Business Headlines

K12 Inc. Reports Q3 2012 Results

K12 Inc. — Monday, May 07, 2012

Q3 Revenues Increase 37 Percent to $178.2 Million on Continued Strong Enrollment in All Businesses

HERNDON, Va.--(via BUSINESS WIRE)--K12 Inc. (NYSE: LRN), 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 third fiscal quarter ended March 31, 2012.

Summary Financial Results

  • Revenues for third quarter FY 2012 grew to $178.2 million, an increase of $47.9 million, or 36.8 percent, over the prior year period.
  • EBITDA for third quarter FY 2012 (see reconciliation below) was $26.2 million, an increase of $4.4 million, or 20.2 percent, as compared to $21.8 million for the prior year period.
  • Operating income for third quarter FY 2012 was $11.6 million, an increase of $0.8 million, or 7.4 percent.
  • Net income to common and Series A stockholders for third quarter FY 2012 was $7.0 million as compared to $5.6 million in the prior year period, an increase of 25.0 percent.
  • Diluted earnings per share for third quarter FY 2012 were $0.18 as compared to $0.16 in the prior year period.

Review of Significant Business Activities
Ron Packard, Chief Executive Officer of K12 Inc., commented: “We are very pleased to announce an important new member of our management team. Timothy L. Murray has joined K12 as our President and Chief Operating Officer. We are also excited by our strong revenue growth across all of our businesses and the infrastructure investments we have made for future growth. Additionally, this past quarter has been one of the strongest business development quarters in K12 history. This success, combined with our infrastructure investments, position us well for the future.”

  • Statewide virtual schools are scheduled to open in three new states next school year (Iowa, New Jersey and New Mexico). Enrollment caps have been expanded or eliminated in Texas (SY 2012-2013) and Michigan (SY 2013-2014), and in Wisconsin, open enrollment windows have been extended (SY 2012-2013).
  • Two New Jersey-based public charter high schools will offer our flexible and individualized learning school programs where students will be educated through a combination of adaptive online learning and face-to-face instruction starting in the Fall of 2012.
  • In-year enrollments continue to be stronger than forecast. This year, the cost of obtaining leads and the overall cost of acquisition have declined while at the same time, our conversion rates have increased. Our student retention rates are similar to last year and all of these metrics reflect higher customer satisfaction and greater demand for our virtual school offerings.
  • More children are now able to benefit from our offerings as the average full time enrollment in the virtual schools we serve grew from approximately 101,000 during the quarter ended March 31, 2011 to over 147,700 during the quarter ended March 31, 2012 (see table).
  • Our Institutional Business quarterly enrollment growth rate is very strong at 49.4 percent.
  • Our private school business, which now serves students in 85 countries, continues to experience strong growth. Enrollments (FTEs) in our K12 International Academy and Keystone Schools each grew approximately 54% and 22%, respectively, year over year.

Financial Results for the Three Months ended March 31, 2012 (Third Quarter Fiscal Year 2012)

  • Revenues for the third quarter of FY 2012 were $178.2 million, an increase of $47.9 million, or 36.8 percent, over the prior year period. Total revenue growth was supported by a 46.2% increase in enrollments in all K12 programs. In addition, our acquisitions contributed approximately $9.3 million in revenue growth during the three months ended March 31, 2012. Managed Schools revenues increased by $37.7 million to $151.8 million during the quarter ended March 31, 2012 as compared to the prior year period. Institutional Business revenues increased by $4.5 million to $14.4 million during the quarter ended March 31, 2012 as compared to the prior year period. Private Schools and other revenues increased by $5.7 million to $12.0 million during the quarter ended March 31, 2012 as compared to the prior year period.
  • Instructional costs and services expenses for the third quarter of FY 2012 were $106.0 million, an increase of $28.3 million, or 36.4 percent, over the prior year period. This overall rise includes increases in expenses to operate and manage schools, including the Insight Schools acquired from Kaplan Virtual Education (“KVE”) and newly launched schools. In addition, costs to supply curriculum, books, educational materials and computers to students, including depreciation and amortization expense, increased $6.8 million over the prior year period. Instructional costs and services expenses decreased slightly as a percentage of revenue.
  • Selling, administrative and other operating expenses for the third quarter of FY 2012 were $53.6 million, an increase of $16.8 million, or 45.7 percent, over the prior year period. The primary drivers of this increase were: personnel costs, including salaries, benefits and incentive compensation; marketing costs; professional fees, including student support center costs, implementation costs related to internal business support systems and legal costs associated with ongoing litigation defense; and depreciation and amortization expenses, related to purchase accounting and capital expenditures.
  • Product development expenses, including software development, for the third quarter of FY 2012 were $7.0 million, an increase of $2.0 million, or 40.0 percent, over the prior year period. The increase was primarily due to a decrease in the Company’s capitalization rate attributable to a change in the mix and timing of projects as compared to the prior year period. This increase was partially offset by decreased amortization costs for the period.
  • EBITDA, a non-GAAP measure (see reconciliation below), for the third quarter of FY 2012 was $26.2 million, an increase of $4.4 million, or 20.2 percent, over the prior year period. EBITDA in the quarter ended March 31, 2012 was negatively impacted by the increases in selling, administrative and other operating expenses and product development expenses over the prior year period as described above. In addition, losses from new initiatives totaled $1.3 million during the period.
  • Operating income for the third quarter of FY 2012 was $11.6 million, an increase of $0.8 million, or 7.4 percent. Depreciation and amortization expense was $14.6 million, an increase of $3.7 million, or 33.9 percent, over the prior year period, primarily due to investments in curriculum, software licenses and internal business support systems to support growth and the effects of transaction related purchase accounting. Results give effect to the additional expenses and startup losses as well as increased revenue described above.
  • Income tax expense for the third quarter of FY 2012 was $4.6 million, representing an effective tax rate of 41.0 percent. Income tax expense for the third quarter of FY 2011 was $5.3 million, an effective tax rate of 50.0 percent. The decrease in the tax rate year over year was primarily due to a decrease in non-deductible transaction costs and other non-deductible expenses in the period.
  • Net income attributable to common and Series A stockholders for the third quarter of FY 2012 was $7.0 million as compared to net income of approximately $5.6 million in the prior year period, due to the factors mentioned above.
  • Diluted net income attributable to common stockholders per share for the third quarter of FY 2012 was $0.18 as compared to $0.16 in the prior year period due to the factors described above. Diluted net income per share reflects a pro rata allocation of net income to Series A Special Stock.

Financial Results for the Nine Months ended March 31, 2012

  • Revenues for the nine months ended March 31, 2012 were $538.0 million, an increase of $143.8 million, or 36.5 percent, over the prior year period. This increase was primarily due to organic revenue growth in our core schools business and enrollment growth, but was negatively impacted by increased reserves and deficit allowances in certain states. In addition, acquisitions contributed more than $35.5 million to revenue growth. Managed Schools revenues increased by $105.5 million to $451.5 million during the nine months ended March 31, 2012 as compared to the prior year period. Institutional Business revenues increased by $20.8 million to $49.7 million during the nine months ended March 31, 2012 as compared to the prior year period. Private Schools and other revenues increased by $17.5 million to $36.8 million during the nine months ended March 31, 2012 as compared to the prior year period.
  • Instructional costs and services expenses for the nine months ended March 31, 2012 were $314.4 million, an increase of $85.4 million, or 37.3 percent, over the prior year period. This increase was primarily attributable to an increase in expenses to operate and manage schools, including the Insight Schools acquired from KVE and newly launched schools. In addition, costs to supply curriculum, books, educational materials and computers to students, including depreciation and amortization expense, increased over the prior year period. As a percentage of revenue, these costs remained relatively consistent over the prior year period.
  • Selling, administrative and other operating expenses for the nine months ended March 31, 2012 were $175.8 million, an increase of $53.4 million, or 43.6 percent, over the prior year period. This increase was primarily attributable to increases in: personnel costs, including salaries, benefits and incentive compensation; marketing and student enrollment counseling; third-party commissions related to the Company’s institutional sales; investment in the institutional sales organization and distribution network; professional fees, which included costs associated with the external sales force, the internal business support systems’ implementations, transaction costs, and legal costs associated with ongoing litigation defense; and depreciation and amortization expense.
  • Product development expenses for the nine months ended March 31, 2012 were $20.8 million, an increase of $8.5 million, or 69.1 percent, over the prior year period. The increase was primarily due to a decrease in the Company’s capitalization rate attributable to a change in the mix and timing of projects as compared to historical periods.
  • EBITDA, a non-GAAP measure (see reconciliation below), for the nine months ended March 31, 2012 was $69.3 million, an increase of 13.8 percent over the prior year period. EBITDA in the period grew slower than revenue because selling, administrative and other operating expenses and product development expenses over the prior year period grew faster than revenue as described above. Also included in these expenses were merger integration costs and additional costs associated with the delay in our year end filing. In addition, losses from new initiatives totaled $6.2 million during the period.
  • Operating income for the nine months ended March 31, 2012 was $26.9 million as compared to operating income of $30.4 million for the prior year period, a decrease of $3.5 million, or 11.5 percent. Depreciation and amortization were $42.3 million, an increase of $11.8 million, or 38.7 percent, over the prior year period primarily due to investments in curriculum, software licenses and internal business systems to support growth and the effects of transaction related purchase accounting. Results give effect to the additional expenses and startup losses as well as increased revenue described above.
  • Income tax expense for the nine months ended March 31, 2012 was $11.3 million, representing an effective tax rate of 43.1 percent. Income tax expense for the nine months ended March 31, 2011 was $14.3 million, an effective tax rate of 48.6 percent. The decrease in the tax rate was primarily due to a decrease in non-deductible expenses in the nine months ended March 31, 2012 and the final adjustments related to the Company’s prior fiscal year tax return.
  • Net income attributable to common and Series A stockholders for the nine months ended March 31, 2012 was $15.7 million as compared to net income of approximately $15.6 million in the prior year period due to the factors mentioned above.
  • Diluted net income attributable to common stockholders per share for the nine months ended March 31, 2012 was $0.41 as compared to $0.46 in the prior year period due to the factors described above. Diluted net income per share reflects a pro rata allocation of net income to Series A Special Stock.

Cash, Capital Expenditures and Capital Leases
• As of March 31, 2012, the Company had cash and cash equivalents of $123.7 million, reflecting a decrease of $69.4 million from June 30, 2011, due to a significant increase in accounts receivable; the funding of the acquisition of the Kaplan/Insight Assets; and to the investment in capital expenditures and product development. Accounts receivable as of March 31, 2012 were $205.3 million. Our collections of accounts receivable have been delayed as some states are paying public schools more slowly.
• Capital expenditures for the nine months ended March 31, 2012 were $32.8 million and were comprised of:
          - $22.5 million for property and equipment, including capitalized software development, and 
          - $10.3 million for capitalized curriculum.
• Capital leases financed additional purchases of $25.6 million during the nine months ended March 31, 2012 for computers and software for students.
 
Enrollment Data
Our reported total average enrollments include students in Managed Schools, students taking K12 curriculum or Aventa online programs offered by school districts (Institutional Business), and students in Private Schools. Students served through our Institutional Business and Private School offerings may enroll in a single course. For better comparability, these students are converted to full-time equivalents (FTEs) on a four course basis. We currently exclude selected programs from our reported enrollment. For example, we do not include students in our consumer channel as we do not monitor the progress of these students in the same way as we do in other programs. We typically sell our A+ curriculum (acquired with The American Education Corporation - AEC) as a site license. As these schools are not limited in the number of students who may access our curriculum, we do not include these students in our enrollment totals. We also exclude students from Capital Education, Middlebury Interactive Languages and our classroom pilots.

In FY 2012, a program transitioned from a K12 district program to a K12 managed school. This program had approximately 2,000 and 1,000 enrollments for the first quarters of fiscal year 2012 and 2011, respectively.

Conference Call
The Company will discuss its third quarter 2012 financial results during a conference call scheduled for Tuesday, May 8, 2012 at 9:00 a.m. eastern time (ET).

The conference call will be webcast and available on the K12 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 888-396-2384 (domestic) or 617-847-8711 (international) at 8:50 a.m. (ET). The participant passcode is 71983639.

A replay of the call will be available starting on May 8, 2012 through May 15, 2012 at 888-286-8010 (domestic) or 617-801-6888 (international) passcode 24739031. It will also be archived at www.k12.com in the investor relations section for 60 days.

Readers are encouraged to obtain and carefully review the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, including all financial statements contained therein and the footnotes thereto, when it is filed with the SEC. Once filed with the SEC, the Form 10-Q may be retrieved from the SEC’s website at www.sec.gov or from the Company’s website at www.k12.com.

About K12 Inc.
K12 Inc. (NYSE: LRN), a technology-based education company, is the nation's largest provider of proprietary curriculum and online education programs for students in kindergarten through high school. Using 21st century tools to prepare 21st century students, K12 provides a new choice for students to learn in a flexible and innovative way, at an individualized pace. K12 provides curriculums and academic services to public and private online schools and districts, traditional classrooms, blended school programs, and directly to families. K12 is accredited through AdvancED, the world's largest education community. Additional information on K12 can be found at www.K12.com.

Contact: K12 Inc., Christi Parker, 703-483-7077, VP, Investor Relations, chparker@k12.com