we’re seeing less attrition that happened in the period of the spring all the way into the enrollment. And then we seeing a little greater withdrawals in the period slightly after the enrollments are done, August up until October. And so what we can see our efforts and schools’ efforts to be more stringent about students who are not truant, who are not engaged, who are not there. There’s more of an effort on our part and the schools’ part to push those out. So yes, there is a little bit higher retention — I mean, withdrawals in that period. So the mix has changed a little bit on it and some of that’s been on purpose, obviously.


Jason P. Anderson – Stifel, Nicolaus & Company, Incorporated, Research Division


Great. And then a little more on Agora. Is the — is everything wrapped up there? Is there still the marketing and enrollment service piece that’s still outstanding? Or is that — are they bringing that in-house? And if not, is there a time line on that, that you’re aware of? And then one bit further about that, what’s the time line on their actual charter renewal? Like when would you guys know about that?


Timothy L. Murray – President and Chief Operating Officer


Jason, it’s Tim. From Agora’s perspective, I think they would say that all of the RFPs are now wrapped up. Our announcement this morning concluded the final RFP that had originally been issued back in the June time frame for the curriculum. They will both bring in-house and subcontract some of the marketing and enrollment services. We have indicated to them that we are willing to work with them as we go through the transition period if they determine that they need assistance in those areas going forward, so that door remains open. In terms of the charter renewal, their application was filed as required on October 1. We don’t know when the decisions are ultimately going to be made on that. The political climate in Pennsylvania, obviously, is expected to change with the Governor’s race very much up for a decision here soon. So we’re all waiting to see when the decision is made and how it’s made. But it’ll probably be sometime after the election, we would expect.


Operator


Our next question today is coming from Trace Urdan from Wells Fargo.


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


So just going back to mop up some of the new disclosure on the enrollment side. So the Non-managed Programs, that enrollment represents revenue that would fall inside what you have previously described as your institutional business. Is that correct?


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


Yes. So yes, Trace, that is largely true except for some of those reclassified enrollments that had previously kind of been in that Managed Public School category that now we’re calling Non-managed because we don’t provide a full — the full range of services to them.


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


Okay. So when we look at institutional business or the Fuel Education business, the puts and takes there are there are some sort of content sales growth that will be taking place, there’s some growth in the category of Non-managed Programs that was already included in there and then there’s some re-class where you’re moving stuff that you had described as managed school business into that category. Is that correct?


James J. Rhyu – Chief Financial Officer and Executive Vice President


Yes, I think that’s very accurate. There’s growth in all 3 of those. That’s correct.


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


And if you look — I was going to say if you look at the numbers for FY ’14 to ’15, remember that the re-class would be essentially the same in ’14 and ’15, very, very close numbers. So the growth you’re seeing in that category is actually growth that happened in our, what we call, managed school programs in — that was always in FuelEd. So the growth is not coming from a growth in what was managed public schools that is now moving growth down to the Non-managed Programs. The growth that is there, the adjustment that was made, was made to both years. So the growth that you’re seeing on our disclosure, ’15 and ’14, the vast majority of that is coming from the FuelEd business.


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


Okay, I understand. And I guess this qualifies as a request, not a question, but are you going to be giving us some restated data to help us for modeling purposes?


James J. Rhyu – Chief Financial Officer and Executive Vice President


Yes, we’ll help you out on the modeling when we do our Q1 release. We’re going to give you some greater detail around the revenue breakdown, some things like that to help you get a little [indiscernible].


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


Okay, great. And then so related to this — a question about the spending and sort of the transition that’s taking place, one of the questions that I had is that it strikes me that this transition that you’ve now acknowledged, where more schools are more mature, schools are looking to manage their own programs and certainly, in terms of what’s going on with Agora, there seems like there are some big implications for you all in terms of your staffing and personnel, right? You’ve got now an infrastructure that reports up that’s all about managing schools. So as that piece of your business is getting smaller and at the same time, the piece of your business that involves you sort of making external sales to school districts, which requires a different skill set, it feels like there’s a lot of restructuring that maybe needs to take place already and then maybe in anticipation of Agora. Can you talk about that a little bit? And how much of that is anticipated in the guidance that you’ve given us? And how much might be sort of incremental to come once you get more of that figured out?


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


I would say, first of all, I don’t think there’s a lot of restructuring because while Agora did account for above 10,000 enrollments out of the 118,000 in that segment, and the way we used to count, 124,000, that still leaves 112,000. So the primary support functions in our company are still focused on Managed Public Schools and will remain so. As I speak to you, I’m also speaking to our boards. We’re not going to back off the support that we need to provide those schools. And I do think that we will have some new states, and we’ll have some more growth in some of those programs. I think Tennessee will come back. So when you’re looking at those programs, I don’t think there’s a dramatic change. We could fine-tune some things for sure, but there’s not a dramatic change. Relative to Agora specifically, yes, the cost structure to support Agora will definitely change. We will definitely be reducing the amount of sources to support them because they’re going to do that work themselves. The cost structure changes that I see us focusing on to move more to support the FuelEd business are changes that I mentioned earlier. We’re looking at the product development area, spending more of our money on product development, focusing on the FuelEd business, less of it focused on those courses that are not critical. And I won’t get into the details of that, but you can imagine there’s a set of courses in places like english and math and physics. And then there are some bunch of electives. And do I need to maintain every single elective for every single school internally? Or can I buy some of that? So we are going to rationalize that, and that’s where it think you’ll see more cost changes as opposed to the direct support services for schools. Was that clear enough?


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


Sure. And then the last — yes, go ahead.


James J. Rhyu – Chief Financial Officer and Executive Vice President


I’m sorry, Trace. Just to — I just want to make sure that we fully answer your question. But our guidance is to the extent we are going through, and we will continue to go through an exercise to see how our cost structure is going to be impacted by Agora and our guidance does not include any charges that would take place as a result of anything we do. For Agora, we’re just trying to make sure that — as Nate said, we’re going to continually [indiscernible] a lot of cost structure, so that doesn’t include any restructuring.


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


The Agora changes primarily happen in the summer of next year, and most of that will be in fiscal year ’16, so most of the change, not all of it. Some will start to happen in late FY ’15, but most of it happens in ’16 and will be included in that guidance.


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


Okay. And then last but related question here, given the transitions that you’ve been addressing in your business, does it make you think differently about how to approach and structure the new business that you see that could be coming from these new states? I mean, as you go into these new states, does it make you think about how to work with those states differently, given what you’ve now experienced or are experiencing with the more mature states that you’re working with?


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


Yes, some of which I can talk about and some of which I can’t, obviously. But if you’ll look — if you were to look at the contracts that we filed, public contracts we filed more recently in some of the new states, you would see a slightly different cost structure. You’ll see a slightly different focus on the way we changed our pricing, and all of that’s geared toward somewhat what the national association chart authorizers are pushing down to the boards and what the boards therefore are pushing to us, so we obviously respond to that. We made sure that we restructured our pricing along the lines they wanted. Less money in big fees and more specifically broken out. Still the same level of — same economics, but changed the structure of those contracts. And so those are the things that we’re doing with those states. We also think about — as they get more mature and as we think about the kinds of students that are coming into our program, we think about what kind of tools are really needed to make those schools successful. I mentioned a lot of family support activities. We actually have programs now that are more focused on providing support to the families, not just to the student, to understand how can we help that family be more successful, how can we make sure they’re engaged. We changed some of the academic programs. And all of that comes about in the mature states because they are larger and more of their success and more of their ability to get their charters renewed is dependent upon the academic results of their students. So there’s a change that we put in place to try to support them better on the academic front and family support front.


Operator


[Operator Instructions] Our next question is coming from Jeff Silber from BMO Capital Markets.


Sou Chien – BMO Capital Markets Canada


It’s Henry Chien calling in for Jeff. I just had a question about the revenue per student increase. Could you talk a little bit more about what’s driving that? Does that have to do with the shift towards Non-managed Programs or…


James J. Rhyu – Chief Financial Officer and Executive Vice President


No. Henry, it’s James. No, the — there’s certainly a mix issue there. As I think everybody knows, each state has different kind of funding levels. And so as we mix into different schools, that impacts the funding rate. There’s — there are a couple of states that had some actual funding increases for this upcoming school year. Many of those states, and I’ll try to walk you through just a little bit how the mechanics are going to work because I think it’s important in terms of our margins, is many of the states, when they increase funding, they do it essentially on a nonmargin basis, meaning that they give schools more money, but they do it with the requirement that, that money is spent dollar-for-dollar. So in a lot of cases, that money flows through as revenue, but we essentially have to spend, again, a lot — it acts a lot like a government grant sometimes in that case. You don’t really get margin around that money. You have to spend it. So some — a lot of times, the rate increase that we saw this year, a large portion of that were those kind of dollar-for-dollar no margin rate increases. And those were a couple of specific states that helped drive that up, so that was a big part of it as well.


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


But in general, I would say, look, think of 3 kinds of activities that affect the revenue per student. One is the rate per student, where it’s just a good increase from the state that we can get profitability from. The second is those pass-through rates that James has mentioned, where they increase the rate, but they’re doing it because they want you to spend more money on teachers or a particular program, they a granted your program. And the last is the mix of state, and that’s within our control. That is where we spend more time trying to make sure that we enroll more students in places where the rates are better and our cost structure is better and the support environment is better. And that falls to the bottom line as well. So those are the 3 categories that affect rate. And at any point in time, depending on a state, you may see some of that rate fall through to the bottom line better than in other states.


Sou Chien – BMO Capital Markets Canada


Got it. If you could just sort of help us understand, looking at the fiscal full year ’15 outlook for — in your revenue guidance, is there any way that you could just help us understand how much of that is driven by enrollment increases versus revenue per student versus just in the context of the shift towards, as you mentioned, sort of Non-managed Programs?


James J. Rhyu – Chief Financial Officer and Executive Vice President


Yes. So I think the — we’ll give you some — we’ll give you a little more color in Q1. But the majority of it is driven by the — what we had traditionally called the Managed Public Schools, which are now the Managed Programs, that will drive a disproportionate share of the — kind of the revenue increase over the course of the year.


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


I think here’s where I — James may kick me under the table, but I think this is the way — helpful way for you to look at it because we disclosed all this. Take the, I said, high single to low double-digit growth in the FuelEd business, apply that to last year’s FuelEd revenue, and then you can pretty much see what that is. Subtract that from the total, and the rest is going to be from the Managed Public Schools and in international and mostly from Managed Public schools. And that’s mostly rate because, obviously, the enrollments went down. So you — that would be the way I’d do math if I were you.


Operator


[Operator Instructions] Since there are no further questions at this time, I’ll turn the floor back over to management for any further or closing comments.


Nathaniel Alonzo Davis – Executive Chairman and Chief Executive Officer


Well, I thank everybody for their time this morning. I would say one last thing, and that is when you’re in these dark days where people look and say your enrollment in the Managed Public Schools dropped, does that mean your business is in some trouble? I would say 2 things to remember. Number one, I mentioned those new states. I mentioned the states that are growing. Yes, we did go through some tough times with Tennessee and Colorado and the lack of growth in the high-penetrated states, but I see them as states that are growing. The thing I’m most proud of, though, and allow me to say this, but we’ll show you the data, we are really proud that — on the outside, you cannot see the factors. On the inside, I’m now seeing the factors that say the things we’re doing are the right things to do. I know we’re going to get a better mobility because of what we’re doing with Desire2Learn. I know that the learning management systems will get better. Our cost ability to maintain those pieces of software that we use will be lower, our academic results are better. The things that we’ve been working on for the last 18 to 24 months are now starting to bear fruit. And you can’t see all of that fruit yet, but I can see the indicators. And I think you’re going to be pleasantly surprised over the next 24 months as this business starts to turn those things around. We’ve now and we’re going to publicly start talking more about the success that we’re having in academics because we’re pretty proud of that. You know that we have dark days when people criticize us a lot for our educational results, but I’m really proud of the way the company has responded. We have done much better, more schools that are in less trouble. Tennessee, the Department of Education clearly said to us, “We want to slow you down in terms of growth.” But they also admitted right in the middle of that process that all of our second and third year students have clearly shown that this program is working for them and they’ve got good acceptable results. That means that if we can [indiscernible] in this program, it really does work. Very proud of that, and I want to make sure I spend a couple of moments saying that to everybody. Thank you for your time this morning. Bye-bye.


Operator


Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.


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via Diane Ravitch’s blog » K12 Inc. http://dianeravitch.net/2014/10/15/k12-inc-investors-conference-call-you-are-there/