Greetings and welcome to the K12 Second Quarter Fiscal 2018 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, VP of Finance. Please go ahead.

Thank you and good afternoon. Welcome to K12’s second quarter earnings conference call for fiscal year 2018. 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. Our results for the quarter were solidly in line with the guidance we provided. Revenue for the quarter was $217.2 million, a decrease of 1.8% year-over-year and adjusted operating income was $20.9 million, a decrease of 8.7% year-over-year. Both the year-over-year decline in revenue and adjusted operating income are largely result of positive performance in our managed public schools offset by lower performance in our institutional business. Year-over-year managed public school enrollment increased 2.2% with slightly lower revenue for enrolment. Institutional revenues declined 15.4% year-over-year as a result of sales execution not being as effective as it needed to be especially during last summer's selling season. We are now halfway through the year and as our third quarter outlook suggests our expectations remain in line with our original guidance for the year. Our team continues to focus on increasing long-term shareholder value by executing against our strategic priorities in the areas of academic outcomes, student recession, curriculum innovation, and diversification. We believe that by executing well on these priorities we will drive revenue and free cash flow growth over the long-term. With regard to academic outcomes, after the initial rollout of the academic excellence framework last school year in year two, our school partners are laser focused on driving best practices and fidelity of implementation. This comprehensive framework rooted in research and best practices from high performing school creates a consistent set of expectations across all of our partner school and areas such as curriculum, instruction, assessment, and school climate. In fact we saw preliminary course passing rates for the first semester of the school year increased by 500 to 700 basis points for grades six through 12 year-over-year. We believe that the framework helped drive these…

Thanks Stuart. Good afternoon everybody. First I want to quickly recap our results. Revenue for the quarter was 217.2 million down 1.8% from last year, adjusted operating income 20.9 million declining 2 million from last year, and capital expenditures were 8.2 million which is 1.6 million lower than last year. In each case these results met or exceeded the expectations we provided in our guidance last quarter. Revenue of 217.2 million was at the lower end of our guidance driven by the declines in our institutional business which I'll discuss more in a moment. Overall however we feel comfortable with our full year revenue guidance and have already seen some positive signs for enrolments in January that bodes well for the rest of the year. In managed public school programs revenue increased 2.5% to 183.4 million compared to the prior year. This performance was a result of a 2.2 increase in student enrollments offset by declining revenue per enrolment due to mix. However, as we begin the second semester in January we see mix improving in the first few weeks of the third quarter. From an enrollment standpoint as Stuart mentioned we are beginning to see some improvement in retention as a result of our proactive set of programs we've ramped up over the past couple of years. We will continue to invest in these programs and believe that over time retention levels continue to improve. And student enrollment activities during the quarter was somewhat softer as we've seen more enrolments push into January instead of December and the backlog of interest working through the enrolment process remained strong through the first weeks of January. Revenue per enrolment decreased 1.6% this quarter. This decline is largely the result of school mix. That mix stems from indexing a bit more in…

Thanks James, appreciate that and we would be happy to take any questions that you might have.

[Operator Instructions]. Our first question comes from Alex Parrish from Barrington Research. Please proceed with your question.

Good afternoon, this is Chris Howe sitting in for Alex Parrish.

Hey Chris.

Hey, I had a question first off in regards to FuelEd, you had mentioned a resect to the strategy last quarter, just an update on this, how it's going, what you're seeing so far in regards to improving the execution going forward?

Sure, well as you might imagine when you are in kind of an institutional sales cycle it's a reasonably long sales cycles. There are three entry points to the year. You can sell stuff at the beginning of the school year, you can implement new programs in the second semester call it January, and there are smaller summer school opportunities. So you have to kind of back up from those entry points really on any new program. We started by revamping our team, putting new team on the ground back in May when we announced that Sean Ryan came in as the General Manager of that business. We've recently over the last I say few weeks brought in a new Vice President or Senior Vice President of Marketing, I'm sorry sales, to help reorganize the sales team. So we're still I would say getting our footings but I think we're doing of good job articulating how our products align to markets and channels and very targeted opportunities. So there is discipline around what we're doing but we have yet to really see that take hold. We do certainly expect that by doing the right thing, going into next school year we will have corrected the situation.

That's very helpful, thank you. And I have one follow-up just in regards to what you saw this past quarter for safe and board imposed caps, were any caps lifted this quarter and if so in which State?

No, I don't -- we really don't have that much in year listing of caps. We managed to sort of the capital levels throughout the year. If you know -- it's complicated in the sense that caps can be of all different varieties. Some are at overall levels, some are at grade band level, some are at high school versus elementary school level. So but in general no major changes. We do as we look into next year, we're always looking to where we see strong demand push for higher cost so we can serve what we think is increasing demand for our programs but nothing to announce at this time.

Thank you so much, I'll hop back in the queue for now.

Thanks Chris.

Our next question comes from Corey Greendale with First Analysis. Please proceed with your question.

Thank you, good afternoon. I'm in an airport so there's a lot of background noise, tell me, I don’t want to aggravate anyone, I can follow up offline but a couple questions on Ohio. So first of all on ECOT, can you give us some sense, is there like a limit to the number of students you would take just in terms of you thought that how many you can serve well and can you just give us a quick primer on how the funding works in Ohio, so as you take students midyear will they be fully funded for the portion that you are serving them?

You bet. Thanks Corey I'll take the first part of the question and then hand funding over to James. There are no cast in Ohio Virtual Academy, the governing board there has really stepped forward -- I would say the only significant operator in the State or school in the State to say they're willing to take on more students and we think that based on conversations the State is very pleased with that because it's a very challenging situation. As you might have seen in the press there were 12,000 students at ECOT. As I mentioned we have already received in ten days or so thousands of phone calls. So call that a meaningful portion of students who are looking for options. Some will go back to brick and mortar schools, some may go to some other virtual but for the most part we've been the major player that has stepped up. Since there was so much preview time and it's a likely closure of the ECOT we had time to prepare and frankly lots of teachers from ECOT were reaching out to us. So we've been able and this gets your question about quality of services. We've been able to ramp up teaching staff, support staff in anticipation of taking students on. So we think from a quality perspective we'll be able to continue to deliver the great services that Ohio Virtual Academy is known for. Regarding your funding question I will turn that over to James.

Yeah, hey Corey. Obviously the right question around the funding, we -- the funding model in Ohio is essentially a pro rata funding model. So we will get the Ohio school that we manage will get funding for the kids. It depends on engagement and attendance and things like that. So it's not that there's an automatic funding so the kids that are transferring over mid-year given all the turmoil stuff they might fund at a slightly lower rate just because they're ramping up and we often see that with kids coming in mid year as a ramp up. So -- but the general answer is the funding will come for the half year that we serve them.

Very helpful and can you give us -- I realize the fluid situation, but have you included any contribution from those former ECOT students in your Q3 guidance?

So, I think the Q3 guidance range is not necessarily -- doesn't necessarily contemplate what could happen because as we're putting this together as you can imagine it has been so fluid, we had a big weekend this past weekend of calls that came in and the reality is that we don't yet know how many will actually enroll with us. So it's very hard to predict for Q3 or the balance of year what the actual impact would be. So it's just -- it was too early to really bake it in.

Okay, and if I could just one maybe couple part question for you James on the -- I know you are focused on free cash flow and you mentioned the up expenses coming down, the cash flow from ops is also down, it seems like its working capital moving around but if you could just kind of tell us what is going on there?

Yeah, sure, so the good -- could pick up quickly on that. So, yes, working capital has gotten a little bit say negative on us. Our DSO's have gotten a little bit behind on us. We have a couple of large customers that are I think not a payment issue but funding, timing, and things like that and just working through some of those logistics. But, largely I'd say a DSO driven issue which we expect to work through and not a long-term structural issue for us.

Okay, and I appreciate the guidance on the tax rate impact of tax reform, can you give us some sense of what the cash flow impact will be?

Yes, so it should be directionally positive for both this year and next year with the sort of the movement in effective rates and some other nuances to the tax collection that we've got in depreciation benefits of things like that -- it is fairly nuanced and it's still a thousand pages over the past month to digest. So you may know that the SEC sort of given a year for everybody to really get their arms around this but I think from a cash flow perspective generically positive for this year. And likely I'd say positive also for next year.

Okay, I will turn it over. Thank you.

[Operator Instructions]. Our next question comes from Jeff Silber from BMO Capital Markets. Please proceed with your question.

Thank you so much. Just one more question about Ohio, on a revenue per student basis is Ohio higher than your average, lower than your average from a mix perspective given the influx of students, how that impacts?

It is a little bit higher than average although like I said just the whole capture element of it might as students transition on but statewide average is a little bit higher than average.

Got it, okay and then I think Stuart I'm not sure if it was you that said this in the prepared remarks but when we were talking about retention and hopefully if you continue to improve I think you said you could potentially enter next school year with a growing population, what does that mean exactly, does it mean as of June 30, 2018 you'll be up year-over-year, if you could just explain that it'll be helpful?

Yeah, I think if you look just over -- at the year-over-year comps, we hope to essentially, if you look at the Q2 year-over-year comp versus what we're hoping to see is the Q4 year-over-year comp we should see that expand if you will. And it gives us a larger base of students upon which to try to reregister for next school year.

Got it and when you say Q2 and Q4 are you talking about the end of quarter population and the enrollment?

Correct.

Okay, got it, just wanted to clarify that, thank you. And then just one follow up on the institutional side. I know this has been an issue for you for a while, you're bringing in new leadership, is it just sales execution, I mean what gives you the confidence that one, that the market's not shifting away from you or maybe you don't have the right product, if you can talk about that that would be great?

I think first, sure, first of all we have augmented the product set so we've actually built that out I'd say considerably. We had historically what I call lots of courseware products. We have in the last year, year and a half or two brought in Stride, the LTS acquisition which is expand the product bag. We recently did a Big Universe acquisition also helps expand the product bag. So it allows us to offer some lower priced supplemental products to help round out the bag a little bit. While we're still certainly very bullish about our aggregate product set is that from a breadth perspective we just have what no one else we believe really have in terms of comprehensiveness, world class language programs. We have got TTE programs, and of course all of the core English, math, science, social studies from grades K through 12. So when we think about what the possibilities are, the bundles and coupled with service we just don't see our product set as being a significant issue. So we really look towards execution in terms of leadership generally speaking and in terms of sales leadership.

I would also tell you Jeff that one of I think actually maybe one of the prime indicators for us is that within our sales organization we had outstanding performance in pockets. So that tells us that we've got products that can be sold, we just haven't done it consistently enough. And we've tried experimentation on Insight sales and things like that, that have worked really well. So we have pockets of actually strong performance that points to if we can do this consistently at greater scale it should bode well for the business.

Okay, that's good to hear. Thanks so much.

Ladies and gentlemen we have reached the end of the question-and-answer session and I would like to turn the call back to management for closing remarks.

Well I want to thank everyone for your support and attention and questions. We look forward to doing this again in about 90 days from now. Take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.