Q4 2019 Earnings Call
Greetings and welcome to the K 12 fourth quarter fiscal 2019 earnings conference call.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mike Kraft Senior Vice President of corporate Communications. Thank you Mr. Kraft you may begin.
Thank you and good afternoon, welcome to K Twelves fourth quarter and year end conference call for fiscal year 2019.
Before we begin I would like to remind you that in addition to historical information certain comments made during this conference call maybe considered forward looking statements.
These statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act 1995.
They should be considered in conjunction with cautionary statements contained in our earnings release and the Companys 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 this last call.
K 12 does not undertake any obligation to publicly update or revise any forward looking statements.
For further information concerning risks and uncertainties that could materially affect financial and 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.
W.W.W. Dot K 12 dot com.
In addition to disclosing financial results in accordance with generally accepted accounting principles and the U.S. or GAAP, we will discuss certain information that is considered non-GAAP financial information.
A reconciliation of this non-GAAP financial information to the most closely comparable GAAP information what's included in our earnings release, and it's also posted on our website.
This call is open to the public and is being webcast. The call will be 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 President product and technology. Following our prepared remarks, we'll answer any questions. You may have I like to now turn the call over to date.
Thank you Mike.
Good afternoon, everyone and thanks for joining us on the call.
[noise] I'm pleased to report the K 12 ended fiscal year 2019, with solid financial results that exceeded our expectations both for the quarter end the full year.
We surpassed the billion dollar revenue Mark for the first time.
Increasing 10.7% year over year.
The strength of our revenue growth is based on the managed public schools programs.
This again demonstrates the strength of our core public schools business.
And the underlying demand for blended and online school options.
Adjusted operating income for the year was $62.2 million, an increase of 34.1% year over year.
Capital expenditures were 48.4 million for the year.
Note that our capital spend was focused on providing interactive virtual labs.
And more adaptive and personalized lessons for each student's learning though.
In addition to teacher and learning coach tools, we've been working to introduce 20, New project based learning courses for the upcoming school year.
These courses are all part of our important career readiness initiative.
As a result of the revenue growth and expense management, we produced more than $93 million in free cash flow.
This was an increase of 49% year over year.
In fact this is the second year in a row in which we grew free cash flow at that pace.
Overall, our results this year met or beat the guidance, we gave you each quarter.
As well as for the full year.
Now, let me turn to commentary.
To our business operations.
First we remain dedicated to helping students grow in every way, especially in our AG their academic endeavors.
Prince that this year, we doubled down on our focus on student in year growth, we established an internal goal.
Every student enrolled in a K 12 powered partner school achieved at least the year's growth or more.
Every year stay 10 school.
Shouldn't matter, whether students starts on grade level above grade level or below grade level.
We want every student to grow academically.
Next as a rule as a result of our partnership with Southern New Hampshire University.
K 12 powered educators can now enroll in a graduate degree program and online instruction.
They can also take a variety, especially like teaching courses or sign up for individual professional development classroom.
We already have hundreds of teachers volunteered to participate in these programs.
The work Weve done this year and continue to do underscores our commitment to equipping teachers and leaders with this specific skills they need to help students learn.
Second.
I want to provide a brief update on career readiness.
Just a few weeks ago, we launched the first national job shut a week.
Companies like Salesforce coming.
Gulfstream construction and others participated in providing students with real life examples of what they've been studying.
In online classes.
In person experiences where available students in South Carolina in Indiana, what other students and other locations participated in virtual session.
Keep in mind, the national job shot a week is just the first step toward working with many companies on internships and other hands on learning experiences for destination Academy students.
Through our network of programs like Callow unimpressed and through our own contacts we're leveraging over 500 partners for more hands on experience for our students.
We're also working at the national and local level with dozens of companies that want to get involved in the crew ready this movement.
Common view career readiness program like ours.
The Bible option to filling a talent pipeline.
We're working with several new corporate partnerships for the upcoming year, which may include Mentorship sessions career guidance job shadowing and internships.
This quarter. We also continue to work with existing and New School Board partners to expand the number of schools that offer credit.
This will be 20, there will be 20 destination career academies open for the upcoming school year that means more than 8 million high school students.
Across 17 States will now have access to K 12 powered career readiness programs.
This fall.
This presents K 12, with the opportunity to grow ARPU readiness enrollment.
Correct slide 21 and beyond.
We're also working with a number school partners on new programs that will open in fiscal year 21.
Over the next three to four years, we plan to expand our coverage across all state.
In which we operate.
This past quarter.
Our career connection partner Tallow, we've talked about before also made great strides.
Hello added more than 60000, new users to the platform.
And while Telo and maintain a strong population at the high school level.
The platform is also now attracting college students as well.
As evidenced by 28% of the new users added this quarter.
We're college students of college graduates.
This increase is tells total user count to over half a million users.
Through our new partnerships with the Camden Dream Center in New Jersey, and the National College Resources Foundation, Hello is increasing efforts to work with nonprofit and student organizations. That's important members of traditionally underserved student community.
Since the start of 2019, how is linked to more than 20000 users to job opportunities through their platform. This is just the beginning.
How is new partners users and connections are creating some truly encouraging career readiness experiences for both students and graduates.
Before moving on.
I want to highlight the results of a recent study publishing published by morning console.
It reinforces our decision to pursue this market opportunity.
They found that only 12% of parents thought that the kindergarten through 12th Grade school system in the U.S.
Is doing enough to prepare students for career after graduation.
Those parents will also deeply concerned about student debt.
On the positive side, they found that 92% appearance agreed that giving high school students more exposure to future career opportunities and experiences.
Before they enter college will help alleviate student debt.
This survey again supports why I'm excited about career readiness, we made some good progress this year and expect this business to be a key driver of K twelves growth for many years to come.
Third I want to address an example of the ebb and flow of our business as I described in my last quarters remarks.
Specifically, we filed the demand for arbitration with the Georgia Cyber Academy Board as the respond.
The demand asserts claims at GCA reach of our contract for the upcoming school year.
Well, we are presently unable to predict the outcome of this arbitration what we do know is that the board of the GCA School is already engaged other service providers for the upcoming school year.
These include providers fill curriculum computer equipment and other managed school services.
And while we sought to renew the contract is now fairly certain that the school year 2019, 2020 will be the last year or by providing service to this school.
In addition, we cannot be assured of how much service division that will be providing in this transition year.
But as with our strategy for all states, we've been seeking to work with other boards to open up more than one school in the state.
And such is the case in Georgia, where we support the application of a career readiness school that we hope will be open and approved in the fall of 2020.
Now from an Investor standpoint, we must conservatively assume that we will not serve GCA for the upcoming school year.
And our financials will reflect that fact.
We also cannot assume that the new school, we support will be in service immediately.
We may have a gap year.
Well, we only served Georgia through our private school.
No I don't want to provide.
Official guidance reflect 20 since the enrollment season is far from over.
However.
We believe that even with F Y 20 revenues.
Without if why 20 revenues from GCA.
We will post enrollment and revenue growth.
In the coming fiscal year that means we believe we can grow through the loss of GCA is nearly 10000 students.
However that growth will be modest and below current revenue consensus for fiscal year 2020.
However, this is very important.
From a profitability standpoint, we currently believe we can deliver double digit growth in adjusted operating income in F y 20.
This growth should exceed the current analyst consensus for fiscal year 2020.
Now while next year's revenue growth will be somewhat dampened, we believe that fiscal year 21 and beyond.
We can achieve revenue and profitability growth rate at or above current analyst expectations.
In fact, our multiyear internal projections.
Call for us to deliver low double digit growth in adjusted operating income for the next few years.
Again I want to emphasize these are not official guidance numbers.
But only our best estimate of the trends in our business at this point in time.
We will provide official guidance or fiscal year 20 at the end of October when we announced our first quarter results.
So in summary.
We had an excellent year first and foremost we posted solid financial results in each quarter of the year, we met or exceeded the guidance, we set back in the fall 2018.
Our managed public school business, our core business is growing and the environment for full time blended and online education.
Continues to be strong.
We've ramped up our career readiness business.
We've grown the number of schools and programs by more than 50%.
Curricula continues to be developed with the significant expansion project based learning courses, which means more hands on experience.
We launched new branding efforts and importantly, tallow has flourished this year with more than a half a million users.
We enhanced the K 12 technology platform and curriculum.
We developed adaptive curriculum tools using cutting edge artificial intelligence capabilities, which we believe will be an important differentiator.
For student outcomes.
And through it all.
We produced more than 93 million in free cash flow and ended the year with 284 million cash on hand.
We continue to be in a strong position to invest in the organic growth of our business.
While also having the balance sheet to allow us to pursue inorganic opportunities when and if they arise.
Overall Im excited about what K 12 has ended the fiscal year with solid academic results solid financial results.
Marketplace demand for the K 12 powered online and blended education.
Remained strong.
Thank you very much for your time today.
I now hand, the call over to our CFO Andrew James.
Thank you Hey, good afternoon.
First let me recap our reported results.
Revenue for the quarter was $256.3 million, an increase of 7.3% from the prior year.
For the year as Nick stated revenue was $1 billion $16 million, an increase of 10.7%.
I want to remind everyone that the new accounting standards, we implemented this year effected the seasonality of revenue recognition.
I meant and impacted the year over year quarterly comparisons however revenue recognition over the full fiscal year was largely not enacted.
For the quarter operating income was $2.7 million.
A decrease of $7.2 million.
For the full year operating income was $45.5 million.
An increase of $20 million or 78.4% compared to last year.
Adjusted operating income of 7.2 million for the quarter, a degree decreased $8.6 million.
For the year adjusted operating income was $62.2 million, an increase of 15.8% or 34% from last year.
As a reminder, adjusted operating income excludes stock based compensation.
Capital expenditures for the year were $48.4 million, an increase of $5.3 million.
Okay already mentioned in each case, our results met or beat the expectations, we provided in our original guidance.
Now this is not a six year in a row, where we have met or exceeded our annual guidance numbers for revenue profitability and capital expenditures.
Now I will turn some additional details for the fourth quarter and the full year.
For the quarter managed public school programs revenue increased $16 million.
Or 7.7% to $224.3 million for the year revenue increased $109.5 million or 14%.
The year over year growth in this business was driven by strong enrollment growth of 6.3% an increase in revenue per enrollment of 7.2%.
This revenue per enrollment growth was driven by strong mix and an improved funding environment.
As we've mentioned previously we expected this to be a strong year for revenue per enrollment growth.
Going forward, we would expect driving a parliament growth to be closer to the zero to 2% range. We have previously indicated before any adjustments for mix.
In our institutional business, which includes both non managed public school programs institutional software and services.
Revenue for the quarter grew 6%.
And finished 10.6% lower on a full year basis.
Revenue for the quarter benefited from timing.
Due to the revenue recognition changes.
Non managed public school program revenues declined 10.8% for the year.
This decline was largely due to lower revenue per enrollment driven by changes in school next school mix.
Institutional software and services revenues were down 10.3% as a result of softer sales.
Private pay revenues were largely flat for the quarter and the year at 9 million 35.5 million respectively.
We expected institutional revenue would decline this year and we work during the year to mitigate the impact.
Of this decline.
And as we move forward.
The size and strategic importance of our career readiness business will play an increasingly important role in our growth story and mobile while we will continue to maximize how we operate all of our businesses, we will be focusing our discussions increasingly on the core business and career readiness.
Gross margins for the year were 34.7%.
Down 70 basis points from the prior year margins were impacted by our continued investments in school initiatives to support academic outcomes as well as.
Business in school mix.
Selling administrative and other expenses were up 5.3 million to 75.2 million in the quarter.
The increase was driven by additional marketing spend in our career readiness and managed public school businesses for the year expenses were up 2.4%.
To 297.4 million.
We continue to focus on driving improved operating leverage in our business, notably we were able to keep expenses reasonably flat year over year, while still making investments in our career readiness.
Product development cost increased 5.6 million 2.6 million for the quarter increased 5.3 million 9.5 million for the year.
For informational purposes, beginning next year.
We'll be combining these lines.
Line items into a single SNA lineup.
As a standalone product development costs are no longer material enough to be separately discuss.
For the quarter EBITDA decreased $6.7 million to $20.8 million for the year increased by $15.1 million $216.9 million.
Adjusted EBITDA for the quarter was 25.4 million.
Decrease of 8.1 million from the prior year and for the year adjusted EBITDA was $133.6 million, an increase of $12 million.
Operating income.
Was 2.7 million for the quarter, a decrease of $7.2 million.
For the year operating income was $45.5 million, an increase of $20 million or 78.4%.
Adjusted operating income for the quarter was 7.2 million down $8.6 million. It grew to 62.2 million for the year, an increase of 15.8 million or 34%.
Improvements in the year over year comparison comparisons in these metrics were driven by the strength of our managed public school business, including after readiness business.
And effectively manage our cost structure.
Some other items to note we ended the quarter with cash cash equivalents and restricted cash of $284.6 million.
This was an increase of 51.5 million compared to the end of last year.
As Nick mentioned free cash flow for the year was $93.2 million up almost 50% year over year and the highest level of free cash flow we've ever posted.
Capex, which includes curriculum and software development infrastructure was $48.4 million, an increase of 5.3 million compared to last year, our effective tax rate for the year was 22%.
And this is the first full year full fiscal year at the lower federal corporate tax rate, we still expect our long term effective tax rate to fall between 25 and 30%.
In closing I'm pleased with our performance. This year, we saw strong growth in both in both revenue and profitability for the third consecutive year.
And we've been able to accomplish this while continuing to make investments to improve the academic outcomes for all the students we serve.
As we look to fiscal year 20, I want to highlight nates comment on profitability specifically.
We will see no pause in the trajectory of delivering double digit profit growth for fiscal year 2000 and beyond.
With the business was we are building, we believe we can deliver.
This double digit.
Profit growth.
On a consistent basis.
Again this is not official guidance on their best estimate of the trends in the business at this point in time, we will provide official guidance when we release earnings at the end of October .
Thank you and now I'll hand, the call over to the operator, so that we can move to Q an operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the.
With first analysis. Please proceed with your question.
Hi, guys. This is looking better on for Corey.
Congratulations on the quarter.
As far as the career readiness what are some industries that you see in high demand and you see that being geographically concentrated as you roll it out.
Hi, Corey thanks for the comment.
The question.
Yes, we do see it.
Geographic.
The highest demand is most likely in the ITC areas clearly seeing so many jobs notched in programming, but in software and hardware maintenance and network support network communications equipment.
Cyber security those areas are all the high schools areas that we see health care administration is the second highest growth area, we see obviously the healthcare overall, but.
High school students can be doctors, so we're talking about health care administration and Thats the areas, we see for them.
Beyond that area Theres, some working in manufacturing and in.
Agriculture.
But primarily its healthcare and and.
And I see and it does it does show itself in geographic areas, obviously, you know and across this country with some of the high itineraries are a lot of Orion in Texas in Southern California in the.
Utah area. So we see up in the northeast a lot.
Then you don't see agriculture, nearly as much in those areas you see it more probably in the middle of the country.
Health care administration is everywhere. So all of our schools have to be focused on what's the high need in that particular area and Thats, how we do what we call centers of excellence.
And we focused our centers of excellence that way.
Okay, that's great and then as far as the.
The GCA goes it looks like you or you think that you can grow adjusted operating income and can can exceed consensus what are some of the levers that you would go about that is that just managing cost structure more tightly or could you just give us a little bit more color on that.
Yeah, and I'm, sorry, I thought that was core but I guess its locomotives quarry right.
Dan the first thing.
[laughter] the first thing to remember is that.
We were spending a lot of money on GCA toward the latter part of the year and.
We won't have to spend that money. So that scores are really that profitable and matter of fact was getting to breakeven for us. The second thing is to remember.
We have new statewide schools in Florida and Texas.
We have a new school in Missouri, We've got eight new destinations career academies in three expansions I mentioned 11 total, but it's made up of eight new and three expansions and then we're seeing some good same store growth in some of the existing schools. So that growth is really what's driving our AR.
Our ability to drive some profitability and yet we're always focused on expense controls.
And I think we've seen some efficiencies and some of the things we're doing.
All right. Thank you.
Okay.
As a reminder, ladies and gentlemen, it is star one to ask your question.
There are no further questions in the queue I would like to hand, the call back to management for closing comments.
Okay. Thanks, everybody for being on the call today, we don't have any additional comments. We were are finished so.
Everybody have a great day and thanks for being on.
Ladies and gentlemen, and ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.