Stride, Inc. (LRN) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Q1 2014 K12, Inc. Earnings Conference Call hosted by Mike Kraft. My name is Bupendra. I'll be your event manager today. [Operator Instructions] And now, I would like to hand the conference over to Mike. Please go ahead.

Thank you, and good morning. Welcome to K12's First Quarter Fiscal 2014 Earnings Conference Call. Before we begin, the company would like to remind you that statements made during this conference call that are not historical facts may be considered forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. In addition, this conference call contains time-sensitive information that reflects management's best analysis only as of the date of this live call. K12 does not undertake any obligation to publicly update or revise any forward-looking statements. For further information concerning issues that could materially affect financial performance related to forward-looking statements, please refer to our filings with the SEC. These files can be found on the Investor Relations section of our website at www.k12.com. In addition to disclosing results in accordance with generally accepted accounting principles in 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 was included in our earnings release and is also posted on our website. This call is open to the public and is being webcast. The call will be available for replay on our website for 60 days. With me on today's call is Nate Davis, Executive Chairman; Ron Packard, Founder and Chief Executive Officer; Tim Murray, President and Chief Operating Officer; and James Rhyu, Chief Financial Officer. Following our prepared remarks, we will answer any questions you may have. I'd like to now turn the call over to Nate.

Good morning, and thanks for joining us on the call today. This morning, Ron is going to give you his commentary on the narrative that surrounds our entity these days and the opportunity for growth at K12 as well. Tim then will discuss our progress on operational performance around enrollments and the promotional efforts, and James will then wrap up on our financial performance. So let's get started. Our financials for the quarter were in line with the guidance we provided a few weeks ago, including revenue of $228.4 million, up 3.3%, EBITDA of positive $8.5 million and an operating loss of $8.5 million. James will be discussing FY 2014 guidance in more detail, but I wanted to make a couple of points on our financials before heading into our discussion on academics. Our results for the first quarter and our enrollment numbers are clearly a disappointment for us. However, it will not change the basic direction we intend to take this business. Our top priority remains our focus on improving student outcomes. Next, the financial performance for the rest of this year will be driven by our focus on improving operating margins, generating positive cash flow and investing in the systems and infrastructure for the core of our business. We also announced this morning that our board authorized a repurchase of up to $75 million of our common stock. At current valuations, we think this is an excellent use of K12's cash reserves. This plan demonstrates the board's continuing confidence in the long-term prospects of our industry and the company's ability to capture the lead -- continue to lead, I'm sorry, the industry and create shareholder value. Now more of this when James gives his comments in a few minutes. Ron, I'll turn it over to you for a comment on the important environmental and academic issues.

Thank you, Nate. Good morning. I thought I would step back for a few minutes and reflect on what we were trying to achieve at K12 and with virtual education in general. I founded the company 13 years ago in order to enable every child to obtain an excellent education, regardless of their geographic or economic circumstances. This technology had and has the ability to provide more choices and options for every child in the world. For many students, especially those living in poverty, they had no choice prior to the advent of full-time virtual schools. I was stunned at the variety of students who came to K12 and never could have anticipated that the same model could serve both children with significant special needs and highly gifted children. In addition to variety of full-time options to students who previously had no alternatives, it also provides choices to students who were at brick-and-mortar schools, but seek to take classes that are not available in their current school. Students can now choose from hundreds of electives, including almost every AP course, multiple foreign languages, vocational courses, technical courses and advanced college courses. While we expect the majority of students will remain in brick-and-mortar schools, their experience will be vastly different, as almost all will take online courses or supplement their education with technology-based learning tools. The past 13 years have been a remarkable journey and seen enormous amount of progress and change. In our first 7 or so years, students came to virtual schools more or less near state averages and the virtual schools scored near state averages. As the Internet became more ubiquitous and the awareness of virtual schools increased, a higher percentage of students were behind grade level, started matriculating the virtual schools increasingly behind grade level. This adverse selection bias is not surprising, as students who are struggling in their current option are far more likely to make a change. In many of the schools we serve, the majority of the students who come to us are significantly behind grade level. Therefore, it was not surprising that school scores began to drop below state averages. Few, if any, schools can bring students who start significantly behind grade level up to proficiency in the first year. Our goal with everything we do is to maximize the learning efficiency ratio. To ascertain if the students were performing adequately, we adopted a test from Scantron that was designed to measure student learning gains and it showed that our students were learning at national norm levels. However, given the large number of new students who enter our schools each year, these schools would not attain state averages despite these learning gains. We are proud, however, of the fact that on average, the longer students are with us, the better they perform. In addition to the Scantron test, we also received acceptable scores on the state gains test that were starting to be used in several states. In the fall of 2011, however, a few of the schools we serve received state gains test that were not positive. Unfortunately, these scores came in too late for us to implement changes for the 2011-2012 school year. While we felt and still believe the gains from an adaptive test designed to measure gains are far better than state tests that impute gains from non-scale CRT tests that were not designed to measure gains, we understood it was necessary to do well in both tests. We launched numerous pilots in the fall of 2012, and I'm happy to say we saw improvements in the gains scores in grades 4 through 8 in both Ohio and Pennsylvania, where we employed a more standard-based didactic approach. This year, those pilots have been expanded to most of the full-time virtual schools we serve, and we hope to see similar progress. During the past year, it has been personally rewarding to be able to focus on academics and business development. The academic improvement team convened at K12 recently came up with dozens of suggestions, many of which have been implemented and many more that will be implemented over the coming years. As I postulated in my book, the main benefit of education technology is to increase individualization and most of the improvement to K12 will do just that. I believe one of the greatest values of online education will be to help reduce the high school dropout rate and remediate students who are behind grade level. This is the primary reason why we've helped design the Insight School model to better meet the needs of the students who have not met with the academic success they seek. Most educators agree that no one brick-and-mortar school or model can be the right fit for all students. The same is true of online schools. The entire culture and education delivery system at most of the Insight Schools we serve is designed to work with students who are significantly behind grade level. These schools have administrators, teachers and counselors who are knowledgeable about and successful in working with these students. It is often their passion. Additionally, the curriculum, scheduling and student support provide an environment where many of these students can thrive for the first time. It is a national tragedy that we have so many students who have not graduated from high school, and I believe online education can greatly reduce this number. We currently see a large number of students coming to our virtual high schools credit deficient, and we have demonstrated that we can graduate many of these students, particularly with the fifth or even sixth year. There have been some suggestions that poor students cannot learn in a virtual environment. This educational elitism concerns me. Virtual schools are income-blind and colorblind. What matters is whether or not a student engages with his or her peers, curriculum, teachers and staff. The public schools we serve do not believe in selecting their students. Since many utilize state open enrollment policies, they are prohibited from any type of screening. Our public school partners will, however, continue to expand the use of face-to-face meetings and diagnostics, which allows schools to maximize the probability of engagement and tailor the instruction to the individual student. Additionally, once students are enrolled in a school, we utilize intensive programs to engage them. If, after a period of time, students do not engage, we and our partners want to work with states to make sure they can be transitioned to schools that may better serve their needs. A student cannot learn through osmosis in an online school. Schools with high growth, mobility and a large percentage of academically at-risk students will always be at a disadvantage on state accountability systems that weigh static proficiency and 4-year graduation rates. This concerns me a great deal, not just because of what it means for K12, but even more for what it means for society. Most of today's state accountability systems greatly discourage schools from taking students who are behind grade level or credit deficient. In fact, state systems often penalize student -- schools who do this. If a student transfers to an alternative high school offering and is significantly behind credits, there is almost no way to catch that student up to graduate with his or her 4-year cohort group. These students need extra time. Schools providing this option should not be discouraged from doing so. These are precisely the students who need choice the most. We hope states become more sophisticated as they evaluate schools in the future. If not, a large segment of our society will suffer. K12 and our partner schools have thousands of talented, dedicated employees who want to help these students, and we have no intention of giving up on them. The past year's cap expansion was unprecedented and created growth not just for this year, but also for next year, as there are significant spots remaining in the caps. We have thousands of slots remaining in fact. If there's one bright spot in the operational state that occurred this fall is that there's growth left in these states for next year. K12 has been helping propel public school choice and the expansion of technology in schools for most of our existence, and we will continue to do so. While we may incur the wrath of those who defend the status quo, it is the right thing to do. No child should be left without choices. A public school system that provides the most options for students has the best chance of adequately serving its students. In addition to spending time on business development, academics and the at-risk model, I have also spent more time with K12's nascent businesses, which deal with the following seminal questions: How can technology make college more affordable and accessible? How can technology be integrated with brick-and-mortar schools? And how can online education be expanded internationally. These questions are of vital importance and excite me in the same way as the advent of online schools in the U.S. excited me a decade ago. We hope these businesses can propel education forward in the same way that K12 already has. As smartphones become more ubiquitous in the most underdeveloped and economically distressed parts of the world, educating these children becomes possible, and we hope to be a part of this. Online education is still in its infancy, and I am quite certain we will accomplish things in the next decade that seem to [indiscernible] today. And now I'll turn the call back over to Nate.

Thanks, Ron. Clearly, improving academic outcomes for all of our students is why we exist and is the key to our long-term future. Performing well in this area drives customer demand, allows word-of-mouth referrals, builds brand spend and most importantly, delivers on our commitment to state regulators, parents, students and our school partners. We've made a number of changes in the last 6 to 9 months to improve in this area. We'll hold our Academic Day and publish our annual academic report in February-March timeframe. At that time, Margie Jorgenson, our Chief Academic Officer; Allison Cleveland, our Executive Vice President of School Operations; and the rest of the management team will give you a complete readout on how we're driving change, as well as the results from that change. We will cover state accountability test scores, Scantron results, our move to asynchronous model, where students requiring additional assistance attend class at an assigned time in specific subjects, and much more. Our instructional approach for 2013 and '14 has been more focused in the following 5 categories: Number one, engagement and expectations to ensure students are ready to learn and parents are ready to fully support students, and to make it clear that online schools require significant amount of engagement, hard work and parental involvement; number two, data to understand each student's strengths and weaknesses; number three, programs to create individualized and adaptive teacher programs; number four, support to allow teachers to teach and alleviate the non-educational obstacles many of our students face; and number five, measurement to help teachers and schools understand how well they're doing at implementing this new model. And I'm proud to say that significant portions of this data-driven approach are not led by executive management team. We empowered our regional school leaders and educators this past summer and they have developed this approach themselves. That's the power being a company where most employees and affiliated teachers are career educational professionals, from teachers to successful public school principals to former superintendents to special educational professionals. More on the Academic Day later, where we intend to help you understand where we focus our time this year, why I believe the core of our business will improve year-over-year and what we've been doing to reestablish a culture of continuous academic improvement. Thanks for your time, and I'll now turn the call over to Tim Murray, our President and Chief Operating Officer.

Good morning, and thanks, Nate. As a follow-up to our guidance call, I wanted to provide you with additional details on the root cause of our enrollment season results and what we're doing to improve our processes and performance for the coming year. As a reminder, our process is 3 stages: Lead, application and then enrollment. While our enrollment growth for this season was disappointing, our work through the application phase of the process was strong. Lead volumes increased over the prior year, unique visitors to our web portals increased nearly 49% and lead to application conversion rates increased by over 23%. The end result was application volume rising 11% year-over-year. That was the great news. But where the process broke down was in converting those applications to enrollments. Now many of you have asked whether our enrollment results were impacted by changes in our preenrollment processes or the time we spent with families on rigor, the commitment and the high level of engagement that the K12 model requires. After a very detailed analysis, we don't see these events is having a significant impact. In fact, for the 12-plus thousand students we offered the preenrollment assessments, the students who invested the time to actually complete both tests converted at a significantly higher rate than the population at large. Of the students who did not take the assessments, we saw conversion rates comparable to the broader population. What we did find was that the root cause of the issue boils down to 3 major factors. First, on the demand generation side, we started the enrollment season looking to increase the efficiency of our marketing spend, which meant increasing our mix of digital media as a way to balance growth and financial performance. While initial results were encouraging, this shift didn't produce the volume of leads and applications we had anticipated. We then pivoted our investment to increase television advertising which generated strong demand. We saw lead volumes spike and push our enrollment platform to a tipping point, where we were unable to convert available applications given the enrollment windows that existed. We generated demand too late, and the spike in demand late in the season hurt us. For the coming year, we're planning our spending earlier, plain and simple. And while we'll continue to optimize our media investment, I would look for us to rely more heavily on regional and national TV advertising. If we're able to smooth the demand, we'll reduce the workload on our enrollment centers, allowing them to be more effective in converting applications to enrollments. Second, our forecast planning and reporting tools that manage the demand created by TV or other media simply weren't robust enough. We didn't get the right information in a systemic manner to allow us to react to changes in the demand profile as they occurred. We already have a number of actions underway to improve this, including a new deterministic financial model that will allow us to take marketing spend by channel, by jurisdiction to be able to forecast the demand curve at a much more granular level. This will help match our media and promotions with the staffing in the enrollment centers so we don't overwhelm the centers late in the enrollment season. And third, limitations in the platform at our enrollment centers, as well as how we structured our workforce at those centers, limited our ability to shift labor capacity to changes as they occurred. Moving forward, we'll change the fundamental workflow in our enrollment process. Up to now, we have had vertical workflows, with enrollment consultants dedicated to families in just a few states. Starting with the next enrollment season, we'll switch to horizontal workflows, with teams focused on the front end of the process, lead to application, and others focused on the back end of the process, application to enrollment. This shift will allow us to utilize enrollment consultants across more states and better optimize our resources. To support this change, a number of actions are already underway, including implementing a knowledge warehouse to enable our enrollment consultants to cover the unique requirements of a broader set of states and schools, changing our staffing strategy away from a regional model to a national model. We'll go from 16 call processing queues to a smaller number, giving us greater flexibility. We'll also manage the enrollment workflow at a much more granular level, looking at calls, faxes, documents and other work drivers literally in 0.5-hour increments to be able to shift resources accordingly. We'll leverage a new cloud-based telephony platform that will allow us to shift capacity on a national basis. And we're implementing a new document acquisition and management platform, automating workflow to increase our quality and efficiency. And the list goes on. We're reviewing every portion of the process and ensuring we're making the right changes to respond to the demand for our offerings. At the same time, we'll continue to work proactively with our schools to streamline the overall enrollment processes and to extend the enrollment window where possible. None of us are satisfied with the enrollment result from last season, but I can commit to you that we're driven to improve our capabilities for the coming year. I remain confident that the steps we're taking will improve enrollment gains next season, while maintaining the quality and integrity that we built into the process. Thanks for your time, and I'll hand the call off to James.

Thank you, Tim. Good morning. As you saw in our press release, our first quarter results for fiscal year 2014 were in line with our guidance, including revenues of $228.4 million, an increase of $7.3 million or 3.3% versus the first quarter of last year; EBITDA at $8.5 million; an operating loss of $8.5 million; a net loss of $5 million; and diluted net loss per share of $0.13. Let me provide you with some additional color on our results. Revenue growth for the first quarter was driven by a 4.9% increase in our Managed Public School revenue, reflecting a 5.7% increase in average student enrollments. These enrollments were a result of organic growth in existing states, including those states where we had enrollment cap increases and states where we had a second school open. The impact of enrollment growth was somewhat offset by the deferral of approximately $4.5 million of revenue from a few school contracts into later quarters this year. As you know, we have individual contracts at each of our schools, and the construct of those contracts can vary. When a contract is renewed, we sometimes negotiate a different construct. As an example, there are contracts with a simple fee amortized over the year and there are other contracts where more services are consumed upfront for things like materials. In either case, the full year revenue is largely the same. But the way we recognize that revenue is a little different, depending on the type of agreement. So this year, we saw some shift in the type of contracts we have, which should result in a smoother sequential revenue this year. As we've previously indicated, overall average rates per enrollment should be marginally higher on a full year basis than last year. Please remember that overall average rates are impacted by a number of things, including mix and capture rate. On the Institutional side of our business, revenue declined $2.3 million or 10% from the prior year. This business continues to be in transition, and we experienced some market pressure this quarter. Lastly, in our International and Private Pay schools, revenue increased to $11.7 million or 3.1% from the prior year, consistent with our increases in total student enrollments and semester course enrollments. Moving on to gross margins. We saw a decline from 46.3% last year to 41.8% this year. The margin decline is largely due to the timing of the $4.5 million in revenue deferral that I just discussed, as well as an increase in instructional costs and services as a percentage of revenue. Q1 instructional costs and services this year, as a percentage of revenue, are closer to what we expect our full year averages will be, whereas last year, these costs were far below the full year average. For the full year, we expect this line item to be basically flattish to last year as a percentage of revenue, plus or minus 50 basis points. We've indicated we are going to continue to invest in the line item and to not expect much leverage here. Selling and administrative expenses increased to $98.2 million. This seasonal spike was for promotional and other costs associated with enrolling students for the new school year, which was clearly for the level of enrollments we did not achieve. These expenses increased $32 million sequentially compared to a $28 million sequential increase in the fourth quarter of the previous year to first quarter of the prior fiscal year. This seasonal spike will normalize in the second quarter as it has in previous years. To put this in context, we saw selling and administrative costs decline $28 million from the first to second quarter of fiscal '13, and we're continuing to tighten our belts with regards to these costs. We have delayed or canceled discretionary spend and are managing costs very tightly across the board. For example, we have put off a number of projects, including implementations of new cash management systems, delayed some HR initiatives, et cetera, that will allow us to remain focused on driving improvements in the areas we've already discussed. Product development expenses increased $1.5 million from the prior year. This was largely due to the type of projects we worked on in the quarter and will -- that were more maintenance in nature, and we therefore capitalized less. This should also normalize in Q2. The net of this is that we posted an operating loss of $8.5 million. However, going to the second quarter, we should expect to see a seasonal decline in operating cost, coupled with tight expense control and no significant sequential increase in instructional costs and services. Depreciation and amortization for the period was $17 million, an increase of $1.3 million from the prior year and consistent with our previous discussions. A few other items to note regarding our financial [indiscernible]. Our cash balance declined sequentially by $18 million to $163.5 million versus a decline of almost $37 million last year. This was primarily due to the timing of some working capital items, particularly accounts payable, due to the normal cycle of our payment cutoff. This should normalize during the year, and there are no significant changes other than timing. DSOs are trending consistent with the prior year. CapEx, as we find it, which includes curriculum and software development computers and the infrastructure, was $23.3 million for the quarter compared to $29.5 million in the prior year. There are 2 factors at play here. First, obviously, is our lower enrollments. Second is we spent a higher percentage of our dollars this quarter on noncapitalized volumes. This both lowered our CapEx spend but also contributed to higher operating costs, including the product development expenses you see in the P&L. We expect this to normalize in Q2. Turning to our view for the second quarter. We would expect revenues of $218 million to $228 million or 6% to 11% gain year-over-year. Operating income of $18 million to $22 million, as a result of the seasonal decline in SG&A cost and tight expense controls in place across the organization. Correspondingly, our operating margins will increase to 8% to 10%. CapEx in the range of $15 million to $2 million, declining on a sequential basis on reduced student computer purchases. And in spite of some of the operational issues we have faced, we still believe we will deliver operating income margin expansion on a full year basis, as well as deliver increasing free cash flow. In addition, we are reviewing our portfolio of assets and may look to rationalize in some way in the future. We've not finalized anything yet, so we are not in a position to discuss details, but we are in discussions internally and with some external partners. We will update you on our progress along the way. Our guidance obviously excludes the impact of any potential action we may take. I'll now spend a minute on the share repurchase plan we just announced. The board and management believes we're undervalued. We are currently trading at historic low multiple levels relative to our enterprise value. We have a strong balance sheet and we're going to continue generating strong free cash flow for the year with increasing operating margins. We believe buying our own shares is the right investment of our cash for our shareholders. The board has authorized a $75 million buyback program over a 2-year period. We will purchase those shares in the open market at levels that will depend on the share price. At this point, I'll turn the call back over to Nate.

Operator, that concludes our initial comments, and we're ready to take your questions.

[Operator Instructions] Our first question comes from the line of Suzi Stein from Morgan Stanley.

Back on October 10, you offered full year guidance. And I noticed in the press release today, there was no full year guidance. I just wanted to make sure that the numbers that you gave back in early October still stand.

Yes, we're not changing full year guidance at this time.

Okay. And then can you just talk a little more about the International and Private Pay business? What are you doing there to accelerate growth? And how are you thinking about that business long-term? And even just for fiscal '14, how should we think about that relative to last year in terms of growth?

Suzie, it's Tim. As you know, we don't explicitly provide guidance at the segment level as you're suggesting here. But to the broader question of what are we doing to try to drive growth, we're continuing to shape our marketing and promotion efforts to better promote the value propositions of these individual schools as a key to driving our enrollment growth, and we're actively testing different message campaigns in the marketplace as we speak to do so.

And then can you offer maybe a little more detail on the Institutional business in terms of what you're doing to accelerate growth there for the year, because that was also quite weak?

Sure. As you know, the Institutional business is a small business for us and still subscale and very much part of a fragmented market. We set low expectations for growth on prior calls. Importantly, as we look at what's happening today, we see a decline in volumes in one segment of that business, the full-time students at our most expensive offering, and we're seeing a migration to a lower-priced set of offerings on a part-time basis. And we see very good growth on a unit-volume basis in those offers. As we continue into the future, we think we'll continue to see that transition from -- in product mix, and we're continuing to focus on unit volume growth and the customer growth. We're also seeing rate pressure and we're responding to that rate pressure in the marketplace. A combination of those things, over time, I think, will lead to growth at some point in time in the future, greater growth in the future.

And Suzie, the reason we made the comments about flattish to down growth and lowered expectations is we think this is an investment year for this part of the business. We don't really expect any acceleration in the year.

Moving on to the next question is from the line of Bob Craig from Stifel. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: I was wondering if you could give us a look at contracts up for renewal over the next 12 months and in terms of number or percentage of students or enrollment that they account for?

Actually, we don't disclose the contracts that are up for renewal on a contract-by-contract basis and the number of students. Number one, it changes of course, depending upon the enrollment factors that happen in each particular state. But that's not something we've disclosed or have chosen to disclose before. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Would it be unusually heavy or light?

No. It won't be any different than it'll be -- it has been in previous years. We do have a couple of large schools that are -- at least one particular large school is up for renewal. That's well known, so I can just announce that. That's the Agora School. But in general, we've not had any more renewals coming in the year than we had in the past year. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Okay. I know it's early, but any read on the withdraw rates thus far in the new academic year?

The withdrawal rates have held pretty consistent from what they were at previous years. We actually -- we're not sure. We were not sure is a better way to put it, whether they were going to go up or down, depending on this higher level of engagement that we put out in front of the process. As you know, we put a lot of emphasis on making sure we explain to people that when you get into this program, it takes a lot of work. We were worried that -- or actually concerned that what would happen is enrollment rates might change as the schools put more focus on trying to screen out as well. But ultimately, we haven't really seen a significant change yet. Now it's early in the season, so I can't predict what's going to happen. But so far, we haven't seen a significant trend one way or the other. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Great. Last quick one for James. As far as the S&A run rate for the balance of the year, is it reasonable to assume something in the mid-60s by quarter?

I think that we're going to see -- we're definitely going to see a sequential decline. We're not giving exact guidance on the actual run rate, but you're not too far off, I think.

Next question is from the line of Sara Gubins from Bank of America Merrill Lynch.

This is David Ridley-Lane in for Sara. If you add back the $4.5 million and -- I guess, first, the $4.5 million deferred revenue was spent in the Managed Public Schools segment exclusively?

It's predominantly in the Managed Public Schools segment, yes.

Okay. And if you add that back, the revenue per average student would be up about 1.5%. Is that your...

That's correct. The average -- if you added that -- if you pro forma that back in, we had kind of marginally higher year-over-year overall average rates. That's correct.

Okay. And we do -- does that sort of what you would view as the underlying pace for fiscal year '14 in terms of revenue per average student?

Yes, like I said -- I think we've said we do expect to have some marginal increase year-over-year on a full-year basis for the average enrollments. It's within a couple dozen basis points, that's probably not a bad proxy.

Okay. And then in terms of the pace of share repurchase, I heard you say it was a 2-year authorization. Do you expect to finish it over the 2-year timeframe?

We're -- that's really -- sorry, that was a question that depends on the share price. I don't think that we can predict really what the share price is going to do. And so we'll be buying in the marketplace at prices that we think are attractive. And so if prices stay compressed, as we think they are today, we'll be continuing to buy.

Got it, got it. If you take out the unusually high marketing expense in the first quarter, could we see -- and also with your cost reduction plans and so forth, could we see SG&A decline year-over-year in the second quarter?

I wouldn't expect any material decline year-over-year.

The next question is from the line of Jeff Mueler from Robert Baird. Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division: This is Nick Nikitas on for Jeff. Given the delay in enrollment period in some states, do you guys see any opportunity or maybe extenuating circumstances that could allow for a makeup of additional enrollments throughout the year? Or given that October 1 funding cut date, should we expect kind of average enrollment to be at this lower decline throughout the year?

Nick, it's Tim. We clearly are focused on satisfying any demand for enrollments where we have the capability to accept those students. But at the end of the day, it's not going to be a material change from where we're at today in terms of average enrollments.

We do see a spike every year in second semester enrollments because there's obviously a second enrollment period that happens in January. So we'll see a spike up at that time. But that's already factored into the guidance that we've given, so -- but the guidance does take that into account. Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then you've talked briefly about the cap expansions that are remaining for potentially next year. In general, could you just speak to the business development expectations and pipeline going forward? Would you expect maybe New Jersey, North Carolina, Maine, any other state to potentially be back on the table?

The answer is they could be back on the table. It's very hard to predict new states, as we've been for saying for 7 years. So we don't want to get specific to any of the states. What I can say is we're continuing to pursue those states as well as others, and we hope to have success because there's such demand in those states. I also think there are -- there's room to get additional cap expansion for what we have. But as I mentioned, we have significant slots left in several of the states. So I think we have a natural success already built in for next year. Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division: Okay. I don't know if you're going to give this. But of the 17,000, would you be able to just add [ph] 50% of the cap expansion that you filled? Or any additional color -- I think you mentioned several [indiscernible]

Let me say it this way. 50%, that's not a bad estimate. It's not far off.

Next question is from the line of Corey Greendale from First Analysis.

High-level question. Understanding that you do not -- you legally can't screen students out, how much -- in your view, how much leeway do you have to discourage students who you think aren't likely to succeed? And what are your thoughts on requiring a bricks-and-mortar blended component for students who come in further behind?

Well, the point isn't to discourage students. The point is to make sure that we adequately communicate the needs of the program and let them understand that this is not necessarily easier than brick-and-mortar school. In many ways, it's actually more rigorous and more demanding. So what you really -- the real goal is to make sure they fully understand what this is. And in general, they'll select it if it makes sense for them. You'll always have people who think they can do the work and don't want to. But the idea is to make sure we have adequate communication is -- I'm very optimistic with regard to the diagnostic tests because one, it is showing a commitment to really want to learn, but second is it gives us very precise information of the student's learning needs, which allows us to tailor an individualized learning plan for that student. So I think if we communicate it adequately, you'll get the self selection out. But we don't have the right nor should we to deny anybody or so overtly try to discourage and you end up getting in lots of other issues. We just want to put out there how rigorous and time-consuming this is and can get to students coming in who want that.

And Corey, this is Nate. Corey, the second part of your question, we very much believe that there's a balance between how much virtual education there should be and how much face-to-face contact there should be. And whether that contact is simply once a month that somebody is in front of that student, talking to them and their parents about how well they're doing and giving them updates and making sure that we understand their environment, all the way to some students who go to school for 2 days to 3 days a week and -- or may go to school 4:00 in the morning and then go home and do virtual work after that. We believe that blended programs are very important. So to answer your question, We think, directionally, those are important things to do. Ron mentioned that he was excited about working on more blended programs because we actually have a number of blended programs in -- across the country, and we use those as test bits to understand just how well students perform in those environments. And what we discovered is, if they have some amount of touch, they're better than if they're 100% virtual. So we want to maintain their flexibility, but we always to touch those students at some amount. So we believe in it fundamentally.

Okay, understood. And one other high-level question. What are you seeing out there in terms of potential changes in funding levels or virtual schools? I think there is some legislation being proposed in Pennsylvania that would cut the per-student funding levels at virtual schools? What do you expect there, and anything you're seeing in other states?

Well, there is legislation in Pennsylvania, and we've seen various pieces of that for almost a decade now. It's hard to predict what will happen to Pennsylvania or any state. But -- so we -- I can't predict Pennsylvania. But I will say this, in general, we don't see it in a lot of places. And we generally are starting to see -- because the state revenue picture is better, we're basically seeing a better funding environment than we have seen, certainly, for the last 5 years when it -- when we saw systematic price not just for virtual schools, but for all schools. I think those all school price per child changes are mostly done within most places. So in general, the environment is better than it has been previously.

Next question is from the line of Trace Urdan from Wells Fargo Securities.

So the guidance -- I mean, basically, the picture that we have of the Managed School business suggests -- I mean, depending on the revenue per enrollment figure, but you kind of gave Suzi a pretty clear idea of what you're thinking there. You kind of barely squeaked to the bottom end of your revenue guidance. And really, all of the upside then has to rest at the margin on the Institutional business and the Private Pay business, which you seem reluctant to talk about. So I'd like to push on that a little bit, trying to understand why the Institutional business is in a year of investment. What you see as the macro trends in the market, how well you believe your product is positioned there? What executional issues, perhaps, you're facing? Because it actually is material at the margin to what you're going to do at the top and even more the bottom line this year. So I'm hoping you can maybe go back to that topic and elaborate a little bit more than you have.

Trace, it's Tim. Let me comment. In the case of the Institutional business, that is we refer to the business as being in transition, it has been since we acquired a number of the assets that are part of this business. We continue to invest in the back office infrastructure to simplify the experience for our customers. We continue to invest in the content that we're selling. On the prior question, talking about blended learning programs. Institutional business is all about equipping districts to offer blended learning programs with content -- online content that can supplement their face-to-face instruction. So we are investing to update and enhance the content we monetize. And most importantly, the peak platform, which we've talked about in the past, deals with the most significant pain point those customers have, which is simplification of workflow. The effort required to enroll students in programs, manage students, measure and monitor student progress is a significant pain point that we hear from districts and administrators around the country. We rolled out a mobile application in this past quarter that in fact gives them significantly better tools to address that pain point. So we see this as a market that is still in that experimentation phase. Districts are at various phases of adopting online programs. They're evaluating all kinds of vendors. Our strategy is to get embedded into their workflow and be able to add more content not only ours, but our competitors' content, to make it easier for them to use that. And so for the long run, as we continue to acquire greater customer share or district share or school share holding, when you think about it, we're well positioned to support their needs going forward. It's a marathon, not a sprint for us, though.

Is there anybody...

Sorry, Trace. I was just going to say, I mean, the quick math that you've done is actually really accurate. You're -- I think you're spot on that it does play on the margin pretty significantly. We're -- listen, we're focused on Managed Public Schools. We think we've got a strong business still there. And I think that, as Ron said, if the funding environment continues to be kind of more positive and negative, it's going to help us throughout this year and into next year, so -- but you're right, and we've got work to do on all fronts. And we're going to continue to do that.

And Trace, this is Nate. The reason why we're reluctant to talk about the business is that we're trying to basically deemphasize the issues. And the reason it is a year of investment for us, number one, it's sort of a land grab. There are a lot of players out there in the educational technology field who are private equity, venture capital backed who are just trying to grow market share and will do it at any price. And in that environment, it doesn't make sense for us to expect that we're all going to grow the market heavily. There's just going to be a lot of pricing pressure there. That competitive dynamic also says we need to make sure we invest in the product to make it as competitive as we can. We've got curriculum that we acquired that's relatively old and we need to bring it up-to-date. For all of those reasons, we think this is an investment year for the business. We've changed from that perpetual license type of business to a per student, per course load kind of curriculum and sales. So all of these are changes you're making. In the midst of making those changes, it's just bad expectation for us to expect that we're going to see growth in that business. And that's why we keep signaling that this is just an investment year, you're not really going to see a growth in this business. That's sort of the nature of the business until the markets settle down a little bit.

That's really helpful. I just have 2 follow-ups there. One, to Tim's point, regarding your strategy, are there any scaled competitors that have a similar approach and are providing that kind of sort of integrated workflow to the schools? And then the second question is maybe more to Nate's comment. Are you guys thinking about opportunistic purchase of emerging ed tech companies that could supplement the business?

So I'll take the first and Nate will take the second. We do other there, just like we view this as Software-as-a-Service business. And so as you think about that, you want to get a platform place for the district and be able to retain and upsell those customers. So we're not the only ones doing it. I think our success will be a function of how well our platform addresses the needs of those customers. And feedback has been very good, the unit volume growth has been encouraging, so we're encouraged.

To your second question, Trace, I sometimes say things that get me in trouble, but I'm just going to be directly honest about this. If you were talking -- if you asked me that question 3 months ago, I'd say yes, we want to be opportunistic. We were actually looking at companies in the marketplace, saying are there opportunities to acquire Stuff. Given the last couple of months -- what happened in enrollment, I have backed off that. The board and I have talked about it, and we basically again reaffirmed that we need to focus on the core business. I want to see us execute properly for 3 or 4 straight quarters before I go back out into the marketplace to acquire. If there's something out there that looks like it's -- we just can't pass it up, then we have the cash to do it. I think we have the capacity to do it. But I really want to continue to execute in the core business before we start looking at acquisitions again. I thought we were there, but obviously, we typically did more to stub our toe in the enrollment season. So we're going to be focused on the internals of the core business and not acquisitions.

We have no further questions in the queue. [Operator Instructions]

Okay, operator, it sounds like we don't have anymore questions. I guess we can end the call.

No questions in the queue at the moment.

Okay, operator, I think we can close the call since there are no more questions.