Greetings, and welcome to the K12 Fiscal 2015 First Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mike Kraft. Thank sir you may began.

Thank you, and good morning. Welcome to K12's first quarter earnings call for fiscal year 2015. Before we begin, I would like to remind you that in addition to historical information, certain comments made during this conference call may be considered forward looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and should be considered in conjunction with cautionary statements contained in our earnings release in the company’s periodic filings with the SEC. Forward-looking statements involve risks and uncertainties that may cause actual performance or results to differ materially from those expressed or implied by such statements. In addition, this conference call contains time sensitive information that reflects management’s best analysis only as of the day of this live call. K12 does not undertake any obligation to publicly update or revise any forward looking statements. For further information concerning risks and uncertainties that could materially affect financial and operating performance and results, please refer to our reports filed with the SEC, including, without limitation, cautionary statements made in K12's 2014 Annual Report on Form 10-K. These filings can be found on the Investor Relations section of our website at www.k12.com. In addition to disclosing financial results in accordance with general accepted accounting principles in the U.S for 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 for 30 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?

Thank you, Mike. Good morning and thanks for joining us on the call today. First let me start by highlighting a few results for the quarter. Revenue was $236.7 million of [indiscernible] year-over-year and within the range of our most recent guidance. Excluding the businesses we sold last year, revenue rose 5.2% versus last year. Revenue growth was largely driven by gains in our public school programs as well as our international and private based schools. For the last quarter, we posted operating loss of $13.2 million compared to an operating loss of $8.5 million in the prior year. Operating losses in the first quarter relate to seasonality of SG&A cost at the beginning of the every school year, which is largely driven by enrollment center and promotional expenses. Importantly, our release this morning provides more details on our new disclosure, including trends from the prior fiscal year for our Managed and Non-managed Programs, as well as our institutional software revenues. James Rhyu will be providing insight on our financials after Tim Murray provides highlight on operations. Before hitting into more discussion about academics, I wanted to again reinforce K12’s direction for the year. First, I don’t want anyone to misinterpret our recent comments about this new category called Non-managed Programs. Our core business is still managing online and blended public charter schools and we intend to remain focused on the quality of the education we provide, as well as growing these managed programs despite the near term shrinkage in enrollments. We will also focus on business development and public efficacy required to gain access in new states and expand schools in existing states. This year we are focused on potential new schools in North Carolina and Maine as well as the potential for a second school in other state.…

Thanks Nate and good morning to everyone. This morning I would like to talk about two key topics. First, Nate talked to about our academic results, I'd like to address the investments we are making to support continued improvement in student outcomes. In addition to systems and infrastructure investments such as the new learning management system for our high schools, we are actively investing in our people and programs. For our teachers, we have enhanced support levels so that there are more coaches and more one-on-one mentorship opportunities. We also hired new teachers three weeks prior to first day of school to allow proper onboarding and training with a focus on data driven instruction. This time allowed teachers to acclimate to an online instructional model and be ready to start at the beginning of the school year. We have also expanded our Strong Start in family academic support teams to ensure students who are engaged and ready to learn as well as to address the issues that are impacting the students' learning environment. Strong Start provides onboarding support for families. The programs begins from the moment students are approved for enrollment and includes getting started with K12 materials, introduction to our systems, fun summer activities and interaction with parents. We've seen a strong correlation between Strong Start participation and those students who remain active and engaged in K12 partnered schools. This year 92% of students completed the Strong Start program, a 10% increase from the previous year. The family academic support teams or FAST as we call them, are school based teams focused exclusively on managing the cases of disengaged students. FAST members work with home mom and the content area teachers and other essential staff to implement a plan with the family for achieving engagement and academic success. This…

Thanks Tim, and good morning everybody. Before I begin, I wanted to recap some updates to our disclosures that have seen in our release today. First of all, we are providing revenue and enrollment information in our new disclosure format that we discussed on our last call, as well as the calculation of the average revenue per enrollment for your information. In the appendix, we provided some supplementary information including revenue and enrollment data in our historical format, followed by enrollment revenue numbers in our new format for the four quarters of last fiscal year. And lastly, we’ll show you a table of the pro forma revenue by quarter in our new format excluding the businesses we sold last year, to give you a better apples-to-apples comparison for the rest of the quarters of the year. For purposes of the discussion this morning, I'm going to focus on our results versus the pro forma results from last year which would exclude the businesses we sold and that is the most comparable view for our business. As Nate already mentioned, we reported revenues of $236.7 million for the first quarter. This represents an increase of 5.2% over the pro forma Q1 2014 revenue of $224.9 million. Growth in the quarter was largely driven by 5% increase in the public school program revenues. Managed program revenue grew 4.6% over the last year. This was in contrast to an enrollment decline of 4.7% on a year-on-year basis. The increase in revenues resulted from a 9.7% improvement in revenue per enrollment, relating to a combination of factors including school mix and improved planning environment in certain states, activity specific funding and other variables. We expect the full year revenue increase to be more modest of around a few percent. Non-managed program revenues rose 15.5%…

Thank you James, operator we are now ready to take questions.

Thank you. At this time we will be conducting a question and answer session (Operator Instructions). Our first question comes from the line of Trace Urdan with Wells Fargo Securities. You may proceed with your question.

Trace, are you there?

Yes I’m sorry, good morning. Nate, you expressed your sort of continued belief in the managed school business going forward in your prepared remarks, but I’m wondering if you could sort of speak to us about what you see as the long term growth rate in that business relative to the non-managed school business, and how you’re thinking about allocating resources to each of those lines of business going forward?

Thanks Trace and good morning. Good question. I don’t know that I can predict beyond this year what the managed public growth will be, because it’s so depended on this new states category. If we see certain states like North Carolina, New Jersey, Illinois, New York, Connecticut, Kentucky -- we see those states hard to open up, then the growth rate starts to accelerate. And I think we are well above the 5% to 10% range. But without those new state opening up I see it maybe 5% kind a range in longer term. It’s really difficult to predict because there are so many factors that making uncertain. As we think about the investment second part of your question, as we think about the investments that we make in the managed business as well as the institutional business, I think you're going to see -- continue to see more investment in the managed public schools than you’ll see in institutional. Because our base is so large there, and that's still 85% of our business, that’s the business that is the bulk of revenue and I think that we have to continue to invest in that. I don’t think that investment is -- I think it’s in a bubble, it's the best way to describe it. We will probably have a two year or so, maximum three year bubble and we'll need to remediate and fix a number of things. Mobility, learning management systems, content management systems, so many of those things will be put in place in the next two years, we have always started. And then I think you'll see CapEx at least start to decline in those areas. In terms of expenses investments like hiring more teachers, I think we’ve done a lot of work this year to improve the number of teachers, hiring them at the right time. We'll probably have a reduced reduction in the incremental investment over a long period of time in that part of the business. So I hope that answers your question.

Yes, that's helpful. Thank you.

Next question?

Our next question comes from the line of Jeff Silver with BMO Capital Markets. Please go ahead with your question.

Hey, good morning, it's Henry Chien calling in for Jeff.

Hi Henry.

Hey. I had a question on the Fuel Ed business. Have you given any thought to the TAM for the business, and any color on the dynamics, sort of as it relates to the managed school business? Thanks.

Henry, its Tim could you repeat the first part of your question was it relative to TAM, total --.

Yes, I'm sorry, the addressable market. I don't know if you put any estimate of how you're looking at the overall market.

We do. What's attractive about the market to us is we envision the entire traditional brick and mortar school market as an area of opportunity for the Fuel Ed business. So to go back to Trace's question a moment ago, many of the investments we are making especially in curriculum, our investments that we would expect to be able to earn a return on both Fuel Ed business and the managed public schools business and we see opportunity across the entire public school system to sell and we see opportunities outside of the U.S. for some of those assets as well. So it’s not just a domestic market. Does that answer your question?

Yeah, it does. That's helpful, thank you.

Our next question comes from the line of Nick Nikitas from Robert W. Baird. Please go ahead with your question.

Yes, thanks. Nate, you mentioned the improving test scores you're seeing at some of the schools. Can you just talk about whether that's maybe a product of slower growth in some schools and a more stable student base, or do you believe that maybe has more to do with the additional services and remediation programs that you guys are providing?

I think it has much more to do with the programs we put in place and not a slowing base -- more stable base and we’d like to say that this year we still have a lot of new students coming into the program and students who signed up early on and -- then early in the cycle meaning the first month of school, still deciding it was too hard for them and some backing out. So the base isn't so much stable as we think the improvement is coming from the programs we put in place. I think the most important program we put in place was this thing we internally call data driven instruction, where we put much more focus on looking at exactly what that individual student maybe struggling with. And having a teacher intervene as opposed to having the curriculum do the work itself and student do work with the curriculum, more teacher intervention and more what we call synchronized session, that means students have to be online at a certain time with the teacher. So those programs are making the greater difference than anything else, than the type of students mix. As a matter of fact we actually saw a slight increase in amount of students that were free of these lunch, so we know the mix is not going to changing dramatically. It’s really, we think the programs.

Okay, that's helpful, thanks. Then just one more from me. You mentioned the potential new schools in North Carolina and Maine. If those were approved, are you expecting them to be managed, or non-managed? And then just in general can you talk more about the trend you're seeing there with any existing schools outside of Agora?

Yes. So the Maine school and the North Carolina School we are working with the charter board and the charter boards are actually the ones who made the application and did the interviews and are working with the state to get their charters approved. Once their charter is approved we have, I mean you file for charter, you generally file with a management contract attached to it. And so our management contract has already been attached to it for the authorization. So those will be managed schools if they are approved to answer your first question. In terms of schools that are -- that could be at risk, we have this year about six schools that are up form some kind of contract renewal and charter renewals. And while I don't see it being a massive trend like Agora, I think Agora was an outlier. There is always a risk that a school can decide to go self-managed. The economics might change for them, they might have a change in the board leadership. And so if those things happen, we could see a change there. But the good news is what we found is that when they made those changes they have stayed with K12 curriculum which is the highest margin part of the business for us and the part of the business that we believe it is a core of the services we provide. The lower margin businesses where we may provide financial services and technology service, they are important and they drive revenue but the core of our business is curriculum. So I don’t think there is huge risk for the other state but I got to admit, there is always a state that can make -- a school board that can make that decisions.

Our next question comes from Jason Anderson with Stifel. Please go ahead with your question.

Thanks for the commentary on academics and the results and seeing improvement there, but I know in various schools you've seen improvement and maybe not as broadly as you’re seeing now, but could you talk about maybe over the last couple years, kind of the sentiment from the departments divided by states, or the Federal, their I guess buy in on how your results are presented, and are they better recognizing the improvement you’ve shown? And kind of along with that, have you made the adjustments, you feel like you’ve fully made the adjustments you need to make to show I guess the right metrics? I mean, I know you’ve talked about that at length in the past, but just maybe getting an update on that?

Good morning Jason. So I’ll start by saying I am still disappointed that there is not enough recognition for the good work that we are doing. So no I don’t think if there has been recognition of the work but I will also admit that, I don’t think that change has been a long term change yet. In other words, you are an administrator of department of education you look back at virtual chartered schools and you question, you're just beginning to understand that whole issue of free reduced lunch mix, the amount of mobility in our program, just begin to understand the dynamics of an online school program. They’ve always compared us for example to the state averages and not to the demographics at schools that are like our schools. Graduation rate is another issue, a student comes to us in the 10th grade but it is really only operating at the 8th or 9th grade level, they still expect us to graduate that student in three years to take it in their four year cohort group. Well that student is already operating at a five year graduation rate and we are supposed to graduate him in three years. So there are still those kind of issues that we face that still need to work to explain the regulators and we’re out doing that work towards the federal and state level. But I think there is greater recognition but it’s not where I wanted to be yet, I want to be honest with you about that. We need continue to talk about it, we need to continue to exposed and have full disclosure with regulators and I think they will eventually get there.

Great, thanks, and then one other -- you were here in the election season here, so in any of the potential new states you’ve talked about, New Jersey, Connecticut, so on. Are there any political or election issues there that maybe would impact this potential success of opening up those states?

Yes there are. In two particular states, I would say there is a slight potential in Illinois, there is a bigger potential in Virginia, from some bills that we see. But I would be speculating if I kind of got to what each regulator and each election might do and what their positions might be. But I am optimistic I know of two states maybe a difference in and maybe a third so we are optimistic at this point. I don’t -- I want to be clear I don’t see a significant change in New Jersey and New York in the near term so don’t want to put that out, they state that we think will work on over the long term. But I don’t see those in the next 18 months - 24 months and those are the biggies. I would love to see us be able to operate in.

Our next question comes from the line of Corey Greendale with First Analysis. Please go ahead with your question.

First, just wanted to go back to a question I asked on the call when we spoke earlier this month. I had asked about what you expect the impact of the Agora change to be in fiscal '16 and I think James said, why don’t we talk about that on the Q1 conference call? So, I'm hoping we could talk about that.

Good morning, Corey and you're good at follow up. I hope I'm the kind of manager as you are. James, you want to address that?

I think if you look at the public disclosures for Agora, you will see that they have paid to us in this past year between $65 million and $70 million in management fees. I think as most of you know the way we account for Agora also includes consolidating in the essentially zero margin services that we also provide which are predominantly teacher related services and we’ll discussed if that would be almost doubling the revenue into K12 and most of those is -- if you look at the board discussions with Agora, most of those no margin revenues to us will essentially go away. They are going to manage their own teachers, there are going to manage their own staff a lot of back of this function et cetera. They are going to manage themselves and so a lot of that revenues goes away. So when you think about the revenue picture, a big chunk of it will go away, specifically related to those little margin aspects of the contract. The remaining pieces we will retain a significant portion and as Nate mentioned earlier in a lot of cases the highest margin pieces of admission really relates to the curriculum and software services that wrap around the curriculum. Of the contract that remains it’s about half of it in those pieces and again those are very high margin pieces. We don’t break out margin by contract obviously, but those are very high margin pieces. I think that you be able with frame work to how to think about '16 relative to Agora.

Okay, then I'll send my follow-up with a couple specifics offline. Then my second question is along the lines that Jason was just asking about -- so first of all, nice progress on the outcome. Do you think -- what's the likelihood of a continuation of outcomes improvement next year, and can you do that without another step up in investment or should we expect kind of increased investment in '16 again over '15 in order to achieve better outcomes?

I don’t think that we are going to see a significant step up in investment next year to continue to achieve the outcomes, the programs that we’re putting in place now, are programs that are going to bear fruit, not just this year but next year. So no I don't expect it to be a step up. I think what we will call the gross margin, revenue minus the instructional cost and services should remain relatively flat into next year. And so the investments it our remaking our grade and curriculum, that as Tim said will benefit both the institutional business and non-management services, curriculum improvements there. We will invest and we will also improve the managed public schools and that's already baked into the capital numbers we have given and already baked into the trends. So I don't think you are going to see a step up in investment.

Okay. And then just one last one for me, Nate. You said in your script, you talked a lot about outcomes and then kind of talked about the fact that you were talking about outcomes and how important that was. What's your current thinking on how you balance in communications, those kinds of things with what the investment community would be looking for, which is growing in profitability and what's your current thinking on in light of that balance, whether it makes sense to be a public company given the business that you're in?

Well we are a public company and I don’t think there are any near term plans to do anything different in that. So our thinking is that that's probably not going to change and that's not where we are spending our energy. Investors do look for returns on investment, they look for operating income and growth. And so it's our job as management to deliver on both of those. Yes there is a balance, I think that the pendulum swung in the last year and half to two years since I’ve been in this job towards more focus on academics and that was purposeful. I now have to make the pendulum swing back a little bit more towards the middle to balance growth. But I can't ever loose site of the fact that the company's reputation was at risk based on what we were before and while I am happy to fix that, some of the outcomes we've got to continue to prove it. I am not claiming success completed yet, I am claiming progress. And I think we still have to improve that. So that balance is always going to be delicate and yes it gets in a way some times when we swing the pendulum too far toward academics. We do think there are some things we can do to improve economics as the Agora situation works its way out of our financials, then I think we are going to again start seeing improvement. As I mentioned there is some focus on new schools in existing states and some new states. I also think there are some things that we are going to do that will continue to help improve retention and all of those things should have an impact. I don't think we are going to go back to date the double digit enrollment growth and double digit revenue growth, I don’t want to signal that. But I also don't think that we are going to be declining business over the long run, I think the pendulum swung one way and we realized it, we’re looking forward to make a better balance.

And Corey just keep in mind that I don't think we divorce academics from economics as we look at the business. As Nate I think mentioned a lot of the academic performance that we are driving in fact ultimately will work to improve by time value of students and those economics are very positive for us over a period of time. So I actually think they'll work in concert with each other overtime. Nate mentioned there -- we're looking to reduce churn dramatically through a lot of these investment that we make in academics. We think that if we bring on the right engaged students, again it goes back to that life time value equation. So I don't think we divorce them, I think we see them in important conjunction over a long period of time.

And James, I totally buy into that. It's more a question about how you balance communication given that different constituencies tend to see things differently, the same state that could be seen differently. But anyway, I appreciate the thoughts, and I will turn it over. Thanks.

Thanks, Corey. Operator anymore questions operator?

(Operator Instructions). There are no further questions at this time. I would like to turn the floor back over to Mr. Davis for closing remarks. Okay, I don’t have any more closing remarks.

Okay, I don’t have any more closing remarks. I think we’ve said enough today and I appreciate everybody’s time this morning, thanks for following. Take care, have a good day.

Ladies and gentlemen, this concludes your teleconference for day. You may now disconnect your lines at this time. Thank you and have a great day.