Q2 2020 Earnings Call - Acquisition of Galvanize Inc by K12 Inc Call
Greetings welcome to K 12 second quarter fiscal 2020 earnings conference call. At this time all participants are in listen only mode of question answer session will follow the formal presentation. If any what's required operators. This is sort of the conference.
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This conference is being recorded I would now like turn the conference over to your host Mr., Microsoft pick you may begin.
Thank you and good afternoon, welcome to K 12 second quarter earnings call first fiscal year 2020.
Well, we begin I'd 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 Security Litigation Reform Act of 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 contains time sensitive information that reflects management's best analysis only as of the day of Thislife coal.
Hey, 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 operational 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 Dot com.
In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S., where 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 was included in our earnings release, and there's also posted on our website.
This call is open to the public and is being webcast Colby available for replay for 30 days.
With me on today's call It Nate Davis, Chief Executive Officer, and Chairman of the Board and James True Chief Financial Officer, and present, President product and technology.
Additionally, we are joined by Dr., Shaun Mcalmont President of career readiness education, and harsh Patel, Chief Executive Officer, galvanized, who will be available to answer questions. Following our prepared remarks.
I would like now to turn the call overdone eight Nate.
Thank you Mike.
Good afternoon, everyone.
And thanks for joining our quarterly call.
[noise] I like to devote most of my time to providing details about the announcement, we made earlier today.
Hey, Twelves acquisition of Tech pioneer galvanized.
I'd like to welcome harsh Patel CEO galvanized to our team and also welcome him to the call today.
This is calling in remotely and it will participate in our Q and a session as Mike noted.
That's been going with a brief summary of this quarter's financial results.
As you saw in today's press release revenue was $257.6 million in the second quarter fiscal year 2020.
An increase of 1.1% year over year.
To our revenue growth adjusted operating income for the quarter was $36.5 million.
Capital expenditures for the quarter were $9.3 million.
Note that our revenue adjusted operating income and capital expenditures for the second quarter fiscal 20 met or beat the guidance, we provided last quarter.
These numbers underscore the ongoing strength of our core business.
It's also worth noting that excluding the impact of our acquisition.
Our business is on pace to achieve the full year revenue and adjusted operating income guidance. We originally provided.
Now, let me turn to a discussion of the galvanize acquisition and our career readiness strategy going forward as most of you heard me mentioned before our career readiness initiatives allows us to support a prepare students.
Every agent background.
For an increasingly competitive job market. According to the U.S. Bureau of Labor statistics.
Job growth is expected to create more than 1 million new jobs per year.
Through 2028.
At the top of the list for end demand job now and in the future our software engineers and data scientists.
However, despite the growing demand for these roles they have some of the most challenging positions to Phil.
Hey towards acquisition of galvanized puts us in a unique position to make a difference.
In this area.
Hi, guys is one of the country's top providers of workforce training in software engineering and data side like K 12, galvanized provides high quality affordable online and facilities based learning programs.
Through its full and part time boot camps galvanized helps students gain the most relevant and in demands Gildan. These fields.
Galvanize offers the software engineering boot camp Andreas industry recognized brand name pack reactor.
Actually after his rate in the top five boot camps on sites like course report and Investopedia.
One of the synergies that this acquisition is that our destinations academies now have become more ability to provide high schoolers with entry level software engineering schools.
Well do this by tapping into galvanize expertise tech training and adapting their curriculum for high schools.
This also gives us the opportunity to license this content and training to public school districts.
Colleges and universities and the other institutions.
For both our schools and public schools, we can help high school, Brad with early aspiration of this courier option.
Now you might ask how effective is the galvanize training.
Nearly 85% of galvanized web development and data science students are gainfully employed within six months of gradually.
But many other forms of post high school education would love to make that claim.
Additionally, graduates earn on average annual base salaries.
$90000 anymore.
Graduates in New York, and San Francisco start even higher salaries.
Galvanized graduates have been hired by more than 2000 companies, which includes 50% of the fortune 500.
For instance, Amazon Facebook, Google and Apple of all use galvanized to train their technical teams will help them five skilled workers.
And then the lump the alumni base now more than 8000 professionals and growing.
We conservatively estimate that the adult learning market. We are targeting was this acquisition is more than $50 billion annually.
Gives me it's estimated the corporations are investing one trillion dollars around the world in the digital transformation, which in turn drives this demand for software engineers and data scientists.
Galvanizers among one of the many young and growing enterprises, which led to two to this kind of growth.
K 12 is now in this market K 12 revenue growth this year.
We'll be accelerated by galvanized and well into the next year in fact in the next fiscal year. After the effects of purchase accounting revenue growth should accelerate.
Over the next year I expect Galvanizes go to to accelerate for the following reasons.
First galvanized will now have the funds to expand its direct to consumer education business.
This includes adding students to existing facilities.
While also opening up new markets across the nation.
Together, K 12, and galvanize will also increase.
The use of both hybrid and fully online training model.
Here galvanized will be able to leverage K 12, deep expertise into teaching students and blended and online environment.
Second we believe the use of income share agreements or Eisais will help drive demand.
Income share agreements make training programs more accessible students can to further tuition costs until after they secure job. This is a win win for both galvanized and participating students.
Third galvanize will work with new and existing enterprise clients to re skill and upskill their workforce a market that has huge potential both domestically and abroad.
In fact, the World Economic Forum has concluded that given the wave of new technologies and trends disrupting business model.
Vast majority of skills required to build or most jobs will have shifted significantly over the next five years.
And the skill that's most needed data analytics and software development.
It's worth noting that in the U.S., 54% of companies think there's some sort of re skilling of their own workforce will be needed by 2022.
This tech oriented corporate training requirement is a perfect for fit for Galvus governance galvanizing his expertise.
And fourth we plan to expand galvanizes existing efforts related to IP staffing requirements.
Corporations will spend more than $39 billion in outsourced IP staffing support.
Slide 2024.
Calvin eyes is positioned to provide companies that candidates that have customized credentials tailored to each company's unique needs. Many graduates won't have to find jobs because they can immediately feel accompanied needs as outsourced I T. Stafford.
In summary, here's what we gained from this acquisition the galvanized management team.
Brand recognition.
Network of alumni.
Campuses and of course industry, leading software engineering and data science programs.
All of these benefits will allow K 12 to accelerate its entry into the important and growing market for software engineers and data scientists.
Importantly, this acquisition also fits nicely into our existing strategy of being industry leader in career education for learners at all stages of life.
Our goal is to continue to build a strong and profitable career readiness business, reaching nearly $300 million in revenue over the next couple of years.
We're already nearly $100 million in a destination career academies alone this fiscal year and growing.
I would just getting started.
Excluding the effects of purchase accounting.
When I will add more than $50 million to that revenue stream this calendar year.
Importantly, galvanized business unit will be EBITDA positive excluding purchase accounting in fiscal year 21.
Reminded that James's comments.
He will discuss how purchase accounting will affect their revenue and their cost.
Both organically and Inorganically, we will continue to look for opportunities to further expand our technology enabled career readiness business.
Especially in areas of healthcare information technology.
As you know K 12, as a very small amount of debt and a balance sheet full cash.
Investors have often asked how we'll use cash to drive shareholder value.
The galvanized transaction was funded completely with cash from our balance sheet.
Putting our cash to work as we said we would.
However, we do believe that this isn't the only smart properly funded acquisition to be done.
The fund other acquisitions should the opportunity arise we just closed the line of credit with the bank that will give us up to 300 million in additional financing.
This funding in addition to our strong balance sheet and cash flow.
The flexibility to continue to grow.
This line of financing will only be used if needed since our core business continues to demonstrate strong cash flow from operations.
In closing.
Career readiness and skills based learning prepare students for our rapidly changing workforce is increasingly important in our country and around the world.
Career readiness is critical for our economy for employers and for the diverse student body that we serve.
Our acquisition of galvanize is consistent with our goals to help students prepare for their futures, while also driving long term growth and profitability for show.
We intended to continue leverage.
Expertise and technique Tech enabled education to build a strong career readiness business.
Marketing, which we are rapidly becoming a national leader.
I want to remind everyone. The K 12 mission remains the same we help students reach their full potential through inspired teaching and personalized learning.
But remember.
For potential can mean the workforce.
College true military career further pursuits students and learners coming all ages and come from all locations are flexible tech enabled platform allows us to be a leader in this field.
Thank you for your time today now hand, the call over to James He will elaborate on second quarter financial results as well as provide some additional details on the galvanize transaction James.
Thank you Nick good afternoon, everybody.
First let me quickly recap our reported results revenue for the quarter was 257.6 million.
An increase of 1.1% from last year adjusted operating income was 36.5 million a decrease of 2.4%.
Capital expenditures were $9.3 million decrease of point 3 million.
In each case as Nate mentioned these results met or beat the expectations, we provided in our guidance last quarter.
Our core business continues to perform well positioned that positions us for accelerating growth into next year.
Excluding the galvanize acquisition, we are on track to be well within the guidance ranges. We previously provided.
More on galvanizing imminent.
Let me turn to our results for the quarter revenue from managed public school programs increased 6.8 million or 3% to 229.6 million.
This was the result of increases in both enrollments and revenue per enrollment enrollment rose, 1% year over year and revenue per enrollment rose 2%.
Had a full year, we expect revenue per moment to be roughly flat to last year.
Institutional revenue declined 16.2%.
This is largely due to the fact, several large general education customers for whom we provided the infrastructure content have gone out of business foreseen major declines in our business for the full year as noted last quarter, the institutional business will decline approximately 15% to 18%.
Private pay revenues were 8.6 million a roughly flat from last year.
I want to know that for the remainder of the year. We will include the galvanize results in the private pay line of business.
We will be revisiting our external reporting for fiscal 21.
Provide more insight into any potential changes in the fourth quarter.
Gross margins were 35% and marginally up from our first quarter gross margins, including the impact of galvanizing purchase accounting gross margins will be 33% plus or minus around 100 basis points for the year.
Selling general and administrative expenses were 59.8 million.
Slightly down from last year by 1.5 million.
The acquisition of Galvanize will put some pressure on us unit costs for the back half of the are particularly with the impact from purchase accounting, but we still expect cost to be relatively flat to last year, plus or minus a couple hundred basis points.
EBITDA for the quarter was 47.5 million and adjusted EBITDA was 53.7 million operating income was 30 million 30.3 million and adjusted operating income was 36.5.
We ended the quarter cash cash equivalents and restricted cash of 213.1 billion, an increase of 45.7 million compared to the first quarter.
We funded the galvanize acquisition as I mentioned from cash on hand, So we expect our cash balance to dropped materially when we report next quarter. In addition to our acquisition of galvanize.
We've entered into credit facility. This facility provides us with up to 300 million and financing. We believe that this facility. In addition to our strong balance sheet and ability to generate free cash flow provides the financial flexibility to fund our existing operations, while continuing to pursue acquisitions in the current readiness space.
Capitalized costs were 9.3 million, which is basically flat to last year and our effective tax rate for the quarter was 33.5%.
Still expect our full year tax rate to be in a 20% to 30% range, we indicated last quarter.
We will also see a multiyear cash tax benefit from the galvanized steel as their net operating loss carryforwards will help offset some cash taxes, we would otherwise be pay.
Our guidance for the rest of the year implies a decrease of approximately 20 million of adjusted operating income decrease is attributable to the impact of purchase accounting and negative EBITDA galvanize. Please keep in mind that while we do pick up the revenue for the remainder of this fiscal year. The revenue was also diluted by purchase County, which is why the impact to our guidance is somewhat muted as Nate.
Mentioned, we expect the underlying galvanize business to contribute more than $50 million of revenue this calendar year.
And we fully expect the underlying galvanizes grow into next fiscal year exit next year positively contributing to our adjusted operating income.
So for the full year, we're now looking at.
An outlook of revenue in the range of 1.033 billion to $1.040 billion.
Capital expenditures of 45 million to 49 million.
Tax rate of 28% to 30% and adjusted operating income in the range of 48 to 52 million.
And for upcoming third quarter, we're looking at revenue in the range of 252 million to 255 million capital expenditures of eight to 10 million adjusted operating income in the range of 18 to 20 million.
Before I hand, the call up the operator for Q1 day I want to reiterate Nate sentiments that the galvanized Gil will help accelerate our strategy pursuing the large and growing curve readiness and lifelong learners market I.
I believe this is the first step in creating meaningful shareholder value through our career business and we will continue to look for opportunities in this space.
Thank you I'll turn it over the operator operator.
At this time will be conducted a question answer session. If you would like does question. Please press star one on your telephone keypad a confirmation so indicate your line is and the question Q.
Your first start to fuel at your move your question from the Q4 participants Gigi Speaker question, maybe Mr to pick up your headset before persons Sarkies. One moment. Please let me pull for questions.
Our first question comes from out of Corey Greendale personnel.
Quick question.
Hey, good afternoon, congratulations on the acquisition Netback couple of questions about galvanize.
First of all how would you.
Described galvanizes differentiation versus.
Versus other boot camp providers in the market.
Well, Hi, I'm curious as Nate Thank you for the.
Attending today.
I'm going to talk first about the things that attracted me to galvanized and then I'm going to ask harsh to give his description of how a differential itself.
First of all.
I wanted to find a company that is a student centric culture and I think they have that they're all about.
Outcomes for students I wanted to company of is large enough to have a proven that they can scale.
It's critical that we not be stuck with a small company that can't grow.
I want to accompany that shown growth I want to accompany that had a strong management team, which I think this team has so I think they'll be able to differentiate themselves and I wanted somebody who is recognized for high quality and when we looked on sites that evaluated many of the the boot camp companies. They were recommended highly recommended because they were all.
Already rated very highly and the quality there friction.
Harsh I think you I do that from my perspective harsh I'd Love you to say, how do you differentiate itself in the marketplace.
Thanks Nate.
One of the biggest ways that we differentiate ourselves in the size of the base.
I'll give you a quick example.
When I look at our alumni.
Back threads or eliminate communities.
Biggest in most frequent message I see in there is hey, where my companies hiring for software engineers or data scientists whose interest.
And I mentioned that as a differentiator because not very many places Ken can have a well engaged large 8000 plus professional network.
Sure Chris.
Network effects or something that we'd French galvanized and reactor because of the size we've been around sense.
2012, one of the earliest in that space and therefore alumni.
Size is larger than than most other places.
The other thing is when you look at rating sites.
One of the Differentiators is that galvanizing hack reactor show up amongst the top five often top two as places to go to learn software engineering and data science and so from a prospective student perspective that immediately differentiates us from the tens if not hundreds of other.
Competitors are players in this space.
Back already knew Nate let me know Theres, something you think I Miss I.
I think the only thing that we didnt cover was the high placement rate.
That's right.
Galvanizing aircraft are both have historically been known to have some of the highest placement rates out of all of the coding boot camps in this space and we continue to keep that as our number one focus.
At an early in the call the majority of our graduates 85% or more placed within six months average starting salaries across entire nation at $90000 plus and over six figures in the big markets like New York in San Francisco.
And.
The alumni base has a lot to do with that as well as the reputation in the marketplace as being high quality generating.
Junior to most embed level engineers, when they're coming out.
Good very helpful. And then my follow up and I'll get back in the queue. Eight you mentioned a number of potential synergies from the acquisition.
I was interested in specifically if you could say a little bit more about what galvanizes.
Primary methods of customer acquisition are and whether you see enersis any synergy on that front like guilt marketing the programs to graduates of.
The existing kind of managed public schools or anything along those lines.
I'll talk a little bit about this harshly you can elaborate if I Miss anything.
First of all these two segments of the marketplace.
And for for galvanized one is the consumer business and then the consumer business they use.
A number of techniques you would imagine there's a lot of social contact and recommendations.
They do a little bit of a web advertising and search names search engine optimization and marketing.
So the most of the acquisition for consumers is coming from either.
Social social recommendations or coming from the Internet. They do very little on air advertising might affect them plenty that I know of.
So thats the most of how they get their their customers.
There are.
I want to minimize this.
This.
Reference and referrals because that business three big based on fact that there are 8000 alumni and they recommend others, who have gone through the who need to go the same process they've gone through but in the enterprise business. It is a face to face sale.
Very very different there is a face to face work face were workforce that is growing and calls directly on corporations to have corporations give them information about the kinds of specific needs. They have and then they go in train in there there are boot camps, specifically forward this corporations neat, but thats a face to face sale much different than.
On the consumer business harsh anything else for that.
No I think you know bear the majority of them come from referrals word of mouth from our alumni that strong alumni network.
And the rest of it through digital digital advertising.
Digital acquisition online.
Good it inside a do you foresee.
Marketing directly to people who are in are graduating from the managed schools or anything along those lines.
Yes, we do.
But I want to be clear that.
This is a this is a pretty intense program.
Yeah.
12 week, but but most of the people who apply the first time don't get in the first time they have to take a few entry level courses before they really qualified to go to the immersive intense program. So we intend to market to our students, but we also intend to help our student get some of those basic courses done first so they can roll into the program.
Galvanized runs on a qualified basis.
But yes, I think there's a synergy there that we can we can have many of our students who aren't going to go to college or don't want to go to college.
Looking for their careers I think we can help them with exploration courses and then we can help them with getting into the galvanized as well.
Excellent thanks very much.
Thank you for a have a good.
Our next question comes a lot of Alex Paris with Barrington Research. Please proceed with your question.
Good afternoon. This is Chris how sitting in for Alex.
Just congrats on the acquisition.
And the partnership galvanize.
Some questions in regard to that you mentioned the potential for.
Scheduling and Upskilling the workforce.
Could you provide some more color on what you're seeing as far as the lifetime revenue of the student.
And the potential for them to.
Go to galvanized for initial training enter the workforce and then after three years as software changes for them to reroute for additional training.
Is that an opportunity currently or how do you see that.
Evolving.
Yes, I think you our best prepared to answer that.
Yes, absolutely.
I actually think Thats, one of the opportunities for galvanize long term down the road.
Right now that entire 8000, plus and growing by over 1000 every year base of alone.
We have not yet offer.
Continuing education programs or second time around programs to re scope from a consumer perspective.
But what is happening today is when students enter into jobs, they're managers may say, hey, where did you learn this modern stuff.
And the they'll reference galvanize Enac reactor and then Exxon for conversation with that company or the enterprise.
To come in and re skill their existing engineering talent.
So from a there's two aspects to this from a consumer.
Perspective lifetime value is huge and we have not yet.
Beginning to extract that for second time or third time consumer based courses, but then the bigger I think lifetime value is when be enterprise engages through our consumer graduates, which which actually could double triple that lifetime value overtime. Thanks for your question.
Thank you all.
Fifth before you go on is one other thing I want to add to that and it's sorta talks about how we put all of this together.
We invested in a company called tallow, they're up to over 700000 students now we are going to be working hard to put all 8000 alumni here and all graduates and tell a platform now what that will allow us to do is tracked that alumni and track their skill and so as they grow and as corporation see them grow we want them to.
Come back into the system and costly get upgraded skills, and we'll be able to track.
When was the last time, they got them skills will be able to market to them and say you realize this new technology or you ought to be trained on and talk about skills. So we'll be able to talk to those those gradually through I'd tell a platform as we get them on the platform. So thats, another synergy and wave of of.
Having continuing education.
That's great and my last question or series of questions. You mentioned some comments a in the queue and any about the go to market proposition the difference in value that you bring.
Being a top five boot camp what are you seeing as far as student mix a geographic trends.
Are you seeing an increasing percentage of your students.
I wouldn't call it transferring or moving to your more elite boot camp from other competitors.
Harsh.
Yes.
I'll be Frank I wish I could answer that with specific data off the top my head, but I'll tell you more example, based.
We do get students who either graduated or went through some other program halfway through a quarter the way through and decided to change to come to galvanized for data science rack retrofits for software engineering.
That does happen.
I'll be honest I don't have the data tell you, whether it's increasing or at what rate.
But at consolidation happens in this space I expect it to continue to increase.
Especially because we need to be focused on quality.
As our top most metric.
Does that answer your question.
Yeah. That's good all very helpful and Oh. This is a lot of interesting things in front of me, but I'll hop back in the queue and thank you for the color and look forward to the combination.
Thanks, Chris.
Devin.
Our next question comes on line of Jeff Silber BMO capital markets. Please proceed with your question.
Thanks, So much I also wanted to follow up on Galvanize you had mentioned in prepared remarks about the use of income share agreement.
I know, it's one other thing the galvanize prides itself on is it possible tell us roughly what percentage of students to use that and how that's been impacted in the market. Thanks.
Hum.
I don't if everybody else understands that these income share agreements are so our sharks, you can answer that but first I want to mentioned everyone that the reason we think it increases the market galvanize actually has just started using into income share agreements. So it's not it's not something is driven growth in the path, which is why we believe this growth accelerator.
Galvanized had just signed in arrangement to have their eisais funded.
We think our cost of capital is lower than there. So we will probably renegotiated and develop a new set of I'd say that even lower costs were.
So with that I'm OLED harsh answer, but I wanted to make sure everybody knew how we look at at that as an accelerated not as not as something they've been doing a long time.
Cash.
Yes, so double down on that.
We just started.
Broadcasting and Publicising I assays more broadly I want to say just a few months ago and so our initial data.
I believe for almost upcoming cohort is going to be about 20% of be cohort using AI assays to fund their education.
Unlike made said we just started doing this so we actually believe that it opens up the entire set of the market that that beforehand wasn't open to us so it's going to be additive to our enrollment which is really exciting.
Okay. That's it would be I guess like any other something online or somewhere that galvanized we're doing that you're doing this for much longer appreciate the clarification.
Yes.
I'm sorry, good once they come up.
No no go ahead.
Okay, great I'm going back to the combination of both companies forgive me I came on late I'm can you just repeat what you said about the path to profitability for this company and you can give us a little bit more color in terms of how are you going to get there. Thanks.
Yeah, Hey, Jeff So it's James.
So what we expect is.
That we're going to exit our fiscal 21.
With with a profitable.
Galvanized subsidiary and.
And we already seeing the early signs of growth in this calendar year, we see that growth continuing the underlying business growth continuing through this calendar year into next year, which is going to drive that profitability exiting our next fiscal year, but as you know the impact of.
The impact of purchase accounting will sort of new debt, particularly in the first sort of six or 12 months, so you're going to sort of see our financials over reflects something different but then again as sort of that washes some of that washes through and then on it.
The adjusted EBITDA exiting next year will be will be positive of our fiscal year next year.
And this can you just this is they speaking this will get to be a little confusing because we haven't disclosed all the details around purchase accounting, but I would say this the EBITDA not adjusted operating income yet, but EBITDA will be positive for the full year of our fiscal year 21.
The comment to James is making about the exit when you fall down to two full operating income or EBIT youre going to see some impact of obviously purchase accounting that shows up in and amortization of goodwill things like that which will cause it not to be to to be exiting the fourth the into year, but if you just look at the EBITDA is positive for the full year of our fiscal.
And 21, so it's going to contribute to our EBITDA.
Is it possible to give us some kind of framework about the purchase accounting impact both from a revenue perspective, and an EBIT perspective.
Yes, I think it's right now it's really early.
In the acquisition as you know there's some mechanically we have to go through but we will provide some updated guidance.
Over the next couple of quarters, we just I think its little early for US having just done the acquisition to give any guidance right yet.
But we will be for now thanks.
Next year, yes, sorry, less less thing I would mention on that from an operational perspective, I think it's important I understand that in the first six months that that Galvanizes is part of K 12, we intend to remove the shackles so to speak from from their arms. They were working hard as the company that Didnt have a lot of funding and they were tight on.
Things like opening up new sites they were tight on their marketing expenses. So we have.
He said, we don't mind im spending a little bit more money to open up new sites spending more money to do a little more marketing to students.
And to do a little bit more development, so with those those ideas, especially by the way there's the opportunity they haven't the military market, which we didn't talk a lot about but they will work with military bases to retrain soldiers as well and all of these things will require somebody in the investment in the first six months. So that's why we said it EBITDA positive in fiscal 21, but.
For the next six months, we're going to less than a little bit money you get some of these revenue opportunities going.
That help Jeff.
Yes, thanks, so much okay.
Once again, if you like does question. Please press star one on your telephone keypad. Once again, if you like Tim's question. Please press star one on your telephone keypad. Our next question comes on line of Stephen Sheldon with William Blair. Please proceed with your question.
Hi, Thanks.
For Galvanizing Standalone financial performance can you provide some detail on how quickly it's been growing the past few years.
The mix online provided versus the classroom based revenue and maybe some detail on it.
Standalone margin profile right now.
So harsh I think you should start with the mix question.
Of online versus.
This classroom.
Sure.
So galvanize has a couple online offerings. One is a full time online and the other is a part time online the former being about three months long in the latter about nine months. So if you add up the revenue of both of those and compare them against the on campus offerings. It about.
It depends on enrollment cycle.
So it's roughly about 20% online 80%.
On campus.
And harsh how do you think that changes over the.
In coming years.
I think the online enrollment continues to increase going up and what we're finding is that a lot of students are loving the.
Synchronous online offering it really feels like you're developing really strong student relationships.
Which goes counter to typical assumptions about online education.
And so where we expect that to continue growing our most.
Our incoming cohort that starts in a few weeks is going to be one of the ever for online offering. So my expectation is that.
That mix will grow while the overall pie will also grow.
Together I think questionnaire on gross margin.
The current mix of business as its constructed today and again, excluding the impact of any purchase accounting has gross margins that are better than the current K 12 gross margin by.
10% to 20%.
But.
With the mix at harsh is outlining.
Changing over time.
We obviously think that that gross margin profile will improve.
Overtime.
But but it's currently the mix is in fact better than the K 12.
In terms of growth I'm. Your other question I think was what does the growth looked like in the past.
The growth in the business as the two segments have different growth profiles.
The fastest growing segment of the galvanized business has been the enterprise business. It was the smaller the too, but it's definitely growing at a much higher rate for the consumer business. The consumer business is growing as well but.
Certainly the enterprise businesses with growing the fast we don't disclose revenue growth rates of individual business unit I can tell you that.
The enterprise business grow faster than the core business that K 12, as going fast within the consumer business that galvanize is the fastest growing opportunity we see in the second one thing I'd.
Just actually the growth question I think it's safe to say that.
As Nate mentioned earlier.
Galvanize team was this a little bit restricted in terms of what they could investing for growth, whereas we won't be so restrictive and we fully expect the galvanize.
Business to grow at a rate.
Higher than we were expecting the overall K twit, K 12 business to be growing high well into the double digits offering for years to comp.
Got it Thats very helpful.
And then I guess in the kind of your.
Core business I guess, I guess on MPS student retention.
How is that trended so far in fiscal 20 relative to your expectations.
Both career readiness and regular MPS programs.
This is Nate speaking.
You know without going into the gory detail, we tried something this year and we talked a little bit better than that on the call for the for the previous quarter. We've talked about the fact, we changed the way we've a marketing in the way, we did enrollment and what that we put a little more money into some things early on in the year I think the market was not expecting it so.
It was part of our plan to market, probably didnt anticipate it.
But what it did was it shifted to the characteristics of of our withdrawal and retention metrics. So we expected and we have seen greater withdrawals in the first half of the year.
It's sort of a washing out that happens that we expect to the rest of the year retention will be slightly better than last year. So we expected to see.
More draws early in the year and lessen draws as year goes on based upon the way we marketed to students and programs are put in place. So.
In terms of retention and how it's going.
It's been largely flat with previous year, but just with a different characteristics.
We have seen by the way in the last three month tick up in retention.
Which is exactly what we expected to happen based upon the way, we put our new marketing program in place.
Great. Thank you.
Our next question comes on line of Greg Pendy with Sidoti. Please proceed with your question.
Hi, Thanks for taking my question, just one I guess trying to get to a.
Grasp on the 85% placement rate I assume as you try and embed some of.
The program at the city is that still going to be based on sort of endpoints sort of exams type thing types of outcomes or are you going to.
Be able to use placement rates as well on that because my understanding was.
Under CTG Youre looking for things like Python certification as the outcome. So I'm just trying to understand because it seems like this is a much more intense program that already is going into the placement rate and sort of salary.
Outcomes.
Yeah, if I got the question right. The answer will be we don't expect the average person coming out of.
Out of one of our programs at the high school level VCA programs to be able to be immediately qualified to move into the galvanize program. The galvanized program Youre right is a more intense program at a higher level. However, however, the key here is for us to be able to take the galvanized content and some of their entry level courses because remember I mention.
And when you go to GAAP applied a galvanized if you don't get in they have recommended a number of entry level courses you can take two to get your skill strong enough that you can enroll and one of the immersive program. So we were going to take that content and make sure. It's available at the high school level and then what is available to high school level that makes more by.
Our students more qualified now sometimes it may mean after they graduate faisel, sometimes they'll be able to do it bidding on their performance while they're in high school, but we certainly think there is a a.
Step of learning that needs to happen between your average high school and before you get into one of these programs.
By the way is there's a lifestyle change happens there as well it's not just your intellectual.
Intensity, it's all sure your life capacity, because it's very immersive, it's very intent and so you have to really be dedicated.
Much more dedicated the most high school students are going to be it's it's galvanized level. So that's a gap that we'll have to bridge and.
I think it's an opportunity for quite honestly because it means we can take a number of high school students and we can enroll them more in the lower end courses, which means we can grow the revenue in the lowering of course.
Harsh did I Miss anything you see that same way.
And do nailed it.
Okay.
Thanks, a lot.
Thanks, Greg.
The operator, there seems to be no further questions left in the queue and I'll, let turn the floor back are you for any closing remarks.
This is named speaking.
As always I really appreciate those who attended the call appreciate the question.
And.
It's obvious that you are willing gauged in what we were talking about and and I look forward to talking to you more about this is very exciting time for K 12, and I hope we will demonstrate.
Do you that we can grow this business. So overall business I think James also wants to make a closing comment by Ken James Yeah I just.
We had.
I think because of the galvanize transaction, we had a very large.
Group of listeners today is much larger than we usually have so I just I did want to sort of emphasize with any other callers that if anybody has a follow up question. After this to please contact Mike craft I think has information is on the on a press release, we issued earlier today.
So Mike will be available for any any questions our follow ups. After this call.
Devon back to you.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.