Q1 2021 K12 Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the K 12 first quarter fiscal 2021 earnings conference call. At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your speaker today like losses.
Relations. Thank you. Please go ahead.
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He jumps out and good afternoon, welcome to <unk> first quarter earnings call for fiscal year 2021 before.
Before I begin I would like to remind you that the addition to historical information certain comments made during this conference call may be considered forward looking statements. These statements are made pursuant to the safe Harbor provisions of the private.
Format 1995 they.
They should be considered in conjunction with cautionary statements contained in our earnings release and the Companys periodic filings with the FCC.
We're looking statements involve risks and uncertainties that may cause actual performance or results to differ materially from those expressed or implied by such statements. In addition, this conference call contains time sensitive information that reflects management's best analysis only as of the day of this last call.
Okay, 12 does not undertake any obligation to publicly update or revise any forward looking statements.
Information concerning risks and uncertainties that could truly affect financial and operational performance and results. Please refer to our reports filed with the FCC. These reports.
Fortune clued without limitation cautionary statements made in K 12, 2020 annual report on form 10-K. These filings can be found on the Investor Relations section of our website at <unk>.
W 212 dot com.
In addition to disclosing financial results in accordance with generally accepted accounting principles.
Yes for GAAP, we will discuss certain information that is considered non-GAAP financial information.
Reconciliation of this non-GAAP financial information to the most closely comparable GAAP information was included on the earnings release and is also posted on our website. This.
This call is open to the public and is being webcast call.
The call will be available for replay for 30 days with.
With me on today's call is Nate Davis, Chief Executive Officer, and Chairman of the Board and Tim Medina Chief Financial Officer also on the call today is Mike Kraft or former head of Investor Relations, who remains with the company as senior Vice President of corporate Communications.
Prepared remarks, we will answer any questions you may have.
I'd now like to turn the call over to Nate.
Thank you, Mike you did very well for Sun.
Good afternoon, everyone. Thanks for joining us on the call today.
So much uncertainty in our lives right now I feel fortunate our business is stable it's growing.
Well position for the future.
As you know the pandemic is helping to drive a shift to more online learning.
What our great results and not just because of the COVID-19 crisis independent of the pandemic as we've said in the past there was an evolving view of online learning as a quality option for many families. This trend started before the pandemic.
We will continue after the pending me.
A new study commissioned in partnership with a third party researcher call.
Called paltry.
Shows that more than 60% of parents believe the quality of education students receive from an online schools equal to what they receive in a traditional brick and mortar school.
In fact independent research.
Recently published by Dr., Ian Kingsbury Corroborate. These findings that the Kingsbury studies concluded that the virtual schools, often outperform brick and mortar schools. When it comes to key learning experiences, which includes promoting active learning communicating effectively managing the classroom and providing high quality instruction.
Key takeaways this while the damage [noise] may have accelerated this trend the.
The awareness and acceptance of online and blended learning.
It's been increasing every year.
Again, we believe the shift has been a key contributor to our growth this year.
So how's this growth impact our financial results, specifically first quarter fiscal year 2021 revenues were $371 million up 44.3% from revenues of the same period, that's why 20.
Adjusted operating income was $39.2 million up 275%.
On the loss in the same period of fiscal 20.
And similarly, adjusted EBITDA was up even more on a percentage basis as was cash on the balance sheet by all measures. We're stronger we're going faster than any time in recent history.
I won't steal all Tim's Thunder [laughter] because.
I'm going to let him address the full set of financials.
Our financial results reflect the multiyear strategy I communicate to investors several years ago.
And since then have implemented.
Some of you May remember, we had two goals first to support the growth of our core general education business and second.
To more efficiently use our strong balance sheet to expand and did his career learning industry.
As you can see in the results we announced today both segments are growing gross and operating income margins is starting to improve which leads to improved return on invested capital.
And we believe these improvements are just the beginning of the benefits and the strategy a first spot in mid 2018 excuse.
Excuse me too.
To align with this strategy and to help investors better understand our progress and our performance.
Well, providing new disclosures in our reporting starting this quarter student enrollment and revenue data will now be reported separately for our general education and her career learning lines of revenue.
This will allow investors to more easily see our progress in building career create learning.
While maintaining focus on the core general education market.
Additionally, we'll be providing detail on the adult learning so.
So that investors can track our expansion into that market.
Well consumers enterprises and the military led.
Lastly for your reference we provide a historical result in the new reporting format.
I will provide additional details on definition of each line of revenue in his remarks.
With that as a backdrop I want to turn to the general education market.
For the first quarter, we posted enrollment would be 165000 enrolled.
Enrollments for 49% increase year over year. This is the largest enrollment increase we've delivered in over a decade.
We saw enrollments rise in the vast majority of states and schools, where we support full time public programs.
As well as in all of our private schools I'd like to also point out that enrollments rose the most.
In grades K. to fly the skew younger grades makes sense in our cobot environment era, because students at that age aren't able to hear just social distancing guidelines as effectively as older. Students. Therefore, many parents of younger students are choosing an online auction.
Importantly, even with the huge surge enrollment and logistics associated with Onboarding tens of thousands of students.
Outreach data indicates that over 75% of parents were satisfied.
With the enrollment process.
In fact parents satisfaction as you actually rose year to year, even though we onboarded more than twice as many new students to.
To handle the volume be honed in automated a document submission process improve communications and engagement learnings is in parents.
We increased functionality of the K 12 that made a host of other improvements.
That's not to say the enrollment process with without challenge.
For example, the availability of computers and materials during the shortage.
Was amazing if you tried to buy a medium to low price computer. During this period you know it wasn't easy.
Another example of the availability of documents the parents needed to enroll in our schools.
When schools in doctors offices were often close.
Difficult for them to get those documents. Another example, some boards raised their caps or what we would limit on enrollment, but it did so at the last minute or late in the enrollment season.
But through it all we persevered and we now support nearly 80 full time general education programs, which.
Which include our private schools that are up running and providing an engaging learning environment. These results are a testament to the depth of experience in our organization strong relationships, we have with our schools and school district customers and.
And also strong relationships with our supply chain partners. This.
This demonstrates our ability to quickly scale, our business rolling out online learning isn't easy when you do it at scale.
But I can't say enough, but how the K 12 team rose to meet these unprecedented challenges.
I'm often asked about our operational competency are.
Our ability to enroll this many students in terms of this many new programs and hire teachers demonstrates our operational excellence, our core competency and operational excellence comes from the ability to take this complicated process of enrolling students and operating in school and transform it into a well run legally compliant.
Educational program so the behind the scenes work is where we excel.
In addition to our school solutions, we also saw growth in revenues by selling our core products.
Services to school districts and in schools across the country.
Learning solution team, which you may have heard US say is the institutional business added over 150, New school and district partners. This year, bringing our total to over a thousand school districts nationwide.
These programs will support over 25000 learners, including students from.
David Douglas College in Oregon.
The Tom Waters School District in Washington, Rescue Union School District in California, and the State College Urea School District in Pennsylvania, I just wanted to name a few to show you the geographic diversity of our district customers.
We're also in the early phase of implementing a new program in partnership with the Rhode Island Department of Education. This program and support medically vulnerable students those with English language learning requirements and other families seeking alternatives to in person instruction during pen to me.
Importantly, we didn't just win new customers, we retain the vast majority of the existing base on a year over year basis over 85% of our large and learning solutions customers renewed their services for this school year.
This is the result of strengthening and re imagining our institutional business in the past few years, while shrinking rather then abandoning that line revenue.
However, I want to be clear something even these great results. Unfortunately, not all of the new implementations went smoothly.
This movie as we'd like a few custom implementations that we look to launch on very short time frames did not go as planned.
One such visibility highly visible implementation was the Miami Dade implementation, what we faced a very large custom implementation with numerous systems interfaces and evolving requirements.
Because we believe in the vision of Superintendent Carlo.
We committed to delivering that solution in six weeks something that should have taken us six months to implement and regular circumstance.
Fortunately just just wasn't enough time to iron out all the Kinks in the interfaces and systems in a short timeframe.
To this day, we still maintain great respect for superintendent Caballo and his staff and their vision.
Now I'd like to turn to career learning for which we posted another year of very strong growth enrollments wouldn't you 31000, an increase of 127%.
Year over year we.
We saw growth in 90% of the programs we administer.
While adding four new programs this school year.
The ongoing interest in career learning programs clearly aligned with what many families are looking for and their students education.
And the same contract survey I mentioned previously.
More than 83% of the parents survey believe it career programs are a good way to prepare their students in demand jobs and for attending trade schools and certification programs.
We need to take on college debt or go to college.
Well do most of these parents.
Say that they would rather prefer their students take career oriented courses as opposed to general elect is in school remember many students taking create learning programs will still 10 College.
But with a better knowledge of their interests and skills.
These results underscore how K twelves career learning programs are in place with the right direction at the right time.
During fiscal 21, we will continue to invest in building out our career rep programs.
For Middle and high school students, we plan on adding between two and five new programs or schools. This year.
And as we noted in previous calls and communications over the next two to three years, we plan on expanding our career learning programs across all 31 states, which we operate full time programs. In fact, we'll also look to add a second or third program in several states due to the high demand for these programs.
So this year, we're also planning on adding new industry pathways in digital media.
And legal in law enforcement.
The California virtual academies will be leveraging a new relationship with the California Broadcasters Association.
Nicknames C.D.A.
To expose more California high school students to digital journalism and media sales pathways.
This collaboration will give K 12 parents students access to CBS network of industry experts.
The program also includes an industry indoors curriculum. The integrates project based learning the technical and production experiences hands on experience.
To complement our career learning offerings, we established a student participation agreement with two important organizations the business professionals of American and the family career and community leaders in America.
These arrangements students will have an opportunity to represent their schools at virtual and in person events competitions at the local state regional and national levels.
Well also be able to gain access to each organizations programming resources and national networks of career focused peers and industry professionals, which is what motivates the young student to stay focused in their career pathway.
These partnerships are just a few examples of how K 12 powered learning programs. It's much more than just a quick here. It's a comprehensive interactive experience were learning environment look for more partnerships in the near future.
Our quick connection partner tell it was also experienced an incredible growth this quarter their community of users grew to over 1.1 million an increase of 10% since just last quarter.
Nearly doubling from a year ago.
Hello, also add new industry partners like Abbott Labs, CBS X lawn and publics were leveraging the platform to feel current job offerings and to connect to future workforce.
And through the end of the summer Tallow made more than 15000 direct engagement matches between talent users and a college of community I'm, sorry, a college accompany or other organization partners.
As important as making these quick connections our Telo also find the right fit for the U.S is even more more importantly.
That's why I tell it was also for strategic partnerships with jobs allergy, which houses and award winning career assessment on rhythm and yellow you may have heard of the nations leader in managed including software.
Last year this.
This past quarter Telo successfully launched Ping.
The new web based App.
It offers an innovative solution to in person college fears this.
This launch included three successful virtual fears that connected students with colleges and companies across the country.
Future events will build on this success and will also provide connections or diverse community of students and job seekers, including a historically Black College and University virtual college career.
Proud of them.
Now I'd like to turn to the adult market.
The adult market her career learning and our galvanizing business is very strong starting to accelerate after months of pandemic related impacts in fact, this month can consumer education classes, the largest that we've ever had.
Enrollment has grown more than 30% quarter over quarter, and 45% year over year in person classes have been minimal due to dependent as we monitor safety precautions. However, we've seen remote learning not only become a short term substitute for in person classes, but actually expand the student population.
In addition, we're seeing increased interest from a nation's veterans I'll talk more about that in a minute. This.
This quarter, we also launched software engineering classes in San Jose to capture theory interest as the pandemic increases were considering adding one to three additional markets to support.
Continued growth and galvanize consumer business.
On the enterprise side of galvanizing business the effects of Cobiz continued to slow decision, making by corporations were strapped for cash. However, this quarter, we did secure new business with I'd T., a communications company and Citadel and investment firm to provide data science training.
We also saw further expansion of the military business as I mentioned a minute ago. This quarter, we became a subcontractor on a military training program for which we are Onboarding software engineers to the Air Force platform one.
We do this through weekly workshops. In addition, we launched one of the very first 12 weeks software engineering immersive classes with selective active duty members.
Due to this success, we received request for deliberate three more immersive classes in the coming quarter.
While still in the early stages of development. The military segment of galvanizing business has grown more than fourfold in the past year.
As I mentioned last quarter to community business segment of galvanized continued to be slow back over 19.
However, we delivered.
We believe that a combination of Galvanizes immersive, who can't business, what we call the consumer business in the enterprise business will deliver revenue growth in fiscal 21.
As expected galvanize posted a $7.6 million loss and EBITDA.
For the for the recent quarter first quarter, but.
Well, we continue to believe this organization will contribute positive EBITDA by the fourth quarter of this year.
This assumes the economy and our community business rebound a bit in the second half of the year is that rebound is delayed and we could see breakeven get delayed into F y 22.
Taking all this into account our revenue guidance for the year is $1.445 billion to $1.470 billion.
This is an increase of up to 41% year over year.
Guidance for operating income, we expect adjusted operating income in the range of $120 million to $130 million, that's an increase of up to 110% year over year.
[laughter]. This income improvement comes from both revenue growth the inherent leverage in our business and proactive management of our cost structure.
This year, we will continue to reallocate funds, if you like career learning activities.
While also investing in programs and enhance the customer experience increase a teacher efficiency.
Poor student outcomes.
And improved student retention.
Regarding capital expenditures were increasing our investment in the range of 50 to 60 million.
This reflects one of our stated use of funds from our recent financing reinvesting in the core business and core business opportunities as a part of this we are stepping up our spending specifically to grow our career learning business and strengthen our systems and infrastructure.
We're continuing to modernize our curriculum and increase the use of game of occasion video.
And artificial intelligence to improve student engagement.
And in building enhancing tools that support teachers, and introducing new products and services for school districts.
Want to expand.
Their capabilities, especially in Korea learning.
Additionally, our investment in career learning will include expanding the number of project based learning courses.
Deepening the continent resistant pathways.
And expanding into new career.
Pathways and.
In summary, we've posted in extraordinary strong quarter provide.
Providing guidance for a record year total full time program enrollments exceeding 195000% to 57%.
Revenues approaching $1.5 billion.
Profitability more than doubled on a year over year basis.
It's important to note that current trends and public opinion support our enthusiasm and our investment in our career learning business. This includes improving trends at galvanized, which we continue to believe it will be accretive to EBITDA as we exit the year.
Let me close on five key focus areas for the year.
These are the things we'll focus on first we remain committed to constantly be imagining the online and blended learning experience vesting and teachers and school leaders.
Second to our customer experience organization I initiated nearly two years ago, we will work to retain as many students as possible.
Showing them the K 12 power program stand head and shoulders above the rest internally, we say weve got a delight the customer.
Improvement in retention over the last few years demonstrates the effectiveness of our focus on the customer experience third.
Third we will continue to invest in and grow our general education business is.
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This includes ensuring that we have products quality and infrastructure to scale the business.
We're targeting consistent single digit revenue growth in this business for the next couple of years.
Now, we all know nobody knows whats going to go on with the pending.
So the impact of that is still unknown.
If there is an effective vaccine sales treatment if it's rolled out fast we could see more than we thought students go back to brick and mortar we might see flat to declining enrollment, but right now our belief is we can see single digit revenue growth in this business for the next couple of years.
Fourth we continue to expand our career learning business that includes expanding our footprint programs partners and capability.
We're targeting a high double digit revenue growth over the next couple of years and we might just might see another year of triple digit percentage growth next year.
And fifth.
Work at school districts to grow our sales of our current products.
Through the learning solutions business.
We believe that our continued focus on these five areas are unwavering dedication to academic service and innovation.
And increase awareness and acceptance in the marketplace for online and blended learning will enable us to produce consistent revenue growth for our shareholders over the long term. Thank.
Thank you very much for your time today, I'll turn the call over to Tim Medina Tim.
Thank you, Dave and good afternoon, everyone.
We're pleased with our very strong first quarter results. The tremendous growth we are experiencing demonstrates the strength of our business model and innovative approach to education.
We are proud to serve more students parents and school districts than ever before with our industry, leading online and blended learning programs and solutions.
And the next few minutes I will review the results of the first quarter, our Q2 and full year guidance and some of the key initiatives. We are executing on to sustain revenue growth margin expansion and strong cash flow into the future.
First, though I want to draw your attention to the changes and how we report revenue.
These successes, we are enjoying and career learning results from the execution of a strategic vision over the past several years.
Our operating structure is designed to support high sustainable growth and the Premier learning business, while continuing to grow and reinvest cash flow from the core general education business.
Given the long runway, we see with this growth strategy. We decided now is the time to adapt how we report our revenue.
Specifically, our reporting has shifted from a product based focus such as managed schools and institutional sales to a market based focus on the revenues we earn from the two markets. We are addressing general education and career learning.
This line of revenue change fits better with how we run our business.
It also will provide investors with greater insight into the business and more clarity around the key drivers of growth.
To help investors understand the transition from our old to new lines of revenue reporting.
We have provided a short presentation that accompanies our earnings release.
Slides three and four provide reconciliations from our old to new reporting for revenue and enrollments.
I encourage investors to review our FCC filing on form 10-Q for additional details on our new lines of revenue.
Now please turn to slide five for a financial overview, starting with the income statement.
Revenue for the quarter was $371 million, an increase of 44.3% from the prior year.
Revenue in the quarter for our general education business totaled $313.8 million, a 34.4% improvement over the same period last year.
This increase was driven by 48.6% increase in student enrolment, partially offset by a 7.6% reduction in revenue per enrollment.
Revenue for our Premier learning business more than doubled compared with the prior year to $57.1 million.
This increase was driven by a 126.5% increase in enrollments in the acquisition of galvanized.
As you know we acquired galvanized in January of this year. So we are seeing a full year impact of galvanized and fiscal 21.
This is the fifth consecutive year that we grow enrollments, reflecting the long term ongoing trend of greater acceptance of online education, and K 12, improving student retention rates each year.
Certainly COVID-19 has been a strong tailwind for topline growth in enrollments in fiscal 2021, as Nate mentioned however.
However, what else.
The pandemic overall enrollments would have grown in a range consistent with the historical pre pandemic levels of growth we've seen over the past few years.
On the topic of revenue per enrollment.
Current results are due to state budgetary pressures in the wake of COVID-19, particularly in California.
In addition, the impact of school mix was a significant factor as a substantial portion of our growth is occurring in lower funded states.
For the rest of this fiscal year, we expect to see continued pressure on state budgets from the pandemic and the risk of some recessionary pressures on the overall economy.
Over the longer term, we believe revenue per enrollment will rise in line with historical trends.
Over the past 20 years per student education funding for grades K through 12 has risen between 1% to 2% on average across the United States.
While the impact to our company may vary due to school and state mix. The overall trend is upwards.
Gross margins for the quarter were 35% over 90 basis points higher than the prior year.
Margin improvement was driven by higher enrollments in both general education and career learning, partially offset by the lower revenue for a moment.
We believe that gross margins for the full year will improve on a year over year basis, largely due to the scale of our business.
Over the long term, we see opportunity for further margin expansion from continuing to grow our topline, including in higher gross margin adult learning revenue.
As well as from the efficiencies, we're driving into our operations.
Similar to my comments on gross margin over the longer term as we scale. The business, we expect to realize increased operating leverage and cost efficiencies and our SGN a cost structure.
This operating leverage was demonstrated this quarter as our SGN a as a percent of revenue for the first quarter was 31.8% compared to 41.7% for the same period last year.
SG M&A expenses for the quarter were $117.8 million, an increase on a nominal basis of $10.6 million or 10% compared with the same period a year ago.
This nominal $10.6 million increase in S.J. is directly related to the rise in enrollments and the scaling of our Onboarding sales and technology costs to support that growth, partially offset by lower media spend.
In addition to ongoing efficiencies that we're driving into our acquisition efforts.
We also saw reduced media costs as a result of the pandemic.
Not only where other companies lowering advertising expenditure this summer, but when the Olympics were cancelled media costs fell.
It's also worth noting that first quarter expenses include expenses for galvanize acquired at the end of January 2020.
That's why I previewed and my comments last quarter, we have updated our definition of adjusted operating income, which presently excluded stock based compensation to also exclude amortization of intangible assets.
With the acquisition of galvanized and potential acquisitions, we may make we believe this offers investors a better way to understand our operating and financial performance. It also aligns us more closely with how other companies are reporting their adjusted operating results.
Now for the quarter adjusted operating income was $23 million compared with a loss of $13.1 million in the first quarter of fiscal 2020.
The improvements in profitability are largely due to higher enrollments and lower seasonal marketing expense.
Stock based compensation expense for the quarter totaled $8.9 million compared with $5.5 million for the same period last year.
The increase in stock based compensation is due largely to the timing of certain stock based grants tied.
Tied to our career running business.
We currently estimate stock based compensation of between 35 and $38 million for the year.
Adjusted EBITDA for the quarter was $39.2 million compared with $3.3 million for the prior year driven by the higher gross profit.
Our effective tax rate in the quarter was a negative 23%.
The rate was negative due to a tax benefit from stock based compensation reflected each year in our fiscal Q1.
Despite positive operating income in this years first quarter.
Free cash flow in the first quarter was negative 127.3 million as compared to negative $103.8 million in the prior year. This.
This was mainly due to the normal seasonality of higher cash outflows in the first quarter for school launch activities.
The timing of cash receipts later in the year.
We expect to generate substantial free cash flow in the remaining quarters as the year with free cash flow in line with our full year Allied guidance.
Learning a Z turning to the balance sheet cash and cash equivalents on September 32020 totaled $308.8 million, an increase of 96 and a half million dollars compared with June 32020.
During the quarter, we successfully completed a $420 million seven year convertible senior notes offering with net proceeds of $348.2 million received by the company.
The notes bear an interest rate of 1.125% freedom M and again mature in 2027.
In connection with the notes the company entered into capped call transactions that are expected to reduce potential dilution to the company stock upon any conversion of the notes.
The upper strike price of the capped call transactions is 86.17 per share.
The cost of the capital of the cap call transaction was $60.4 million and was recorded within additional paid in capital.
We used $100 million during the quarter to pay down our revolving credit facility and.
And intend to use the balance of the proceeds for general corporate purposes.
Our increased Capex guidance. This year is one example of that.
We'll also use the proceeds for an organic investments, especially in support of our fast growing career learning business.
Capex in the first quarter was $12.8 million and as Nate pointed out we are increasing our full year guidance for capex to a range of $50 million to $60 million to drive improvements in academic performance student and family experience customer.
Customer service retention and innovation.
Celebrating the benefits of these roadmap investments to sustain our growth beyond the current year and.
And to enhance our competitive position in the marketplace is prudent given the current strength of the business the opportunities and our balance sheet.
Our capital priorities for fiscal year, 2021 hour, our free cash flow generation.
Balance sheet strength and flexibility.
Investing to sustain organic growth and strategic acquisitions.
Finally, turning to slide six and our guidance for the second quarter of fiscal 2021. The company is forecasting revenue in the range of $358 million to $366 million.
Capital expenditures between 12, and $15 million and adjusted operating income between 42 and $45 million.
For the full year. The company is forecasting revenue in the range of 1.44 or $5 billion to $1.470 billion. Adjusted operating income is anticipated to range between 120 and $130 million.
Capital expenditures are expected to range between 50 and $60 million.
And the effective tax rate for the full year is expected to range between 26 and 29%.
And with that I will turn it back over to Nate.
Thanks, Jim.
We obviously are coming a lot today with the change in reporting.
The guidance the.
The new numbers, so I hope, it's all being absorbed will we're here to answer questions. So let's open the floor up to questions operator.
As a reminder to ask a question press star one on your telephone keypad to answer your question press, the pound or hash key jump I look in politics, and then they roster.
Our first question comes from Henry Chien with BMO. Your line is open.
[noise] Henry your line is open.
[noise] panicked or am I mean academy.
Yeah now we can hear you Henry.
Okay, great Yeah, no. Thanks, Thanks for the update and it's very helpful to hear I'd said to refer to the new segmentation I was why don't you talk a little bit about.
I guess two things one in terms of the enrollment it I guess, what's sort of your I mean, just just trying to disaggregate a little bit.
How much of it is related to pandemic versus how much of.
You know you're expanding services are expanding Tam. It if you can provide any insight to that and ER and if you could also speak.
Well now now that with this the new Segmentations, how how how leverage in the model would work.
You know understanding its.
Yeah, probably added this amount of leverage in the tech and software model that I was wondering if you could speak a little bit to that as well. Thanks.
Okay, well, let's try to tackle those enrollment [laughter] disaggregating the enrollment growth [laughter] you know we talked about the fact that.
The career readiness Grove, and I don't think that has much to do with.
With the pandemic there may be some people out there, who said I'm going to dive into career learning because my normal high schools closed but for the most part we think that's growth due solely to the new programs, we put in place.
Certainly the galvanized growth was not associated with the spend to me. Although you do see it sometimes Henry people, who are when they're not working or they've lost their jobs. They go spend little more time getting educated so we may have a little bit of that being in there, but we think the vast majority of the enrollment growth in career learning and the revenue growth in Q.
We're learning is really associated with with the program itself.
Uh-huh, it's hard to tell on the general education side to be honest with you.
I hesitate to give you any number or try to split that out because I. Just don't think we note I don't think we know how many people make which kind of decision I would say this though is one way to think about it when.
When we looked at the kind of growth the nominal growth we were getting in the last couple of years, we were getting a well into the 14000 15000 student growth and it was growing so you can assume that of our growth. This year you know it would have been somewhere north of 15000.
You know south of.
90000, I can't tell you what number it would be though its just the best way I could disaggregate. It just it's hard to tell because parents make the decisions on the basis of many things and some it was safety for sure but some of it was also what we've just seen as an exposure in the marketplace.
Got it.
Yeah, the leverage Tim you want to answer the leverage yet Henry hub.
You know for the last several years, we've been focused on improving profitability and free cash flow and this year, we did see some benefit from scale.
And.
You know really him on both lines of revenue for your learning Inge and general education of course.
And so I'm not sure exactly.
Where you wanted to go with that question you may want to clarify it this way we could ever I'll give you a couple of a couple of points to understand.
When we saw more people interested in online learning, we didnt have to spend as much money in media and advertising. So the marketing spend went down the spend for enrollment center. However had had to keep pace with the marketing spend promotional alone could go down we didn't have to increase most of the core.
For departments, our accounting Department didn't increase our finance you know reporting department did not increase our logistics department didn't have to increase so all of those departments our size, whether we doubled enrollments are AAA enrollments doesn't increase in the number of some support there yes, we have to buy more computers, yes, we have to buy more mature.
Cereals, but those things are the variable cost the fixed cost associated with the size of the departments was already there and in fact, we had started in F. Y 19, Im sorry for 2000, we had started enough why 20 with a cost reduction program that we put in place it saves us the money enough why 20 any kicked in on a on a Monday.
Big basis going into 221. So those are the reasons why I think you're seeing margins get better and leverage is there because most of the growth that we're getting doesn't require additional expenses that are at our corporate department. It really requires extra teachers ex computers and extra material beyond that for the most part we don't really have to increase expenses.
To take a more robust.
Yeah got it okay. Yeah, Yeah I was I was also thinking you know that the growth in career.
Yeah, the career side of things and whether that's different leverage profile versus down you have general education.
I think it's a different leverage profile in the early years because in general education, we pretty much built all the content.
That we need to build we're going to try to upgrade it with some artificial intelligence and and a newer technologies like that but we're still building project based learning courses, which is the interactive course allows students to learn their crew ready career, a very courses. So were building more content. There. So I think there is little less leverage in the <unk>.
Learning business.
Because it hasn't reached it it's it's scale curve yet so.
So I think there's less leverage their news in general education.
Got it okay, yeah that makes sense. Thanks, so much and congrats on a stellar results.
Well, thank you for listening in Henry I'm sure, we'll be talking more.
Okay.
Operator next question.
Our next question comes from Greg Pendy with starting your line is open.
Hi, guys. Thanks for taking my questions. So I mean.
If I'm not mistaken then essentially not to harp on the prior question, but the the SDMA only going up say 10 million. It's it's your student acquisition costs I assume.
It's really what's driving are coming down and if that is the case can you just give us a little bit more color on sort of what a normalized rate would be you think maybe going forward, assuming maybe the media one offs and everything kind of came in.
Well first of all let Tim talk about what.
With the.
Run rate kind of cost might be but I would I would draw your attention to the fact that I don't think it was just acquisition cost per student I think it was also our corporate costs were not going up is you know and we've kept SGN a at the corporate level flat for a number of years, we had a little bit of an increase this year.
But not nearly the kind of increase compared to what enrollments for it. So I don't think it was just acquisition costs I think it's awful overall corporate costs. We have we have produced a pretty efficient Finance Department Logistics Department Legal Department, you know all of those departments did not really see any increased the little bit of increase that.
We did see came primarily from the area of focusing on retention and put a customer experience department in place small increase there, but we did add some hit there.
Just about all the other departments remained flat.
So I don't think it was just acquisition cost, Tim and Greg We don't Uh Huh.
Disclosed the that that metric. However, it is accurate that or our overall media spending like like many other companies was down.
This quarter and we had so much enrollment driven.
By just more generally into our company so our acquisition costs.
Just on the media side were much lower than in prior year, but we don't disclose that metric.
Okay. That's helpful. And then just one more I guess you know the world has changed a lot since the galvanize acquisition can you just kind of give us I guess big picture, maybe some of the areas, maybe it's exceeded and maybe some of the areas where you know it's been a little bit.
Behind just in your opinion or since you did the deal.
Yes.
Let's start with the areas that are behind.
Most most clearly most visibly there are three parts of this business. One is the community business. It's not the reason we purchased it but it came along with it it looks like a little like do we work business you have a physical facilities, where people that are are leasing space, especially entrepreneurs young entrepreneurs and their leasing a why.
It opened kind of friendly space, obviously with Colgate people are not coming into that space and so that community business not only was not growing but also shrink during the current period. So that business is not performing as as we thought it would when we did the acquisition.
The enterprise business is growing but is not growing at the pace, we thought it would and that's primarily because as.
As you know many companies, whether your airline or you're a hotel company already retail companies, they're little cash right now to say the least right they're not getting the kind of revenue that they thought they were going to get so they're not spending money on the things such as training employees and in building a more I T system. So we're seeing a slowdown in spend there other companies who are in.
In a in a place like a telecom companies are still growing so you mentioned the T. Mobile deal last time, so that that business is sort of a slightly growing and not nearly going as fast as we thought the upside business has been to the ER.
The first one is the community business that the upside businesses, the consumer business and that's where the individual decides that they want to get an immersive training in software engineering or in in and data science that business is growing much faster than we actually thought it was a part of looking at the time, we did the acquisition and even though we're not.
In the physical classrooms were still getting more than what we call remote more online learning going on so as I mentioned in my script. There are more students enrolled in that program than ever before.
Bye Bye bye factor on by factor too. So it is actually performing much better than we thought it would and we think if we were back into a brick and mortar environment between the remote and the brick and mortar environment together it will grow even faster the final piece of the puzzle, but it is growing faster than we thought is the middle.
Her business.
You know was a it was a nascent little opportunity and now we're finding that the federal government and military also wants to train its personnel as they need to be a lead the military service.
To help make sure they get jobs, and obviously I T jobs are well paying job. So they want to make sure they're getting the train. So that's another one that that's performing better so summary, military consumer performing better enterprise is performing.
Less faster than we thought going as fast as you thought and community business is declining.
That's very helpful. Thanks, a lot yeah, that's very good thanks.
Thanks, Greg.
[laughter] again, if you would like to ask a question press Star one on your telephone keypad. Our next question comes from Stephen Sheldon with William Blair. Your line is open.
Hi, Thanks.
Wanted to ask first you know what what you roughly a sound and the full year guidance for starting.
To ending enrollments in both general education and career learning yeah. It looks like it's been down I think mid single digits in aggregate the past three years start to and would that be a fair assumption for this year.
In your in your decline.
Yeah. So I'm also not I don't think we actually give a point to point a number there, but what I will say is that we you know we saw much higher re registration in.
In the spring semester students coming into this year.
And so we at the same time on the other side of the pandemic, we're modeling higher withdrawals and.
You know so it's we don't give a pinpoint number as you mentioned it usually does a slightly declined and we would expect this year would have a similar slight decline as the year progresses.
The well have to see a time just bought let's see on some of the factors Nate mentioned about.
The virus vaccine those are all uncertainties that make that that prediction difficult.
If we just looked at the first two months of the year already from September until then we're almost at the end of October. So the end of October our internal reports tell us that we're not declining as fast as we did last year, but we don't think that will hold we think that over time, we'll start to see some more deterioration, but right now retention is better than it was last year, it's actually.
The improved from last year and you can imagine some of that's cold.
As people start to hear that that this year cope with the code rates are already going up in in colder state and the expectations that that was going to see it go up through the winter. We may in fact see better retention that we thought we would normally we see some deterioration during the year.
We may not see that this year, but as Tim said he said it appropriately. We just don't know at this point in time I challenge anybody to predict what's going to happen with Kobe and I'll send it back.
Got it yeah it makes sense.
And if it's more of your revenue comes from Middle School and high school career learning, how could that impact overall retention rates and marketing efficiency over the next year. So again looking at clear learning enrollments versus general education.
Well in career learning.
I think the best way to look at it is.
We will likely see some the cost the teachers and little higher.
The retention is a little bit better.
So there's sort of an offsetting that but we we expect to see retention better because that's what our cost of all the early data from the first couple of years of the program has told US is that retention is better in those programs. Therefore, the cost of acquisition, we won't have to acquire as many because whenever it is replacing as many that's not like an order of magnitude decides to one but we're seeing.
Finished point improvements will create learning over what general education has done so I expect to see over the next couple of years.
That the cost of acquisition for career learning will probably go up a little bit and then stabilize a little bit only because im going to spend some time exposing the market too to it the second big factor is scale.
Where we have 31 states in which we operate for our general education programs, but we're only at 20 states are so for our career learning when that gets the 30 I think it was going to be able to leverage national advertising programs with digital and on air and we'll start to see more efficiency in that program.
Now the general education sort of has a.
A different mix general education.
We already are at scale on on the customer acquisition side, and I think that you will see it it probably won't change much. We did have a dip as Tim talked about though this year, but I don't think it's going to go back to where it was because the the visibility of online education is still greater than it was.
Before cold.
So that's sort of my.
You know I can give you any numbers there because I can't give you numbers, but I can tell you directionally that that's how I see it shake it up now that that's really helpful.
Makes a lot of sense and just last one for me.
If you think about kind of the opportunity for hybrid career learning options. I know you have some small hybrid offerings out there right now and say the Wisconsin's one but how are you thinking about the central to more broadly rollout hybrid offerings over the next few years and what what would be the challenges I guess to do that.
Everybody on the management team that sitting in the room or anybody else on the call is probably left and right now because they know this is a hot button for me I strongly believe that that face to face needs to be a component of everything we do.
I don't know that we will go to full blended schools, where student goes to a classroom five days a week and takes using online digital content, but I do think that students who go to an online school need to go to some place periodically where they're facing the rest of the appears that basing their teachers and so I believe that it's a it's a big part of what we're going to do.
Especially into real learning, because it's going to need to be more hands on experience. We accomplished some of that through a lot of a virtual tools today, we've talked before about Nexus, which allows the student to communicate with a mentor and have their projects evaluated understand what the industry is all about through a virtual learning experience, but I think there has to be more physical learning.
Expenses, there as well so I expect to see more blended programs more face to face opportunities become a part of this how do we fund that and why does it wasn't that change our models funding it doesn't because we've been working with a lot of national organizations, So national churches.
Why is the age Washington Boys and girls clubs theme parks libraries.
All of those are opportunities for us to spend just a little bit of money using some of their facilities, especially the facility to sit idle during the day you go to boys and girls clubs. The kids are generally they're into clubs in the evenings on a weekend right what's happening during the day when we've got kids in classes, it's empty so for them its incremental revenue for us, it's a low cost way.
Hey of having these blended blended operations occur so I think that you're going to see more and more of that in our programs, which is going to give our teachers more of a chance to interact with their students face to face again I want to be 100% clear that's not going to be five days a week seven hours a day, but it might be one day week it might be two days a week it might be just mornings on.
Thursdays, where the teacher, where the council, who gets a chance to interact with the students and students interact with their their peers and students interact with with corporations or partners. So I think it's a highly important part of where we're going as it as an organization improves retention improved student engagement.
And I'll stop there because everybody's laughing because they know I can wax on for this for hours I believe in it.
Well I appreciate the color and congrats on the results.
Thank you.
Our next question comes from Alex Paris, with Barrington Research. Your line is open.
Hi, guys I just have a a quick question I'm sorry, I got on the call late so if you addressed this pardon me but.
Revenue per student was down 7.6% in general Education I'm sure you commented on it down a little bit more than that and career learning.
I kinda, it's down a little bit more than I had expected, although not entirely surprising given what's going on with.
Tax revenue at the state level and that sort of thing could you just give a little additional color on that and where you maybe see it for the full year.
Hi, Alex do you want to give for sure so I Alex.
The current results are due to state budgetary pressures related it could have been 19 up particularly in California.
Also the impact of school mix was a significant factor.
Given all of the growth that we've had occurring in lower funded states I commented Alex that we do expect to see continued pressure on state budgets from the pandemic.
And the risk of some recessionary pressures and the overall economy, but over the longer term consistent with the long term history in the U.S.
Increasing funding for K through 12.
Okay levels are increasing and it.
Typically 1% to 2% the past 20 years that that's still what we expect over the longer term looking forward, we expect the overall trend to be upward.
And Alex I don't know if you understand what happened in California.
We're we're so proud of this enrollment growth, but it could have been much better had we not had a ruling in California, where they were not funding growth.
Growth enrollments, so whatever your enrollments, whereas if a certain date if you grow past those enrollment state wasn't going to fund that enrollment we did a little growth anyway, because we had so much demand, but we shut down a lot of growth. We could have had in California that meant that the the revenue per student in California went down and then the.
Mix changes because California is the you know the decently funded state not only funded but certainly decently funded and when we couldn't grow there, but we were growing in states with lower revenue per student.
That means you have a lower revenue per student states are growing faster than than California, and that affected to the rate as well. The overall revenue per student. So those two things combined the ruling in California, and the fact that we couldn't grow in California, I think drove this number down for the day it should have been and further than we expected quite honestly. So we just like you.
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Good well that that's helpful. I appreciate the color there any different explanation for career learning is that because some of the things that are in career learning like galvanized and things like that or is that a similar.
Set of reasons.
Yeah, not not galvanized, we're not including any of the adult learning in our enrollment figures and it's really the same drivers as general Ed.
Okay got it thank you.
Great quarter take care.
Okay.
Mr. Davis there are no further questions at this time.
Alright, well once again I want to thank everybody, who had a chance to sit in is it's a great time for us.
In terms of the results, it's a tough time for the country, but you know we're doing our best to make sure were good good citizens in the process and delivering shareholder is a good business. Thank you everybody for attending and look forward to chatting with you further.
Bye bye.
This concludes today's conference call you may now disconnect.
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