Q1 2020 Earnings Call
Greetings welcome to K 12, first quarter fiscal 2020 earnings conference call. At this time, all participants are not listen only mode of question answer session will follow the formal presentation, depending which require operators. This is turn the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now let's turn the conference.
What's your hosts my craft head of Investor Relations. Thank you you may begin.
Thank you good afternoon welcomed K 12 was first quarter earnings call for fiscal 2020.
Before we begin I would like to remind you that in addition to historical information certain comments made during this conference call maybe considered forward looking statements.
These statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act up 1995.
They should be considered in conjunction with cautionary statements contained in our earnings release and the company's periodic filings with the FCC.
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 contain time sensitive information that reflects management's best analysis only as of the gay.
Slide call K 12 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 FCC.
These reports include without limitation cautionary statements made in K 12, 2019 annual report on Form 10-K .
These filings can be found on the Investor Relations section of our website at Www Dot K 12 dotcom.
In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. for gap, we will discuss certain information that is considered non-GAAP financial information.
A reconciliation of this non-GAAP financial information to the most closely comparable GAAP information. What's included in our earnings release and is also posted on our website.
This call is jumping to the public and is being webcast. The call will be available for replay for 30 days.
With me on today's call is Nate Davis, Chief Executive Officer in Chairman of the Board and James True, Chief Financial Officer, and President product and technology.
Following our prepared remarks, we will answer any questions you may have I'd like to now turn the call over Dinni Nate.
Thank you Mike.
Good afternoon, and thanks for joining us on the call.
Today I want to provide you with some detail on our fiscal year 2020, count data enrollment as well as our guidance for the full year.
I'd like to start by thanking the entire K 12 team for disagree year.
Outside of having a large school in Georgia decide to go to stuff management, which as we previously announced dampened our Roma growth.
Team is driving excellent progress on so many fronts.
Specifically on enrollment our managed public school business grew to 122.3 thousand students.
An increase of 3.5 thousand students or 2.9% year over year.
Importantly, this marks the fourth year in a row that we've seen enrollment growth in our managed public schools business.
Without the impact of the GCA Board decision, our enrollment growth would have been even stronger in fact enrollments would have increased 14.7 thousand students instead of 3.5 thousand.
And this would be up from the 11.1 thousand in the prior year.
This is an increase of more than 32% year over year.
It's also the highest absolute enrollment growth we posted in the last seven years.
Importantly, enrollment growth was not concentrated in one school nor in one state.
We saw growth in more than 80% of the states in which we operate in fiscal 2000, it's also worth noting that nearly 50% of the schools posted enrollment growth.
More than 10%.
New program in Alabama, Florida, Texas, Missouri, and Ohio also helped as they comprise a little more than one third of our enrollment growth.
These results underscore the enrollment growth we posted over last few years, we're not a temporary phenomenon.
Whether there are clear indication that the market demand for online and blended learning options continues to be robust.
Now number of factors that contributed to our enrollment growth first the number of families who we registered for another year, excluding GCA increased 16% year over year.
Continued focused on improving user experience resulted in stronger student engagement.
Motivation and retention.
We will continue to improve in this area and maintain a culture of students first and everything we do.
Also customer satisfaction continues to rise somebody you may know the net promoter score is a global standard of customer satisfaction and loyalty that measures the likelihood of customers to recommend the company.
K 12, most recent score is visits for the third year in a row to 70% for families rating K 12 power schools.
Second lead volume hit another high point.
This season, we saw an increase in lead volume of 8% to over 385000 Lee.
Marketing team used the mix of online and offline marketing to drive interest in K 12 power program.
National on your advertising has long been very effective for us, giving our national footprint. However, every year, we focus more and more of our marketing spend on digital online strategies.
Results show that our continued focus on digital marketing generated 2.5 million unique visitors to K 12 web sites this year.
Compared to 1.5 million in the prior year.
Third interest from parents and students and career readiness continues to grow.
Enrollment in our destination career academies.
Increased to 13.5 thousand students.
This means that more than 10% of students in managed schools are in a career readiness program.
This represents an increase of 6.4 thousand students for growth of 90% year over year.
We estimate that the career readiness business will deliver about 90 million in revenues.
During fiscal year 2020.
Overall, we remain confident that we can achieved revenues in the career readiness business.
Over 200 million over the next two to three years.
To achieve this goal we will continue to work with a number of school partners.
On new programs that will open in fiscal year 21 and beyond.
We started school you with 20 career readiness program and our targeted to add four to five new program over the next year, bringing the total so 24 to 25 schools at the start of next school year.
As we've noted in previous calls in previous communications.
The next two to three years, we plan on expanding our coverage across all the states in which we operate.
At the same time, we will also look to expand our part time programs those programs allow students to attend the local brick and mortars, who also enrolling hard time and destinations Korea Academy courses.
Our targeted to add two to five states that provides is kind of part time program.
We will marketed.
Both directly to consumers and direct to school districts to drive enrollment.
And while this initiative is in its early stages I believe that the potential to drive significant growth for career readiness over the long term.
You talked about tallow.
Hello is our career connection partner.
And there were also making great strides tallow ended the quarter with 580000 users on the platform an increase of nearly 55% year over year.
While continuing to grow their population of student users and partners. This year Tallow is also expanding into state workforce initiatives. For example, tallow just partnered with Ivy Tech Community College, the nations largest accredited statewide community College system.
Hi schooling college students will discover and have access to a multitude of tech and manufacturing related opportunities available in Indiana.
Ivy Tech along with Indiana companies like Michelin.
Country, Mark Ingeus, Hauser, and Duke energy, we showcased the communities.
Connect with talent on the tell tell platform and view analytics about talent using the tele platform.
In addition, how has also started a partnership with same incorporated in Delaware.
This partnership will create a statewide ecosystem pulling together high schools colleges companies and government agencies.
Same is one of the country's first nonprofit stim organizations with a mission to prepare motivates students, particularly young girls and those from underserved communities to enter college and completed degree and Tim.
You can see theyre very some very exciting things happening and tell this year.
In addition to partnering with companies through Tallow, we're working with more than 100 partners across the nation to offer various workplace experiences for destination in Korea academies to.
These range from job shadowing experiences to mentor shifts to internships.
And this is Jeff the beginning.
There is a genuine excitement when we talk to companies about crew ready.
I expect a number of partnership opportunity to continue to expand throughout the year as we educate more companies about what K 12 is doing in the crew readiness space.
It's important to note that our expansion and career readiness will not stop with full time and part-time public schools.
We've already launched a private school focused on career readiness, we serve students across the nation and apparent pay model.
Our vision over time includes profitable expansion even into adult learning corporate training.
Perhaps even the international market.
The key takeaways that building out a blended experian show career readiness program largely for high school students right now is just the first step.
So in summary, enrollments grew on par with our expectations and other than the impact of one school moving to self management. These enrollments grew faster than any year in the past seven years.
Importantly, brocade 12 power Gen education academies and career readiness programs contributed to our growth.
One thing is clear our base business is strong and is getting stronger.
Taking all this into account.
Our revenue guidance for the year is $1.2 billion to $1.35 billion.
As an increase of up to 1.9% year over year.
And if the enrollment growth trends continue along the lines of fiscal 19 in fiscal 2000.
Where we grew more than 11000 14000, respectively without the effect of GCA.
Our future revenue growth should be strong steady.
On the base of a very strong core business. We're also starting to see the benefit of entering new career readiness market.
A market that is helping students at all levels prepare for jobs in the future.
Now turning to operating income we expect adjusted operating income in the range of $68 million to $72 million. This is an increase of up to 16% year over year.
As I said last quarter, our multiyear internal plan calls for us to deliver low double digit growth in adjusted operating income for the next few years.
I believe north market demand for online in blended option combined with efficient expense management continued to make this internal plan clearly achievable.
Regarding capital expenditures.
We expect to invest in the range of $45 million to $49 million.
This year, we will continue to spend on innovation, primarily to grow our career readiness capabilities and strengthen our support for teachers in our core business.
Our investment in career readiness will include expanding the number project based learning courses.
Deepening the content for existing pathways and expanding into new career pathway.
In closing I want to be clear that our number one goal continues to be helping students grow in every way.
Especially of course in their academic endeavors that means investing and teachers and school leaders, making the learning experience more personal engaging.
Building, a robust career readiness business.
And leveraging the latest innovations and technology.
We believe that our focus on academics and innovation. In addition to driving an efficient business model will produce consistent growth in revenue and an earnings for our shareholders.
So thanks for your time today, and now I'll hand, the call over to James to review, our first quarter results as was provide some additional detail on our guide James.
Thank you need and good afternoon.
First a recap of our reported results.
Revenue for the quarter was $257.1 million, an increase of 5.8 million or 2.3% kind of prior year.
Our loss from operations was 19.4 million compared to 13.8 million in the prior year.
Adjusted operating loss was 13.9 million compared to $9.7 million.
Capital expenditures for the quarter were 16.9 million versus 17.7 million last year.
Revenues for managed public school programs increased to 227.5 million.
3.2% higher than a year ago.
The increase is largely a result, with the 2.9% increase in student enrollments.
As Nick mentioned, we're encouraged with the with the enrollment growth and broad based demand you saw across the schools in the states.
Over 80% of the states in which we operate saw enrollment growth and we believe that this growth reflects the ongoing macro trends of greater acceptance of online education as well as demand for our career readiness education offerings.
Revenue per enrollment for the quarter was largely flat.
We continue to see a positive overall funding environment in fiscal 2000, however for the full year, our revenue per enrollment will be somewhat pressured by school mix.
As we previously highlighted one states open.
We see revenue per enrollment that is often below average over time, we work with the schools, we support and the states to increase per people funding.
This year, we are in Nick indexing, a little bit more in newer states, such as Texas, Florida, Missouri in Alabama.
We're funding is below average.
Given our mix in the current climate, we believe our people funding levels will be flat plus or minus couple hundred basis points for the full year.
And our institutional business revenue declined 7% on a year over year basis.
Non managed public school program revenues declined 16.1%.
As a result, as a result enrollments declined 34.5% and revenue per enrollment was up significantly in the first quarter given mix.
Our revenue decline is largely due to K 12, terminating its relationship with certain programs specifically.
We saw several schools close or have challenging operational issues due to poor compliance or general mismanagement by school operators.
Unfortunately fuel Ed was the provided some of these companies.
Once we became aware of these situations we terminated relationships.
Institutional software and service revenues were up 2.3% for the quarter in total we expect institutional revenue will be down about 15% to 18% for the full year.
Private pay revenues were 8.7 million ups, 4.7%.
We still believe in the long term outlook for this business and have a number of initiatives and progress to drive growth. However, these activities are early in their development and should not have an impact on current year revenues as such we would expect.
Current year revenues to be largely flat to prior year.
Gross margins for the quarter were 34.1% down 260 basis points.
The first quarter last year.
Just for the quarter over pressured by some early investments in schools to get them off to a strong start for the year.
Some of these onboarding costs were one off and we expect full year gross margins to be about flat to the prior year, plus or minus 100 basis points.
On the expense side as we outlined last quarter for fiscal 2000, we combine selling administrative and other expenses with product development expenses.
This means we're only reporting a total jenna selling general and administrative number going forward.
For the quarter.
These expenses grew by 1.1 million to $107.2 million.
As we grow we believe we will continue to have leverage in this line item.
We will do this by driving automation and other operational efficiencies and it will not detract from our investments in growth areas like career readiness.
For the full year, we expect selling general and administrative expenses to be basically flattish to last year.
I also want to remind you that as with prior years, we expect a sharp sharp sequential decline in spending in the second quarter, resulting from the seasonal decline in advertising.
Our EBITDA loss for the quarter was 2.2 million adjusted EBITDA was 3.3 million both measures declined over last year, largely as a result of lower gross profit for the quarter.
Stock based compensation increased 1.5 million from last year.
Granted some performance based stock compensation that will drive some higher cost this year and also introduce some potential variability in future years.
We currently estimate stock based compensation of between 20 426 million for the year.
Our loss from operations for the quarter was 19.4 million and just on adjusted operating loss was 13.98.
And as with previous years losses, primarily the result of seasonal marketing on expenses, which are higher in the fourth first quarter.
Profitability in the first half of the year will be lower than last year.
And we will make it up in the second half of the year.
As our guidance for adjusted operating income demonstrates we still believe we will go grow profitability by up to 16% year over year.
A couple of other than items to notice that we ended the quarter with cash cash equivalents unrestricted cash of 167.4 million.
This was a decline of 117.2 million compared to the fourth quarter.
However, on a year over year bases, our cash balance increased by 22.4 million.
And the first quarter decline is inline with our normal seasonal trends.
And we'll expect to grow our cash balance throughout the year.
Capex, which includes curriculum and software development and infrastructure was 16.9 million.
As a decrease of 1.8 million compared to last year in for the year, we expect capex of between 45 to 49 million.
Our effective tax rate for the quarter was a 47.5% benefit compared to a 37.9% benefit in the year ago quarter and for the full year, we expect the tax rate of between 28 and 30%.
This is inline with expectations, we outlined in last quarter's call.
To summarize our guidance for fiscal 2020 were looking for revenue in the range of 1.020 billion to 1.035 billion.
Capex of 45 million to 49 million a tax rate of 20, 30% and adjusted operating income in the range of 60 $872 million.
And for the second quarter.
We look for revenue in the range of 255 to 260 million.
Capital expenditures of $9 million to $11 million and adjusted operating income in the range of $35 million to $37 million.
In closing I want to reiterate that our full year guidance in line with the expectations, we laid out last quarter.
We're all excited about this underlying growth in our core business and the initial success that we are seeing at occur but readiness business.
Thank you and now I'll move to QNX operator.
Thanks at this time, we will be conduction a question and answer session. If you will that does question. Please press star one on your telephone keypad.
Information until indicate your line is in the question Q.
The first start to fuel what's your move your question.
For participants disease bigger equipment and may be necessary to take up for handsets record pressing Starkey one moment. Please on poll for questions.
Our first question comes from the line of Alex Paris with Barrington Research. Please proceed with your question.
This is Chris how sitting in for Alex Paris, Good afternoon, congrats on the quarter.
I had many questions here for you, but I'll start off with a few and then I'll hop back in Q.
Can you talk about the cost structure in the quarter more specifically the early investments in schools that you mentioned to squeeze them with Onboarding is that just more of a timing.
Expenses or how should we look at those investments in the return that you're seeing thus far yes, I think so we test various things every year this year.
We invested a little bit more in the first quarter on us sort of a 100 basis is not really shifts in timing, but it's more on a one off basis.
On Onboarding students, we find that the better students onboard onto our programs the better they retain and obviously there is a long term financial benefit to them retaining there's also a long term academic benefit now comes benefits and retain longer so.
We invested in some programs to essentially help kids get onboarded.
Better easier or help them winter set up et cetera. So so really incremental in some respects not a ship we would not expect to see that shifts out of other quarters.
Got it got it okay.
And then.
Nate mentioned the lead volume that was strong in the quarter, reaching the high points.
How should we think about these leads coming in as you look at growth in 2020.
About the current capacity.
To handle.
Inflection.
Hi, Chris This is Nate.
Yes, I did mentioned that the lead that made up to 385000 leads this year.
Thats up from from previous years.
Yes, we have not seen a deterioration in our conversion rate will lead to application thats going to student applied or into a.
The student actually entering school so the way to think about it obviously is at the top of funnel for more leads we have and keeping the conversion rate the same.
The more enrollments we have so.
From a capacity point of view it does cost us a little bit more enrollments entered a process. These students if we get more lead but on a profitability basis. The return on that investment is strong and.
Not only return on investment, but the incremental costs is not nearly as much as incremental students now some of that happened because you open up new schools and some of that happens because.
Of the destinations grew academy, but we are seeing greater lead as as we market these categories and marketing schools.
Okay.
That's helpful and my last question is on career readiness.
You mentioned your expectations of 90 million revenues in 2020.
And then 200 million over the next two to three years as we look at this outlook.
And consider your part time programs versus your full time programs, how should we consider the mix.
As we move two to three years out in regard and in regard to revenue and margins for part time versus multi.
Well I think we're now the best thing to do is see free.
All of the growth that we're talking about as coming from the full time programs.
The part-time programs are brand new their nascent there's small at this point time, when two to five states and it's only a few hundred students. We started in Wisconsin, and we're going onto a few other state I think from a volume point of view you should think of all of the enrollment is coming from the full time.
We will report out next year this time and say how will they part-time programs are going after we have to think about it.
Okay. Just just bookkeeping you mentioned the adjacent to the adult learning corporate training International.
That additional upside none of that's factored into the next two to three years for career readiness is that Ben that's correct all of those are upside.
And opportunities we see in the market.
Thank you need.
Thank you Chris.
Our next question comes the line of Corey Greendale with first analysis. Please proceed with your question.
Hey, good afternoon, and congratulations on the strong.
Paul intake.
As a few questions.
Do you is your sense that I had the good results are.
How much of that is because of just.
Just the market getting more sort of comfortable with online program. So how much of his market growth versus how much as you taking share from other providers.
Yes, actually I think that.
Couple ways I look at that high Corey doing.
Number one I think it's really more to do is our growth in career readiness and that was sort of the top factor. The more we talk about it the more people are interested in online program, even if they they first having initial interest in and career readiness schools. They may find that a general education schools good form I think.
More market growth because of the talk about career readiness than it is taking share from others I actually can't see yet what others are reporting so taking share from others I really can't see that at this point, but if I look over the last couple of years, it's not been share from others. It's driving our growth has really been increase in the market.
Yeah I was again can you share the data on leads which is helpful. It looking at like conversion rates or anything like that everything I guess, you Kevin Sallie just aggregate, whether that's through the market growth for us.
Or taking share but.
Anyway it.
I think you answered my questions I appreciate that.
Second question I had is on the other non managed I just want to make sure with some of the thing it sounds like it was entirely due to these folks operating as schools, but is there any is that Don and no issue or could there be sound like is there any contentiousness around termination of those contracts or is there any possibility someone could come back and say hey was that he will add that was part of the problem.
I can't see that are the.
Without going into detail because we don't comment on open mitigation, but I can tell you that at least one or two of those parties are under investigation.
By the by the state authorities. So it doesn't appear to have anything do with US we were just a quick and provider.
But all the other things they did how they ran to finance Italian market to students how they accounted for things was all on NIM. So I don't have doesn't do that.
We just provided curriculum. So we don't see in any way that this has any impact on us or any coming back at us in anyway. So no I don't see that.
And should we assume that Q1 year over year trend in that segment continues for the entire year.
Yeah I mean.
Pretty much you're going to you're going to see that flow through the rest of year because the enrollments that we don't get essentially from them in the beginning of the year, we're not going to bank after the rest of the year.
Hi, James had a question for you the I know that there is seasonality in the Caslen. This is consistent with that but it looked like the cash flow was down pretty meaningfully year over year in some of that looks like its deferred revenues. So can you just something going out there, but there's some timing issue with getting paid by by new states or anything no. There was there was a little bit of timing in just in Q.
Before actually Q4 bleeding into Q1, but nothing structurally unusual I was just a little bit of unfortunate timing that's all.
Would you expect that free cash flow or let's say a capital from opt for the full year should grow in line with operating income Thats right. Okay.
Alright, and then had made strategic question. It sounds like machine things are going on at Tallow you I don't think you control that I think I think you are working closely with them is there any did give them locked up at all or like theoretically could they.
Other there's certain tackling this argue they sell to someone else or what's the protection against.
Someone else.
And then taking advantage or leveraging what there, but there are accomplishing.
Two things number one we have.
Board seat and and and the very tight relationship with him and number two we have a path.
That deals with what happens if they need further investment in obviously involves us first so given that our are sort of right of first refusals and path to control. We're not worried at all about somebody else. That's it because we have for slow and for the other thing I would say is that we are I would say in many respects encouraging as many people to get on the platform as possible. So.
So we don't really view clinical competitors, we want their kids on as well we think it's good for everybody.
Sorry, if I misinterpreted that tallow is very much obviously the number of students at 500 some thousand.
We're not the majority of their customers, it's really an open market for talent.
So we want more people to leverage them I thought you were talking about our financial leverage.
Yeah, No that is why Matt. So those are both helpful. But then the last question I had is and then I'll follow up is.
Some of the other things you're talking about Nate with the career readiness.
It sounds like some of that is potentially other corporate training, obviously, it's a different first the revenue, but I just want to verify it some of that it only enrolling students that are of an age that they are eligible for all the revenue source is coming from the state or are you getting to other revenue sources today, and secondly, meaning like.
Workforce revenue or something like that and secondly.
How are you thinking about deployment of capital as some of those other things are clearly adjacent but I would think they would take a different go to market than what you're doing today and how you're thinking about kind of the gating about deployment of capital Yep. So first of all of them.
All of the funding today is coming from this the traditional state funding sources that come to all our MPS schools were not tapping on funds from from.
Let's say from consumer directly.
We're not happening in either of those funding sources.
Those are all opportunities for us.
In fact, the part part time schools, we that's a you know as I mentioned before it's a very small market force. It started in a couple of states. We want to go to <unk> to five states, but it's still very small. So you should think right now 100% of that revenues come from traditional state sources that we use for RMBS.
Now in terms of the opportunity and and how we deploy capital around that the first step in doing that is in these part-time part-time program. We are developing a different go to market because that's not the same team that develops a new MPS school, we have to go out of work with school district.
And work with the funding sources that the school district half for example, some of them have innovation funding.
Some of them have career readiness funding you might even be Perkins funding that goes to school, we can be a provider of the content and by the way that is the institutional did that would be nothing that sale. So we we plan to go to market with a whole new approach because it's not traditional.
MPS schools.
We see if we see that working I intend to just take a look at what we can provide a college level, what we can but an adult learning level, but those are not those are not businesses I mean today, but what we want to do is build these pathways and build a content and then be able to go to corporation pick the name of the corporation that had a number of.
Workers that are not college educated and say you need those work has to have a better education. We can provide that content. So expertise in programming expertise and in manufacturing expertise in agriculture business courses. Those all courses, we can provide to digital employee base not the ones that a college degree did not the ones that are that are generally.
Advanced degree can be more the ones that are not an advanced educated.
Good and if I could just one more comment which is.
It's not easy to identify kind of a new market opportunity and and grow that to 90 million in revenue and you know they the idea made sense on paper, but the fact that it's playing out as you said is very impressive.
Congratulations to you and the whole team on laying that out and executing on.
Thank you it's.
Interesting story, we had some consultants in one time and they told us on an how you're going to get this done we really don't see the path [laughter].
It's obviously working a lot better than they thought it would so sometimes it just requires vision and focus and I'm really proud of the team to do that thank you.
Our next question comes the line of Stephen Sheldon with William Blair. Please proceed with your question.
Hi, guys. Thanks for taking my questions.
I guess can you talk some about the enrollments that you have now in career readiness and specifically are a lot of the I think you said 13.5 thousand enrollments in these programs students that had previously been on your platform in some way or the vast majority of these students essentially new to you and I guess I'm wondering are you attracting a much.
Different student profile to career readiness, then you are and.
Most of your existing other online schools.
Ill give James you may have different point of view, but I'll give you my point of view first of all I Steven.
Yeah.
I believe that the majority of the students that are coming into the program right now.
Look very much like the student that come into the MPS program and we're still there's still room for us to get what I call a market expansion right. So students that would never have considered.
On online school, we still think there's a lot of room to get more of those many many many more those students multiple multiple factor.
Right now the students that are coming in for the most parts students that are sort of hey, I was interested non line in the first place, but now with this grew ready thing they really get over the hump loudly takes forces I want to in for Mike What I'm passionate about and life gives me some confident.
Add to Mike My initial interest the student who said I was never going to consider an online school in for I would never have considered that now for we are ready causes me to consider I still think theres a lot of room to get a lot more of those too. So that we're early in that phase.
Yeah, I just would add.
We do see a fair number of sort of the internal transfer as meaning kids, who are signing up for the normal programs that are transferring over into the curve progressed, we see that as a good thing because we think that career programs are are more applicable for them. They are better suited to them. So but I just want to reiterate when they said like I think.
The one thing that we Didnt do great. This year was expand the market for new incremental.
Students.
We did a better job of getting the craziness folks into the career schools.
But I think that our go to market for curious as wearing the first better the first inning, we've got a lot of upside opportunity on that and.
We'll continue to push that to drive greater growth in the future.
One thing to the Stephen because it's a pet peeve of mine inside the company.
We're going to be looking at our marketing approach and making sure that we reaching out to new sources, new channels to be able to reach students that would never have considered online before now let's not do we didn't get any of them. This year, we did get some and we can tell the ones that are brand new to the market, but we also there's some channels that we havent tap yet and.
We we use them outside resources to come up with some of those channels. We think we can get better at it next year.
Got it that's helpful.
I guess in in Georgia can you maybe talk about any progress youve potentially made on getting another school opened there right. I think you talked last quarter about how would have on opened by the fall. So I guess, where are you now and what's the outlook there.
It's unlikely we will see US we'll open up this coming fall, it's more likely to fall afterward.
The bore we've been working with onboard we may be working with another soon.
So we may actually be were at the supporter of more than one school.
We've gotten some positive signal that.
That the things, we're talking about doing especially in the career readiness area and especially in the blended school area. When I say blended school I mean, having more faith based contact with students. Some innovative model that we've been looking at all of those things are reasons why the commission would approved a new school and we're working with a couple of words on that so I don't think you'll see a new school in Georgia.
In school year, 2021 use more likely see at the next year, but we are working with boards in the board for more than one board has been excited about working with us.
Okay got it.
And then just lastly on the 2020 guidance it assumes roughly 13% growth at the midpoint for.
Adjusted operating income, but but as you noted youre going to be down in the first half and you gave some helpful expense commentary, but just wanted to ask.
What factors, we should think about that is going to drive strong year over year growth in the second half I know you have any of the comparison in the fiscal fourth quarter, but just I guess any color there.
Yes, as I mentioned in my comments I think we'll continue to drive leveraging SG nay, but we also have we were our gross margins were a little bit down year over year, I think will normalize.
Closer to flat year over year throughout the year.
We continue to look for opportunities to drive.
Automation.
And efficiencies throughout our around Thats going to affect both line items. So I think you get some benefit across the board throughout the rest of the year.
Great. Thank you.
Our next question comes the line of Greg Pendy with Sidoti. Please proceed with your question.
Thanks for taking my question just just real quick on then non managed public schools, just kind of understanding now I guess with contracts you've walked away from.
Yet a bump I guess in this quarter specifically on the revenue per enrollment is that something that's going to be sustainable throughout the year I guess, what the mix maybe.
Being more favorable from the contracts you walked away from or is that just a onetime thing.
Yes, I think.
I think what you'll see is last year.
In fiscal 19 in Q1, the non managed revenue from wrong for enrollment was actually unusually low which helped to comp year over year.
But so youre going to see the comp year over year declined dramatically.
So you're going to be closer to say flattish for the rest of year year over year.
I would add more dramatic in Q1, but it's because of the low first quarter of last year.
Okay. So that was more of an anomaly this quarter, where you had the unusually hot yes, okay.
All right that's all I got thanks.
Our next question comes from lineup and Ken with BMO capital markets. Please state your question.
Hi, guys.
Just a sort of follow on question related to.
Positive.
Enrollment growth.
Maybe its relate to Korea.
Yeah.
Career technical stuff, but I was wondering like what where where what is sort of.
Sort of like sticking point of going to online versus say like I don't know theres like ground or community kind of resources.
What wherever you kind of seen like the most traction.
Where we.
Mitch Hi, Henry you're asking a question what what causes the student to come to our program versus going to a ground based programs that exactly yes, I'm just trying to get sort of an update as you think about sort of new growth right now.
The first thing is reach.
Viewer nm Buner traditional high school.
You only have so many students. So you can only justify so many courses in so many teachers to teach agree readiness course, we can.
Look across the state and just five students here 10 student Theres three students. There next we rolled up a large number across the state, which justify thus providing more courses. So its geographic reach and therefore, a higher number of career pathway than individual school might offer.
I think many this the brick and mortar schools offer great program, but with only a couple of thousand students in your school or sometimes even less they can only offer so many programs they can't offer.
Ill and healthcare and now and the automotive and Dan Dan and under line, because we have such reach across the state and we're looking at larger numbers. The students across entire geography, we have the advantage offer more program. That's really to the advantage of this program that most people didnt see when we when we first came out that we have a scale advantage most.
Okay can't reach.
Got it okay, and and it sounds like it's it's like a decent chunk of that would be like hybrid partnering with.
Brick and mortar schools as well.
Well not today, that's the future market opportunity. If we were talking about that few but today. It's all about full time student in one of our destinations Academy screens, that's where all of the revenues coming from today, what I was mentioning you as we're going to start that process, we've actually done it a little bit in Wisconsin, but it's really tiny and.
We want to do more of it across the state, Wisconsin was pretty excited about it when other state was pretty excited so we'll be getting the people want to work.
Because if we walk into a school districts that offers let's say the off from five I'd courses, but they don't offer data analytics. So they don't offer Python programming, we can offer that where they can't so we can augment what they're providing that that that's the new market opportunities for us that we've got work on.
Okay.
Great.
And switching gears on the political front.
Warren has been sort of out.
Campaigning against charter schools just wondering.
You know your thoughts on.
I guess, maybe not Elizabeth Warren, but the potential impact of upcoming election, and whether that does kind of changes or feasible or not.
Yeah, I have some expertise and a number areas politics is on one of them.
I will comment on this one but it will say there.
Yes.
We have no number one thing that everybody has to remember is most of the educational funding in this country comes from local and state funds not from federal funds.
Federal funds contributed four especially education disability, but they don't really contribute to the general Education Fund.
It's a matter of fact, most the federal level also contribute Perkins funding and things like that but mostly stay low so it's not really up to the federal governments up at a local government no federal government could try to band for example.
Our profit charter schools, we don't third for profit charter schools, we certain non not for profit charter schools. All of our boards are five only three boards that are all not for profit.
We are provided to them, but they're all not for profit. The other schools that we provide this is a another thing it's not a well known fact, a little over 30% of our schools are district programs.
Ill take the federal government is going to ban districts from pricing on time program. You know districts are your traditional school in your neighborhood, but they want to have an online program. We run the fourth so we're not a for profit charter operator, we are service provider to not for profit there's a big distinction.
So.
Not to say that you know the program can do something harm our business, but it is say.
We're not the immediate target.
A for profit charters, because we're not we're not a charter so what operator.
Got it okay that makes sense.
Thanks, so much.
You're welcome and.
Once again, if there are any further questions. Please press star one on your telephone keypad.
Yes.
One on your telephone keypad.
Please when you pull for questions.
There seems to be no further questions. At this time I'll, then turn the floor back over to management for any closing remarks. Thank you David.
I noticed today, we had.
More engaging set of questions that I really appreciate everybody being involved you know Chris Corey even Henry everybody.
If it's nice to have an engagement with you.
We're very proud of results for this year I. Thank you guys spending time, and maybe spending time on the call today. So I have no other comment and thank you.
Right.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.