K12 Inc. Reports First Quarter Fiscal 2013 Results, Reaffirms Fiscal Year 2013 Guidance and Provides

K12 Inc. Reports First Quarter Fiscal 2013 Results, Reaffirms Fiscal Year 2013 Guidance and Provides Second Quarter Fiscal 2013 Outlook

Q1 Revenues Increase 14.4 percent to $221.1 million on Solid Enrollment Growth in Core Business

HERNDON, Va.--(BUSINESS WIRE)-- K12 Inc. (NYS: LRN) , a leading provider of proprietary, technology-based curriculum, software and education services created for individualized learning for students primarily in kindergarten through 12th grade, today announced its results for the first fiscal quarter ended September 30, 2012.


Summary Financial Results for Q1 Fiscal 2013

  • Revenues for first quarter FY 2013 grew to $221.1 million, an increase of $27.8 million, or 14.4 percent, over the prior year.
  • EBITDA for Q1 FY 2013 (see GAAP reconciliation below) was $24.3 million, an increase of $3.0 million, or 14.1 percent, as compared to $21.3 million for the prior year.
  • Operating income was $8.7 million, an increase of $0.4 million, or 4.8 percent, as compared to $8.3 million for the prior year.
  • Net income to common and Series A stockholders was $4.4 million as compared to $4.6 million in the prior year, a decrease of 4.3 percent.
  • Diluted earnings per share were $0.11 as compared to $0.12 in the prior year.

K12 Continues to Lead Technology-Driven Transformation to Individualized Education

Ron Packard, Chief Executive Officer of K12 Inc., commented: "K12 continues to lead the technology-driven transformation of education to individualized, child-driven learning. This quarter was in line with our expectations and puts us on track to make our annual guidance. Our core virtual Managed Public School business remains strong and is growing at a healthy rate."

Continued Mr. Packard, "We are working hard and making substantial investments to recruit and train the force of 21st century teachers and develop the products, processes and operational infrastructure to meet the needs of a growing and increasingly diverse student base, as our average student enrollments in Managed Public Schools grew to 121,665 in the first quarter of fiscal 2013 from 106,665 in the same period in the prior year, an increase of over 14 percent."

"Looking ahead to the balance of fiscal 2013, we are pleased to re-confirm our annual guidance on the basis of this solid quarter," Mr. Packard concluded.

Financial Results for the Three Months ended September 30, 2012 (First Quarter Fiscal Year 2013)

  • Revenues for the first quarter of FY 2013 were $221.1 million, an increase of $27.8 million, or 14.4 percent, over the prior year period. This increase was primarily due to solid organic revenue growth in our core business of providing curriculum, technology and academic services to K-12 managed public schools, partially offset by a decline in Institutional Business revenue, primarily as a result of the perpetual license revenue in the prior year period.
  • Instructional costs and services expenses for the first quarter of FY 2013 were $118.6 million, representing an increase of $17.5 million, or 17.3 percent, from $101.1 million for the prior year period. The increase as percentage of revenue was associated primarily with advance hiring during the first quarter of fiscal 2013.
  • Selling, administrative, and other operating expenses for the first quarter of FY 2013 were $89.6 million, representing an increase of $11.8 million, or 15.2 percent, as compared to $77.8 million for the prior year period. This increase was primarily attributable to increases in personnel costs related to growth in headcount, related benefits and recruiting costs. This was partially offset by a decrease in ERP implementation costs.
  • Product development expenses for the first quarter of FY 2013 were $4.2 million, a decrease of $2.0 million, or 32.3 percent, over the same period in the prior year. The decrease was primarily due to more development projects that qualify for cost capitalization than in the prior year and a decrease in ERP implementation costs. Our cash expenditures, including capitalized costs, however, increased year over year by 4 percent.
  • EBITDA, a non-GAAP measure (see reconciliation below), for the first quarter of FY 2013 was $24.3 million, an increase of 14.1 percent. EBITDA in the current year period reflected growth in revenue in the core Managed Public Schools business and a decrease in ERP implementation costs, offset partially by a decrease in Institutional Business revenue.
  • Operating income was $8.7 million for the first quarter of FY 2013 as compared to operating income of $8.3 million for the same period in the prior year, an increase of $0.4 million or 4.8 percent. Depreciation and amortization were $15.7 million, an increase of $2.7 million or 20.8 percent, primarily due to investments in curriculum and systems to support growth.
  • Income tax expense was $3.9 million for the first quarter of FY 2013, representing an effective tax rate of 46.1 percent. Income tax expense for the first quarter of FY 2012 was $3.7 million, an effective tax rate of 46.1 percent. The increase in the income tax expense was primarily due to the impact of losses generated by our foreign operations during the period.
  • Net income attributable to common and Series A stockholders was $4.4 million as compared to net income of approximately $4.6 million in the prior year due to the factors mentioned above.
  • Diluted net income attributable to common stockholders per share was $0.11 for the first quarter of FY 2013 as compared to $0.12 in the prior year due to the factors described above. Diluted net income per share reflects a pro rata allocation of net income to Series A Special Stock.

Cash, Capital Expenditures and Capital Leases

As of September 30, 2012, the Company had cash and cash equivalents of $107.9 million, reflecting a decrease of $36.7 million from June 30, 2012, due to a significant increase in accounts receivable;

  • Capital expenditures for the first quarter FY 2013, which were $15.2 million and was comprised of:
    • $10.1 million for property and equipment, including capitalized software development, and
    • $5.1 million for capitalized curriculum; and
  • Capital leases financed additional purchases of $14.3 million during the first quarter, primarily for computers and software for students.

Revenue and Enrollment Data

Revenue by Business Line

The following table sets forth revenue for the Company's three lines of business -- Managed Public Schools (turn-key management services provided to public schools), Institutional Business (educational products and services provided to school districts, public schools and other educational institutions that it does not manage), and International and Private Pay Business (private schools for which it charges student tuition and makes direct consumer sales) -- for the periods indicated:

               
($ in thousands)   1Q FY 2013   1Q FY 2012   Change   Change %
Managed Public Schools   $187,761   $159,449   $28,312   17.8%
Institutional Business   $21,972   $23,482*   $(1,510)   (6.4)%
International and Private Pay Business   $11,363   $10,399*   $964   9.3%
Total Revenue   $221,096   $193,330   $27,766   14.4%
     

*Updated from information previously provided in a press release issued on October 17, 2012 to reflect reclassification of revenue across the Company's three lines of business. This update also impacted revenue disclosed for the second quarter of fiscal 2012 for the Institutional Business and the International and Private Pay Business, however, it had no impact on either Managed Public Schools revenue or total quarterly or annual revenue amounts previously disclosed. For ease of reference, presented below is a revised table which reflects quarterly supplemental historical revenue and enrollment data for the last two completed fiscal years:

                               
FY 2012   FY 2011
($ in thousands)   4Q2012   3Q2012   2Q2012   1Q2012   4Q2011   3Q2011   2Q2011   1Q2011
Managed Public Schools   $144,162   $151,885   $140,645   $159,449   $107,557   $114,163   $113,411   $118,870
Institutional Business   $16,595   $16,412   $16,662   $23,481   $12,970   $10,948   $11,366   $11,472
International and Private Pay Business   $9,644   $9,878   $9,193   $10,399   $7,741   $5,182   $4,225   $4,529
Total Revenue   $170,402   $178,175   $166,501   $193,330   $128,268   $130,293   $129,002   $134,871
             

Certain totals may not add due to the effects of rounding.

Enrollment Data

Managed Public Schools

The following table sets forth average enrollment data for students in Managed Public Schools for the periods indicated. These figures exclude enrollments from classroom pilot programs.

       
    1Q FY 2013   1Q FY 2012   Change   Change %
Managed Public Schools Average Student Enrollments   121,665   106,665   15,000   14.1%
 

International and Private Pay Business

The following table sets forth cumulative total enrollment data for students in the International and Private Pay Business for the periods indicated. These figures exclude enrollments from consumer programs.

               
International and Private Pay Business   1Q FY 2013   1Q FY 2012   Change   Change %
Cumulative Student Enrollments   12,996   12,415   581   4.7%
Cumulative Semester Course Enrollments   36,032   34,692   1,340   3.9%
     

Fiscal Year 2013 and Q2 Fiscal Year 2013 Outlook

The Company is confirming its previously issued forecast for the current fiscal year:

  • Revenue of $840 million to $870 million
  • EBITDA of $107 million to $115 million (see GAAP reconciliation below)
  • Operating income of $45 million to $50 million
  • Depreciation and amortization expense of $60 million to $65 million
  • Capital expenditures including capitalized curriculum, capitalized software development, and property and equipment of approximately $55 million to $60 million
  • Capitalized leases for student computers of approximately $20 million to $25 million
  • Income tax rate of 42% to 44%

The Company is forecasting the following for Q2 FY 2013:

  • Revenue of $205 million to $215 million
  • EBITDA of $30 million to $33 million

Special Note on Forward-Looking Statements

This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have tried, whenever possible, to identify these forward-looking statements using words such as "anticipates," "believes," "estimates," "continues," "likely," "may," "opportunity," "potential," "projects," "will," "expects," "plans," "intends" and similar expressions to identify forward looking statements, whether in the negative or the affirmative. These statements reflect our current beliefs and are based upon information currently available to us. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties, factors and contingencies include, but are not limited to: our potential inability to further develop, maintain and enhance our products and brands; the reduction of per pupil funding amounts at the schools we serve; reputation harm resulting from poor performance or misconduct by operators in any school in our industry and in any school in which we operate; challenges from virtual public school or hybrid school opponents; failure of the schools we serve to comply with regulations resulting in a loss of funding or an obligation to repay funds previously received; discrepancies in interpretation of legislation by regulatory agencies that may lead to payment or funding disputes; termination of our contracts with schools due to a loss of authorizing charter; failure to enter into new contracts or renew existing contracts with schools; risks associated with entering into and executing mergers, acquisitions and joint ventures; failure to successfully integrate mergers, acquisitions and joint ventures; inability to recruit, train and retain quality teachers and employees; uncertainty regarding our ability to protect our proprietary technologies; risks of new, changing and competitive technologies; increased competition in our industry; and other risks and uncertainties associated with our business described in the Company's filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All information in this release is as of November 9, 2012, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations.

Conference Call

The Company will discuss its first quarter fiscal 2013 financial results during a conference call scheduled for Friday, November 9, 2012 at 8:00 a.m. eastern time (ET).

The conference call will be webcast and available on the K12 web site at www.k12.com through the Investor Relations link. Please access the web site at least 15 minutes prior to the start of the call to register and download and install any necessary software.

To participate in the live call, investors and analysts should dial (866) 730-5765 (domestic) or (857) 350-1589 at 7:50 a.m. (ET). The participant pass code is 88254755.

A replay of the call will be available starting on November 9, 2012, through November 16, 2012, at (888) 286-8010 (domestic) or (617) 801-6888 (international) pass code 18717833. It will also be archived at www.k12.com in the Investor Relations section for 60 days.

Financial Statements

The financial statements set forth below are not the complete set of K12 Inc.'s financial statements for the quarter and year and are presented below without footnotes. Readers are encouraged to obtain and carefully review K12 Inc.'s Annual Report on Form 10-K for the year ended June 30, 2012, including all financial statements contained therein and the footnotes thereto, filed with the SEC. The Form 10-K may be retrieved from the SEC's website at www.sec.gov or from K12 Inc.'s website at www.k12.com.

   
K12 INC.
Condensed Consolidated Balance Sheets
 
September 30, June 30,
  2012       2012  
(In thousands, except share
and per share data)
ASSETS
Current assets
Cash and cash equivalents $ 107,938 $ 144,652
Restricted cash and cash equivalents - 1,501
Accounts receivable, net of allowance of $2,242 and $1,624 at September 30, 2012 and June 30, 2012, respectively 258,832 160,922
Inventories, net 28,113 37,853
Current portion of deferred tax asset 14,673 16,140
Prepaid expenses 14,621 11,173
Other current assets   20,440     14,598  
Total current assets 444,617 386,839
Property and equipment, net 65,864 55,903
Capitalized software, net 37,674 34,709
Capitalized curriculum development costs, net 61,944 60,345
Intangible assets, net 35,587 36,736
Goodwill 61,428 61,619
Investment in Web International 10,000 10,000
Deposits and other assets   2,384     2,684  
Total assets $ 719,498   $ 648,835  
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
Current liabilities
Accounts payable $ 33,393 $ 23,951
Accrued liabilities 16,183 13,802
Accrued compensation and benefits 12,219 17,355
Deferred revenue 69,952 25,410
Current portion of capital lease obligations 19,525 15,950
Current portion of notes payable   1,153     1,145  
Total current liabilities 152,425 97,613
Deferred rent, net of current portion 8,493 6,974
Capital lease obligations, net of current portion 21,231 15,124
Notes payable, net of current portion 390 777
Deferred tax liability 32,525 31,591
Other long term liabilities   1,987     1,908  
Total liabilities   217,051     153,987  
Commitments and contingencies - -
Redeemable noncontrolling interest   17,200     17,200  
Equity:
K12 Inc. stockholders' equity
Common stock, par value $0.0001; 100,000,000 shares authorized; 36,844,093 and 36,436,933 shares issued and outstanding at September 30, 2012 and June 30, 2012, respectively 4 4
Additional paid-in capital 523,081 519,439

Series A Special Stock, par value $0.0001; 2,750,000 shares authorized, issued and outstanding at September 30, 2012 and June 30, 2012

63,112 63,112
Accumulated other comprehensive income (loss) (214 ) 100
Accumulated deficit   (104,804 )   (109,161 )
Total K12 Inc. stockholders' equity 481,179 473,494
Noncontrolling interest   4,068     4,154  
Total equity   485,247     477,648  
Total liabilities, redeemable noncontrolling interest and equity $ 719,498   $ 648,835  

   
K12 INC.
Condensed Consolidated Statements of Operations
 
Three Months Ended September 30,
  2012       2011  
(In thousands, except share
and per share data)
Revenues $ 221,096   $ 193,330  
Cost and expenses
Instructional costs and services 118,648 101,079
Selling, administrative, and other operating expenses 89,619 77,760

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