Greetings and welcome to the K12 Fiscal Year 2017 Year-End 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, Mr. Mike Kraft, Vice President of Finance. Thank you, sir, you may now begin.

Thank you and good afternoon. Welcome to K12’s four quarter and year-end earnings call for fiscal year 2017. 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 and 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 2017 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 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 for 30 days. With me on today's call is Stuart Udell, Chief Executive 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 Stuart. Stuart?

Thanks, Mike. Good afternoon and thanks for joining us on the call today. I'm pleased to say we ended fiscal 2017 with solid results both for the quarter and the full year. Revenue for the year was $888.5 million. Increasing 1.8% year-over-year. Our operating income for the year includes $11.4 million of charges that were booked in the third quarter and $3.8 million in additional performance based stock compensation expense related to our long-term incentive plan. Excluding those charges, we would've reported operating income of $28.4 million for the year. This is an increase of 35.2% year-over-year when you exclude the net impact of a non-recurring legal settlement from the 2016 results. When we look at adjusted operating income again excluding the charges in both fiscal 2016 and 2017, we ended this year at $46.4 million, an increase of 17.2% year-over-year. Our capital expenditures were $48.2 million, a reduction of $14.7 million from the prior year. The majority of our capital went toward upgrading software and curriculum to improve the student online learning experience. Notably, we generated over $40 million in free cash flow and ended the year with nearly $231 million in cash on hand. These results are tightly aligned with the guidance we gave last fall when including the updated guidance of the capital expenditures we provided during the year. Performance in each of the quarters and for the full year consistently met or even beat the guidance we provided. Our investment philosophy going forward will include making targeted expenditures to drive academic excellence and outcomes while simultaneously focusing on growing free cash flow. Therefore, as I’ve said previously, we believe that our capital outlays for fiscal 2018 will remain below $50 million and then tapper down to the $40 million to $45 million range in subsequent years.…

Thank you, Stuart, and good afternoon, everybody. First, I would like to recap our reported results. Revenue for the quarter was $215.8 million, a decrease of 2.5% from the prior year. For the year, revenue was $888.5 million, an increase of 1.8% from the prior year. For the quarter, operating come was $4.7 million, an increase of $4.2 million from the prior year. Operating income was $13.1 million for the year, a decrease of $0.8 million, compared to the prior year. Adjusted operating income was $12.8 million, an increase of $17.4 million from the prior year. For the year, adjusted operating income was $35.7 million, a 9.9% increase from fiscal 2016. As a reminder, adjusted operating income and adjusted EBITDA excludes stock-based compensation. Capital expenditures were $48.2 million, a decline of $14.7 million from the prior year. As Stuart already mentioned, our operating results for the year includes $11.4 million of charges from the third quarter, a small piece of which is stock-based compensation and depreciation. So when you do your add backs to EBITDA on operating, it won’t tie it exactly and $3.8 million of additional performance-based stock compensation expense related to our long-term incentive plan. Excluding those charges, operating income would have been $28.4 million for the year and adjusted operating income would have been $46.4 million. For comparison purposes, if we look at fiscal 2016, excluding the $7.1 million in charges recorded relating to the settlement with the state of California, our fiscal 2016 operating income would have been $21 million for the year. Adjusted operating income would have been $39.6 million. And excluding the charges discussed in both periods, operating income would have grown $7.4 million or 35.2% and adjusted operating income would have increased 17.2%. Our fiscal 2017 results exceeded our guidance on profitability and…

Thanks very much, James. I want to also thank everyone on the call for your time. Darren, we'd be happy to take any questions that folks might have.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Corey Greendale of First Analysis. Please proceed with your question.

Hi, thanks. This is Ken Wang on for Corey. Thanks for taking my question. So, just looking at the – this is from a couple of months back when your 8K was published with some details on the Ohio Virtual Academy contract renewal, it look like you may be offering a volume discount, which would mean lower revenue per student for higher enrollment levels that looked like it wasn’t in the prior contract. Just wondering what effect might the volume discounting have and do you expect higher enrollment levels to fully or more than fully offset the discounting?

So the discounts are – we did offer some volumes discounts. The right enrollment levels that we feel that as long as the Ohio Virtual Academy board wants to achieve those levels, they will be more than offset by higher fees to us. So we think the economics of that contract are really very attractive for both us as well as for the Ohio Virtual Academy board.

And I would just add that notwithstanding the comments that James just made, materially the contract is renewed on very similar terms.

Okay, thanks. That’s very helpful. And then just wondering when is the – is there any other large contract that's up for renewal anytime soon, when would that be – what percentage of revenue would be associated with that contract?

I certainly don't have the full schedule in front of me, but typically our contracts are five years, some go a little longer, some go a little shorter, so as you would expect about 20% of our contract turn in any given year to be a little higher, to be a little lower, which means that there are always a bunch that we’re working against. And that's just a constant piece of our business.

All right. Thanks. That's helpful. And then just one last one for me. So just looking at Pearson’s – its recent earnings call, they had made some comments that their Connections Education segment saw some of its school partners taking some noncore services in house in 2017, so I’m just wondering whether you're seeing anything similar and maybe also if you could comment on any changes and competitive behavior from Connections?

We certainly don't see too much happening in terms of a move from managed public to non-manage, it’s not to say that it can't happen again at some point in the future. I think that the situation at Agora is one that has suggested, we’ve been able to continue to work with them as a partner and they obviously had challenges a year or so ago that were very visible. So, we don’t expect to see too many folks moving in that direction. In terms of Connections, we don't see too much difference in terms of competitiveness, it’s a large market, we are the only two significant players. So, we’re frankly much more focused on expanding the marketplace through new offerings like our blended programs and our CTE programs. We believe that we are a little bit ahead of competition in that area.

Thank you.

There are no further questions at this time.

Okay. Well, once again, I’d like to thank everybody for joining us today and we appreciate your time. We look forward to speaking with you in three months. Thank you.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.