Stride, Inc. (LRN) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the 2014 K12 Incorporated Second Quarter Earnings Conference Call. My name is Patrick, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Mike Kraft, Vice President, Investor Relations. Please proceed, sir.

Thank you, and good morning, everyone. Welcome to K12's Second Quarter Fiscal 2014 Earnings Conference Call. Before we begin, the company would like to remind you that the statements made during this call are not historical facts and 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 day 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, Chief Executive Officer and Chairman; 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 turn the call over to Nate. Nate?

Good morning, everyone, and thanks for joining us on the call today. First, let me start by highlighting a few results of the quarter. Revenue was $223.9 million, up 8.7% year-over-year and within the range of our most recent guidance. We posted an operating loss of $8.9 million, which included a set of specific charges adding up to $32.2 million, as outlined in our press release and in our 10-Q. Without these specific charges, our business delivered $23.3 million in operating income for the quarter, an increase of 42.9% year-over-year. This $23.3 million was slightly above our guidance of $18 million to $22 million and is a result of management's focus on expanding operating leverage and generating positive cash flow, while continuing to drive improved academic outcomes despite a disappointing enrollment growth last fall. So today, Tim Murray will provide highlights of our operations, after which, James Rhyu will review our full financial results, including detail of the charges I mentioned. But first, I'll touch on a few strategic topics that are worth noting. As you know, we announced an intent to form a new company with Safanad Limited. That transaction, which we're still in the midst of finalizing, is about building an environment that will allow products currently in their early stages of development to thrive and grow faster. The new company, led by Ron Packard, will create an entrepreneurial environment with the necessary management attention, goals and speed of execution required to propel and expand these businesses. At the same time, this allows us to bring in a group of partners with a similar vision for the future of education and a willingness to invest significant capital to drive profitable growth in these businesses over time. While many of the assets included in the transaction were part of our international portfolio, K12 will retain the ability and responsibility for students living abroad to enroll in a U.S.-based accredited online school, our International Academy. In addition, we will still look to expand the virtual academy model in other countries if the appropriate opportunity presents itself. Beyond this transaction, we've been carefully focusing our attention on the core business, and we're building depth in our management ranks to broaden our skill sets across many functional areas. The most recent additions to the management team were Chuck Sullivan, our Chief Marketing Officer; and Tim McEwen, who many of you know from the education -- from his education industry leadership. Over the coming months, I still hope that you get a chance to meet more members of our management team, including executives in charge of our schools, our academic programs and our marketing and product development groups. While we build our core competencies even further, in evaluating the strength of our organization, I believe that we already have the best business development and government affairs teams in the industry, led by 2 of our most seasoned leaders, Peter Stewart and Bryan Flood. Their teams paved the way for online and blended public school choice for families across the nation. I'm confident that the total combination of our -- in our management depth and experience position K12 for its next decade of growth. On the business development front, as I'm sure many of you saw, the Florida Virtual Academy gained approval to open 2 new public charters in Hillsborough and Pinellas Counties. Hillsborough is the eighth largest school district in the United States and will initially serve students in grade K to 8, and Pinellas will offer grade K to 12. These counties serve over 300,000 students, and we are very excited to work with the Florida Virtual Academy to bring a new option for families in these counties. This quarter, we also announced the creation of the College and Career Readiness Academy in Idaho. This first of its kind online program will offer 4 years of occupational training, thereby providing a pathway to job opportunities for the students. This is part of our strategy of offering school programs tailored to the needs of the market. We expect this type of school will provide many students with another choice, thereby improving retention rates, academic outcomes and overall graduation rates. Going forward, our growth will continue to be fueled by these types of efforts, developing new counties and opening new schools within our current state footprint. At the same time, we will continue to work with states that don't offer virtual academy options today to offer that choice for their families. Expect to hear more from us on the business development front in the coming months. But needless to say, I believe that these efforts, in conjunction with our efforts to expand enrollment in our existing academies, will support our growth expectations, both for the near term and for the long term. Now changing topics for a moment. This quarter, we continued to invest in courses and programs for our students and tools for our teachers. In fact, we just signed an agreement to transition our learning management platform to Desire2Learn, a pioneer in next-generation digital education systems. The Desire2Learn platform is used by over 100 kindergarten to 12th grade organizations, from statewide systems to virtual programs, and provides an industry-leading student experience, which helps us with student engagement, retention and outcomes. From a teacher's perspective, the system provides more easily accessible insight into student academic health and new audio and video tools to allow for more interactive student feedback. In addition, this significantly advances K12's effort to deliver a more mobile-ready curriculum, because Desire2Learn has a mobile-ready capability beyond what's in our current systems. We have to work -- we have work to do to format our content for the browsers, the sizes and user interfaces of tablets and phones. The Desire2Learn's learning management system will make that transition much easier. The investment with Desire2Learn and the partnership with Safanad are both examples of our commitment to deploy capital responsibly. Our aim is to use our capital as efficiently as possible by evaluating the trade-offs between build and buy. We will continue to look to integrate with the best-of-breed systems, tools and capabilities available in the marketplace, whether those are built in-house or externally. We will also be open to partnerships to create new content and curriculum, to market products or to create new ventures. And this approach allows us as an internal team to focus on the applications and the innovative learning approaches and programs that make us unique, rather than investing our time and capabilities that are not our core competency. So with that, I want to thank you for your time this morning, and I'll hand the call off to Tim Murray.

Thanks, Nate, and good morning, everyone. We had a very busy quarter, but I want to focus my remarks on 2 key topics. First, our continued commitment to our students and teachers, including the investments and enhancements we're making to our academic capabilities; and second, our continued progress in improving our enrollment and marketing effectiveness. On the academic front, we moved a number of programs from the trial phase into partial or full deployment, expanding our rollout with our partner schools across the nation, including our Strong Start program, which we use to support new K12 families with a protocol to ensure early engagement from enrollment approval through the end of the first 4 weeks of school. Study Island, which complements our online learning program, and is also aligned to each state and its standards. Students are expected to work on assigned lessons from Study Island to demonstrate mastery of specific standards and to get additional practice on key skills. In a suite of teacher workforce tools, which enable us to discern best practices across our teacher community, the platform captures data on time management and tool utilization in order to support data-driven instruction to understand and replicate what works best for students and teachers in different situations. And in the first phase of our K through 8 integrated grade book, providing a single repository for grading from multiple sources, the ability to customize grading logic to conform to schools' specific requirements and offering families on-demand access to student grades. We also focused this fall in improving the participation in our Scantron testing, and I'm happy to report that we've improved student participation from 85% last fall to 95% this fall. By working to ensure that the vast majority of students complete the Scantron exams in the fall, we are on track to have an even more accurate picture of academic gains across all types of students for the 2013-'14 school year. Moving forward, we're continuing to test different models and programs to evaluate what other aspects of the instructional model can be improved, including a new at-risk model for those students behind grade level and a family support team concept to address student and family well-being and ensure deeper collaboration between parents, students, staff and the broader community. The teams are designed to help students stay on track through early interventions and engagement strategies. During the quarter, we also invested in a wide range of new content for students at all grade levels. Some of them include new language arts enhancements to our Noodleverse software for early grades; math, algebra and geometry upgrades for lower and middle grades; art and computer courses for high schoolers; and even a new GED assessment and content upgrade for those students who need an alternative pathway to achieve their degree. At the same time, we continued our rigor around student experience, achieving system-wide performance of 99.9% availability for our learning management platform and 100% availability for our PEAK solution for school districts. This is important because it's our systems that are the delivery mechanism and the backbone of the digital learning experience we provide. Now turning to marketing enrollment. During the quarter, we made a number of changes to processes and systems, while bringing on a new Chief Marketing Officer, Chuck Sullivan, to assess our approach with a fresh set of eyes. Much of the work is ongoing, but let me share some highlights. First, we're planning to expand our communications program to increase awareness of our virtual academies. If you remember, one of the things that hurt us in the past was the compression of our enrollment cycle. To address that issue, we'll be increasing investment and beginning our communications efforts earlier in the spring. Second, we've begun the transition from having approximately 16 processing queues in our enrollment center to a much smaller number. This allows us to use the same agents with applicants from more states and to balance workflow and to provide a better experience for families. And third, we've implemented new tools to improve our capacity planning, demand forecasting and cohort tracking. Our goal is to build a marketing enrollment team that can effectively identify and attract students who will thrive within the online curriculum option provided by K12. The key will be enhancing our customer experience while also improving our execution. And I'll continue to provide more updates as things progress. 2 other items before I hand it off to James. First is our win with the National Joint Powers Alliance, whose members include about 10,000 school districts. K12's Institutional group and Middlebury joint venture were selected for 2 of the 5 slots awarded. This 4-year contract provides a way for schools and districts to bypass issuing their own request for proposals, or RFPs, in purchases of curriculum, education materials and services, and instead, purchase through the alliance. One of the reasons for the award was our national footprint and breadth of capabilities, and we're very excited about the possibilities for fiscal 2015. And finally, I could not be more pleased to have Tim McEwen join our executive team. Tim brings a wealth of operational experience and education industry experience to us. Thanks very much, and now I'll hand the call over to James.

Thanks, Tim, and good morning, everybody. I want to start off by saying that I think we had some technical glitches on our webcast earlier in the call. I think those have been resolved, but I'll remind people that the webcast will be available for replay on our website, so you can go back and refer to that later in the day. As you saw in our press release, we've reported an operating loss this quarter of $8.9 million. Included in this loss are $32.2 million of charges I'm going to describe in more detail but are not part of core operating expenses. Excluding those charges, we would've reported an operating income of $23.3 million. Let me start by giving some color on the $33 million -- $32.2 million in charges. As we reported in early January, in conjunction with the departure of Ron Packard as CEO and along with a small workforce reduction we enacted during the quarter as part of our belt tightening, we recorded severance charges of $7.4 million. Last quarter, we also indicated that we're looking to our portfolio of assets. We recently announced our intention to enter into a partnership to create a new company in which we would take a minority interest. As Nate previously mentioned, we believe those assets will be better served under a separate entity structure, with the investment capital contributed by our partner. And in addition to this partnership, we assessed some other assets on our balance sheet and we've written off the following: computer and material inventory of approximately $12.6 million, and this was an update to our estimate for obsolete inventory; fixed assets of approximately $6 million, these are assets that we've been developing and have decided to discontinue development given some strategic shifts in platform to Desire2Learn that Nate mentioned earlier; some intangible assets from previous acquisitions of $5.2 million; and some other miscellaneous charges of about $1 million associated with the formation of the new company. In total, $19.2 million of the charge have been recorded in cost of goods sold and $13 million have been recorded in selling, administrative and other expenses. For your reference, we've provided additional information at the end of our press release that shows our income statement excluding these charges on a line item basis. And all but $4.4 million of the $32.2 million total are noncash charges. So with that as background, let me provide some further insight into our Q2 results. Revenue for the quarter was $223.9 million, an increase of $17.9 million or 8.7% versus the second quarter of last year, just above the mid-point of the range that we communicated for the quarter. Revenue was driven by a 10% increase in our Managed Public Schools revenues. As we discussed with you last quarter, some revenues that in prior years would've been reflected in Q1 are now being more evenly spread through the year. Q2 was a beneficiary of some of that trend. In addition, we continue to see rates and revenue capture holding consistent with our expectations. Institutional sales revenue decreased $1.5 million or 8.3% from the prior year. This was primarily due to a decrease in volumes in our full-time programs and continued market pressure. As we previously have mentioned, Institutional sales are in transition, which should continue through the remainder of this year and partly into next year. Our International and Private Pay Schools revenue increased $1.7 million or 16%, with gains across all of our schools. This includes approximately $0.5 million in revenue from a school in the U.K. that was not operating in the prior year. Excluding that school, we would have increased revenue $1.2 million or 11%. And as a group, total semester course enrollments rose by 5.6%, somewhat offset by a 6.1% decrease in total student enrollments. This is really a mix shift into more full-time students and fewer part-time students. Gross margins declined from 40.4% last year to 31.4% this year due to the significant charges in the quarter. Excluding those charges, gross margins were basically flat at 40.0%, consistent with our expected financial trends. Selling, administration and other operating expenses increased to $75.8 million. However, excluding the charges, they totaled $62.7 million and were essentially flat on a year-over-year basis. Sequentially, these declined $35.5 million from the first quarter. This decline is due to seasonality in marketing expenses, as well as the general belt tightening that we've enacted during the quarter. These cost-reduction efforts have been systematic, targeted and thoughtful. We ensure that we retain substantial investments in programs that support enhancing academic outcomes and in initiatives to improve the enrollment process. While we will continue to look for efficiencies, we do not expect any further significant severance payments this fiscal year. Product development expenses for the quarter were $3.4 million versus $5.6 million in the prior year. The decline was primarily a result of greater focus on resources on new project initiatives and an improved operating efficiency in our model. I would expect these expenses to remain at the Q2 levels for the remainder of the year. The net result is that we posted an operating loss of $8.9 million in the quarter. But excluding the charges, our operating income would have been $23.3 million, which was above the range of the $18 million to $22 million guidance that we previously gave. In the coming quarters, we expect to continue to invest in academic initiatives, as well as our enrollment center and promotional activities in preparation for the next academic year, while still being mindful of our bottom line expectations. Let me turn to some other items. We ended the quarter with cash and equivalents of $162.9 million, an increase of $19.7 million over the prior year, largely due to the stronger cash position we entered the year with. However, our cash balances remained relatively unchanged from the first quarter. Net cash provided by operating activities for the first 6 months of the year was $20.6 million, down $11.5 million from the year-ago period. This was primarily driven by the year-to-date operating results along with some shifts in working capital, primarily accounts receivable. Accounts receivable increased $31 million on a year-over-year basis compared with the prior year, and correspondingly, DSOs rose. The increase was primarily attributable to a single state payment, which slipped from November to January. Normalizing for this 1 event, DSOs would have actually improved and over accounts receivable, would have been largely flat year-over-year. The company repurchased over 284,000 shares of common stock at a total cost of $5.9 million. While we have over $69 million remaining available under our authorization, please keep in mind that this program was put in place when our stock was trading at $18. We will continue to evaluate the program as market conditions and our share price continues to evolve. CapEx, as we've historically defined it, which includes curriculum and software development, computers and infrastructure, was $17.5 million for the quarter compared to $15.4 million in the prior year. This was largely the result of some shift from Q1 to Q2. Capital spend for the first 6 months actually declined from $45 million to $41 million for the first 6 months. You should also note that we've replaced our $35 million unsecured credit line with PNC Bank with $100 million unsecured credit line with Bank of America. This line has a 5-year term. We've increased our line of credit to provide us with future flexibility but have not earmarked these funds for anything specific at this time. Now let me turn to expectations for the third quarter. We expect revenue in the range of $225 million to $235 million, operating income of between $23 million and $27 million and capital expenditures of $15 million to $20 million. And thinking about the third quarter, I just want to remind everybody that we previously stated that revenue would be much flatter quarter-over-quarter this year than in previous years. In reviewing the consensus estimates for the third and fourth quarter, it would seem that this input hasn't been fully integrated in the expectations for our financials, so please be aware of that. And finally, given the charges incurred in Q2, full year operating income on a reported basis is expected to now be $21 million to $25 million. However, excluding the impact of the charges in Q2 and the impact of completing the spin-off of our venture assets, we expect operating income to still be in the range of $53 million to $57 million, with our revenue guidance being at the lower end of the range we've previously provided of $905 million to $925 million. Thanks for everybody's time today, and I'll hand the call back over to Nate.

Thank you, James. Before I move into Q&A, I just want to remind everyone that we will be publishing our academic report, our annual academic report, and are holding our Academic Day on March 20. At that time, Margie Jorgenson, our Chief Academic Officer; Allison Cleveland, the EVP of School Operations; and the rest of the management team will give you a complete report of how we're driving change in public schools across the nation and our specific academic results. I look forward to your meeting this group of educators that I'm very, very proud of and hearing more about the great work that they are doing. Thank you very much, and let's move to Q&A. Operator, we're ready for our first question.

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

I'm just curious, was the inventory write-down a result of the enrollment miss? Or was there another reason for that?

Yes. This is James. No. The inventory write-down is really a result of -- I think we looked at the inventory on our balance sheet. We've had a new processor over the past year that gave us some better insight into the accumulation of our inventory balances over a number of years. It gave us an ability to better estimate those things that are going to be obsolete. Also, over the course of the past few months and as we plan into the future enrollment seasons, courses shift, we make decisions at our schools to move materials from 1 set of materials -- or 1 version into another. And we kind of systematically sunset those over time. So it wasn't really driven by any enrollment-specific activities.

Okay. And are there any state-by-state issues with regard to legislation or funding that you would highlight? And I guess specifically, could you provide any update on Pennsylvania?

This is Nate speaking. It's always difficult to predict what a legislator is going to do and what's going to happen. Of course, the Pennsylvania legislation has some proposals in it that would affect us negatively. I don't know if that legislation will go through or won't go through, we monitor it closely. We make sure that we give our input, and schools give their input. So I can't handicap it and tell you that it's actually going to happen or isn't going to happen. We monitor it closely, and our current thinking is that if it happens, it would only happen late in the year and would not affect us much in the current year. So that's the only one that I'd highlight. I don't think there are any others that I see that have significant risk at this time. So we think we're in a pretty positive environment as the economy has gotten better, a number of states have thought about the things that they need to do to continue to support education better. And so we get the benefit of that. But I don't see a significant negative opportunity -- negative risk out there today.

Your next question comes from the line of Sara Gubins with Bank of America Merrill Lynch.

Just to clarify, the full year revenue outlook, is the revenue towards the lower end of the range? Because you're taking out expectations for revenue that would've been in there for the joint venture, or is it something else?

No. Just to clarify, the guidance that I'm giving doesn't assume anything for the venture deal that we're contemplating. So I think as you -- most of the -- most of you have modeled in a consensus toward the lower end, we're just confirming really that excluding the impact of the ventures, we're likely to be in the lower end of our guidance range.

Okay. Can you talk about where you're seeing things coming in a little bit later than you might have expected and what would have gotten you towards the higher end?

Yes. I think, really, and you saw this quarter, our Institutional business is under transition. I think we're seeing continued softness in certain areas that was probably a little softer than we had hoped for or expected. We still think that we'll have a couple more quarters of transition here and there's going to be some variability there and a little bit of uncertainty, but we continue to invest in that business and we have a strong belief that going forward, that's going to be a good business for us. But I think that's creating some uncertainty for us here.

Okay. And as you look at the Institutional business, do you think there's a chance that could grow next year -- next fiscal year? Or is that too aggressive, given some of the long cycle that this business has?

Yes. Sara, it's Tim speaking. We're not giving any guidance, obviously, on 2015, but we continue to be very positive on the market opportunity here. We have made strong progress on enhancing our product offering. We have made strong progress on improving our customer retention rates. We're seeing the utilization of our offering drive average revenue per seat up, if you will. So we are encouraged by those trends, but I'm going to stop short of giving any guidance about next year.

And Sara, this is Nate speaking. Let me add 1 point to all the points that Tim said I agree with, which is, if you think about it, the way -- part of our Institutional business is when we run these virtual school programs for school districts, they need to increase their enrollment. And when they increase their enrollment, we get revenues from that. So just as our enrollment process was lower than we expected this year, that affected the Institutional business as well. I don't expect that to continue, therefore, I think what you'll see is the Institutional business, as we said, continue to be a flat to down for the rest of this year, but less down by the fourth quarter, and by next year, if we do the enrollment as we expect, I expected that we'll have good opportunity to grow this business. So I'm optimistic on the business next year.

Okay, great. And then just last question. I know last quarter you talked about deferred revenue impact hitting revenue per student in the first quarter, but probably helping it through the rest of the year in the Managed School Business. Could you talk about any impact that, that might have had? How we should think about it for the rest of the year, and also just what you're seeing in terms of underlying budgets in various states?

Yes. I think what you saw for Q2, we'll continue to see a little bit of benefit heading into Q3 and Q4. I'm going to stop short of quantifying the actual impact for you. And I think that in terms of, I think the other question, in terms of rate, I think we'll continue to see good revenue capture and reasonably strong rates through the rest of the year as well.

Your next question comes from the line of Corey Greendale with First Analysis.

I wanted to ask you about the Desire2Learn transition. First of all, is that already done, or when do you expect to make the transition?

It's not already done. Corey, this is Nate Davis. What we said is we signed the contract, and the contract now starts the conversion process. The conversion process will probably take us a good 1.5 years to get done. So the target right now is to get that done, and to start that conversion process, we'll have to do it sort of grade by grade, school by school, so that conversion process is planned out. But it will take multiple years to get it done. We are starting the process. That's really what I was announcing.

Okay. So in other words, the Desire2Learn is a good platform but whenever there's a transition, there's always risk about changes and how people have to operate, so the concept is you're going to do it in smaller chunks to make sure it doesn't affect the company in a big way in any given quarter?

The way we'll do it is we'll start off with a couple of pilots that we will do, and we'll work with individual schools and teachers to make sure we understand all the changes. We will then make sure that we build interfaces into their system for all of the various things we need to do, for example, student registration systems and -- as a registrar would. The coursework, the trainings for teachers. After we've gotten that done, then we'll introduce it to all of the Managed Schools in certain grades. So yes, it's a phased approach, and each phase adds more and more capability. But we'll not do any kind of flash cut because, as you said, that will significantly impact families.

Okay, and can you tell a little bit about how the switch to Desire2Learn affects how you view the Institutional side of the business, given -- maybe I had this wrong but I think the PEAK 12 initiative, the concept there was that it was a kind of a plug-and-play, you brought everything, and now you're using an outside provider's LMS, just how that affects how your -- your value proposition for districts?

Corey, it's Tim. We think it actually enhances both our value proposition to the market as well as Desire2Learn's. We see various opportunities to partner with them in our respective go-to market models, where we can be a delivery channel to them through our PEAK 12 through our sales force. And likewise, we save them as being -- as opening up additional market opportunities to us, both domestically and internationally, so it's a win-win all around.

Your next question comes from the line of Jerry Herman with Stifel. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: I wonder if you guys could talk a little bit about business development pipeline. I know it's a little bit early but -- at this time, or say 9 months ago, you guys started to get some visibility on that. Is there any early read on how that feels at this juncture?

Yes. There's an early read on how it feels. We sort of know what is going on in a number of states, and we think there are -- I don't think you're going to see any new states by the way. I think you're going to see new schools within existing states. That's the primary -- and you're going to see new types of schools. We already announced that Idaho career technical education capability, and we're working on others, but we don't have any others to announce at this point. But that one is going to be pretty significant for us, and that's going to be a significant area of push for us. In addition to second schools and third schools within a state, that's another significant push for us. We will probably do at least 1 Passport School dropout and recovery. So most of the work that we're doing is work that is within existing states to grow the capabilities in those states. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And then with regard to product development, James, you sort of referenced that, I think, the run rate should look the same for the rest of the year. I guess, if we go forward, is this sort of the new established run rate on product development?

Yes. I think we'll have some variability, but I think that Q2 establishes a new range, I think, for what we should see going forward, yes. Were you asking about expense or capital, Jerry? Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Well, actually, the combination of both. But in particular, how it hits the P&L as a line item.

Yes. I think that line item is -- we're probably in a new lower range than we were in, say, Q1. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. Helpful. And then just one final question. Given some of the charges, can you talk a little bit about expected adjusted D&A for this year and CapEx?

Yes, sure. So I think on the D&A side, if you think about a lot of the charges that I mentioned, there's a fairly limited impact to D&A run rate, primarily because a lot of the things that we wrote off were things that were still in development. So we hadn't actually started the depreciation on those. So you're not going to get a lift. You get a future -- we will start depreciating those things in the future, but you won't get a structural shift, really, of any material amount in the rest of the year. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Okay, and CapEx?

Yes. So CapEx. I don't think it really changes the view of CapEx and how we invest in CapEx for the rest of the year. Those were things that they largely look back. I think our view of spending capital hasn't changed. We -- there's some new things that we will be investing in, so the termination of certain projects just gives us an ability to invest in new things. We're always assessing kind of how we're going to deploy our capital and ensuring that we're deploying capital on things that are going to give us a return. And we go through those reviews regularly here that I think the indication right now would be that we'll continue to deploy capital at the rate that we've guided to.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

I just wanted to follow up from Sara's earlier question regarding the revenue guidance for the year. So the reason that it may fall towards the lower end of your prior range is mostly because of the Institutional business? Any of the other verticals seeing somewhat disappointing numbers?

I think, a, as you know, the -- our overall enrollments for the year, there are always a little bit of variability that we -- between revenue capture, between the deterioration of enrollments during the course of the year, so there's always a little bit of variability there. But primarily, it's the Institutional business, I think, that is driving kind of us to the lower end of the range.

Okay, great. And I know you haven't given official guidance about what the company will look like once you've done the joint venture. But just so I understand at a high level, what businesses will be put into the joint venture. If I look at your 3 segments, where will we see the impact?

Yes, so I think you've got -- so if you think about the businesses, we have some international businesses that we'll be putting in, and that's primarily from our Private Pay internationals area. There are a couple of schools in the U.S. that are part of the Managed Public School business, and they will also go. Once we get this deal done, we'll give you some further guidance on how to think about where these fit into the different buckets and how to look forward on these. But we gave you -- I think when we announced earlier in January, we gave you some high level numbers around last year, the sizing, in aggregate, and as we go forward, we'll give you some greater granularity into each of the segments.

All right, great. And can you just remind me when you expect that deal to close?

No. No deal is done until it's done. We continue to work to close it. I think just like any deal, I don't think we want to give any pre-announcement on how it's progressing exactly. But we feel pretty optimistic and, hopefully, next time we come to speak to you, we'll have some good news for you.

The one thing I do want to clear up, James said a couple of schools from the managed schools -- Managed Public Schools area would go with the ventures. It's only brick-and-mortar schools that will go. None of our virtual academies will go into the ventures. So James is talking about specific brick-and-mortar schools that would be going into ventures.

Your next question comes from the line of Trace Urdan with Wells Fargo Securities.

Are you able to tell us the mix within the Institutional business of ratably-recognized revenue versus one-time revenue in, I guess, this year and then maybe the prior year?

Yes, Trace, it's James. We're not really breaking the revenue out into those types of specifics. We do -- I think we've earlier indicated that perpetuals continue to contract over periods of time. We are focused on more recurring annual license revenues, but we haven't broken out that out in any more granularity.

I'm just trying to find a way to determine whether this is really transition or whether this is something else.

Well, I think one way to look at it is that number 1, the perpetual license business is declining. The business for annual licenses is increasing, and that's the place we're spending our time. And the third category in that area are the -- what I mentioned, the virtual school programs, where the real revenue there comes from more students enrolling in the program. And that's a matter of how good our enrollment efforts were and, of course, this year, we didn't deliver our own expectations, so that was down. But that's something we expect to be up. So those second and third categories, we're bullish about, especially the annual licenses, which tend to be doing very well. The first category, which is the perpetuals, is definitely declining. So we think the virtual -- the annual licenses will become a larger portion of our business. The perpetuals, pretty much be in a steady-state level by the end of this year. So that's why we're comfortable that we'll start seeing growth in the future from the second two categories.

Trace, it's Tim Murray. If I could just follow up from a customer's point of view, what's happening is we're seeing districts shift away from full-time student programs to more blended part-time programs. And so the shortfall in permanent enrollments that Nate referred to is, in part, reflective of how districts are putting blended learning programs in place, where they're offering students a variety of capabilities, which we will monetize through an annual license model, as Nate just said.

Okay. And then part of my understanding of that business, about your go-to-market strategy, was that you were leading with your platform. And I may have that wrong, but I'm wondering if that is the case, how does the transition to D2L affect that go-to-market strategy for Institutional business?

Yes. So there's a couple of things to think about here. Number one, the Desire2Learn platform is the platform we'll use for our Managed Schools. It's not the platform we're using for Institutional. The PEAK 12 platform that we are selling to institutions basically is the -- you can think of it as a portal or as a front-end that gives a lot of capabilities. Desire2Learn will be one platform that interfaces with PEAK 12. Other platforms, like Study Island and other tools out there, we want all those to interface with PEAK 12. So from a school district's point of view, when they're looking at all of the things that they do, we expect PEAK 12 to be a front-end to some of those programs, including Desire2Learn, by the way, that it might be a one student sign-on, being able to look at student status and the status of their grades, all of that they would be able to do through PEAK 12. So Desire2Learn will partner with us in interfacing with our PEAK 12 platform. But it is not -- we're not going to the market in our Institutional business with Desire2Learn as the lead platform. PEAK 12 remains the lead platform in that category. Desire2Learn is our internal use for Managed Schools.

Okay, and then on an annual basis, you guys have a certain amount of cash expense that's typically capitalized for software development. I'm wondering if you can, maybe just as an order of magnitude, give us a sense of how much of that annual investment was spent on the platform and whether you see that expense then going away as a result of sort of more outsourcing of the platform?

Trace, it's James. I think we have a number of back-end systems that support our schools. This is just one of them. And so rough order of magnitude, the systems, the conglomerate of systems that support, we spend anywhere from -- you could think about it, about 1/3-ish on those systems, but I don't think that we're going to materially reduce our investment in platforms given our pivot to Desire2Learn because it's just one component. I think what we'll want to do is to ensure that we are investing in those other systems more heavily and ensure that those are providing the right student experiences. So does that answer your question?

Sort of. Except that I thought I heard Nate kind of positioning this move to an outside platform as a way to be more efficient with your capital? So I guess, you kind of left me now a little confused by why you're making the transition to an external platform, if we're not going to see any benefit from it in terms of the amount of spending that you're doing on technology.

Well, I think the benefit you see isn't determined by just the amount of gross spending we have. The benefit you see is that instead of spending on this platform, we'll be able to spend in other areas. And that those areas will actually provide a good return for us.

Let me try to clear that out for you. This may help you. So think about the fact that in order to get our mobile platform ready, we would have to do that development in-house. In order to build all of those new capabilities in our -- in an LMS system, we would have to do that work in-house. In addition to everything we're doing today, those programs haven't even really started yet for mobile, for building a lot of capabilities into our LMS that Desire2Learn has. Rather than having to spend additional capital, in addition to where we are, to get those things done, we now have a capability from Desire2Learn. So we can spend our capital on greater enhancements to the curriculum. We could spend our capital on things like student information systems and other parts that are not part of an LMS. It is a little difficult to understand, but think about the parts that are not part of LMS, that's where we get to spend our capital, and no longer do we have to put more capital, additional, meaning spending more than our normal program to get mobile. We now get mobile as a part of just the normal capital we get for Desire2Learn. That's what I meant by efficiency.

Got it. And then last question, then I'll let you move on. But can you talk about the transition and sort of how long it will take, what the user experience will be like and whether sort of what risks there are to downtime, et cetera, as a result of the transition?

Trace, I think Nate gave the transition process in an earlier -- answer to an earlier question. One of the reasons we partnered with Desire2Learn is they actually have experience doing conversions at larger levels of scale than even we are. Most of us have been in higher ed, some have been in K-12. But we will take a measured approach to prototype pilot, expanded pilot, to assess the impact on student experience, the teacher experience, the family experience before we do a full cutover. We're obviously somewhat held to the normal cycle of the school year where there are certain windows in which we can convert larger numbers of schools. But we have an arrangement with Desire2Learn that allows for complete flexibility on a success-based model to make sure that our conversion occurs when we're both comfortable with the customer experience, the user expense will be what expect it to be.

Okay. I'm sorry for making you repeat yourself. Does this mean that by next fall, we will see the transition complete? Or could it take longer than that?

Oh, definitely longer than that. By this fall, the fall of '14, what you're going to see, you have pilots in place. We will start to work with teachers on the enhancements we need to do, building our interfaces to them. But full cutover most likely won't happen until the fall of 2015, although the detailed schedule is not worked out yet, but that's the general expectation.

Your next question comes from the line of Jeff Meuler with Baird. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Just a follow-up on the RPS commentary. I know that you had said that Q1 was depressed and that the benefit or the catch-up benefit would be kind of spread over the remainder of the year, but I guess the 5% delta in the year-over-year averaged Managed Public Schools enrollment growth and the revenue growth was greater than I would've expected this quarter. So just maybe, are you expecting a similar delta there for the rest of the year? Or when you say that your expectations are unchanged and you're expecting a little bit of a benefit, I guess, how should we think about that?

Yes. I think if you think about the rest of the year, the year-over-year growth rate in Q1, I think was, which was, for MPS, specifically, was about 4.9%. And I think for the full year, it's going to be higher than that, so kind of in order to average it out, you're going to have a Q3 and Q4 that's kind of above Q1. So I think, in the range of Q2, you'll see a little bit of lumpiness, I think, but more in the range of Q2 than in Q1. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then there was a question on business development and there was a couple of parts to the answer. In terms of the schools that you think have a potential to open for the 2014-2015 school year, are those growth opportunities? Meaning, in uncapped states or effective cap increases in existing states that are capped and around their caps? Or is it more about the process of rolling out several different types of schools having the Insight Schools, having the college prep schools. So it's more a kind of bracketing out the different abilities or drives of the different types of students and making sure that you best serve them or is it a 2014-2015 growth opportunity?

It's both. So when we open the Idaho College and Career Readiness Academy, which we're intending to open this fall, that academy, when it opens, will be a whole new set of enrollments that we'll be able to do that are not in the current enrollment. We think we have another authorized in one of our big states. The authorizer has approved it, but we're still waiting on the Department of Education to give us a school number in a really large state. That is a whole new set of enrollments in that state as well. As I mentioned, Florida has 2 new counties. The way to look at that is increasing our cap in the state of Florida. Every time we open a new county in Florida, that's effectively raising the cap in that state, because as long as you're in one county, you know the cap about the market opportunity in that county. Opening a new country, especially one as large as Hillsborough, which is right around the Tampa area, that opens up a brand-new set of students available to you. So if both expansions of existing programs like second school on state, also brand-new enrollment opportunities that come from new schools like we're doing in Florida. And there are a couple that I didn't talk about because they're not completely approved yet. We have one state, with about 300 enrollments, that we expect the opportunity to open up sometime this year, to be able to open up in the fall. So we're working on a number of things that we think will give us more enrollments in the fall. But they're not formally approved so we generally don't talk about them until we know we're pretty much approved in this state. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Okay, and then in response to a question on the revenue guidance, I think you guys listed that student retention or in-year withdrawals can be a factor. Wasn't sure if you were trying to signal something there or if you're just listing it as a potential factor. So maybe a comment on how in-year student withdrawals or retentions have been trending.

So Jeff, it's Tim. As we look at withdrawals this year as compared to the prior year, with the exception of a couple of outlier schools, we see retention rates being comparable to what we saw last year. As you'll recall, we've talked in prior calls about our Strong Start initiative, which was designed to initiate proactively contact with our students, especially new families coming into our schools. And one of the results of that was that we would identify students who were either not working with our model or not a good fit with our model earlier. And so we actually saw that as we expected, slightly higher withdrawal rates in the early part of the quarter. And then as we also expected, we saw those withdrawal rates decline in the later part of the quarter. But overall, on balance, they're comparable to the prior year.

[Operator Instructions] At this time, I'm showing there are no additional questions. I would now like to turn the call back over to Nate Davis for closing remarks.

I will mention again to everyone that I'm looking forward to seeing you at our academic day. I think it's going to be a very good day and a very open day and a chance to meet the management team. I appreciate everybody's time on the call this morning and the questions. I hope we answered your questions. If not, certainly, I'm available during the day, as is James and Tim, and Mike Kraft as well. So we look forward to talking to you more. But I appreciate your time today. Thank you, everybody. Operator, we're finished.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.