Greetings and welcome to the K12 Third 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, Vice President of Finance. Please go ahead.

Thank you and good afternoon, everybody. Welcome to K12's third quarter earnings 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 Nate Davis, Chief Executive Officer and Chairman of the Board; and James Rhyu, Chief Financial Officer. Following our prepared remarks, we will answer any questions you may have. I'd like to now turn the call over to Nate. Nate?

Thank you, Mike. Good afternoon, everyone. Thanks for joining the call today. As you saw in our press release, we delivered solid results for the third quarter. Revenue was $232.9 million and our adjusted operating income was $24.3 million. Our revenue, adjusted operating income net of the cost of transitioning CEO and capital expenditures met or exceeded the guidance we provided last quarter. Our performance this quarter is a result of a multi-year strategy to balance growth with profitability. We successfully instilled discipline in the assignment of resources, the funding of content, program, and systems investments that supports students and teachers, while also building a strong foundation for growth in our business. For the fourth quarter, we are tightening our full-year guidance with a slight increase in our revenue guidance as James will detail later in the call. Now, since I resumed, reassumed the position of CEO earlier this year, investors have been asking me what my vision is for driving shareholder value. Let me spend a few minutes detailing our priorities, how I believe we can drive continued growth and profitability. The short version is that I want to mine the significant opportunity to continue improving our base business. And I also want to focus on growth in the Fuel Education business. First, it starts with strengthening our core, which is our public school business. We served nearly 1 million students through these programs since we started this business. Over time, we expect to reach 2 million or even more, as we deliver on the parents' academic expectation and the academic needs. When we meet or exceed those expectations even more parents will seek out our personalized education approach. Along with delivering academic success for our students, we also need to retain more students because the longer they stay…

Thank you, Nate. Good afternoon, everybody. First to quick recap of our results for the quarter, revenue was $232.9 million, an increase of $10.4 million or 4.7% from last year. Adjusted operating income was $24.3 million, an increase of $6.3 million or 35% from last year. And capital expenditures for the first nine months of the year were $33.3 million, which is flat compared to last year's first nine months. As Nate mentioned in each case, these results met or exceeded the expectations we provided in our guidance last quarter, with the caveat that for adjusted operating income, we exceed our guidance when you exclude the severance charge we took for outgoing CEO. We've updated our revenue guidance for the year and are keeping the rest of our guidance unchanged excluding the charge, I just mentioned. Revenue of $232.9 million was overall stronger than we expected driven by strong enrollments in Ohio and solid student retention performance in our Managed Public Schools. However, this was somewhat offset by continued disappointment in our institutional business, it make just addressed. In our Managed Public School Programs revenue was $200.6 million, increasing 7% compared to the prior year, this performance was a result of 6.7% increase in student enrollment and a slight increase in revenue per enrollment. From an enrollment standpoint, as Nate mentioned, and as we have previously indicated retention has improved well over 100 basis points, this in year period, and we have essentially validated at this point, our belief that we are able to turnaround last year's disappointing performance. In addition, in year new student enrollment has also been strong. Our Q3 average enrollments are 6.8% higher than last year. That year-over-year growth is the highest growth, we've seen since fiscal 2013. We are also entering Q4 at the highest…

Thank you, James. Mike, I think we can actually move to Q&A.

Okay. Operator, if you'd like to poll for Q&A.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] One moment please, while we poll for questions. Our first question comes from the line of Corey Greendale with First Analysis. Please proceed with your question.

Hey, thanks a lot. This is Ken Wang on for Corey. Hey, guys, how are you?

Hey, Ken, how are you doing?

Doing well, doing well. Thanks. So just a couple for me, any update on ECOT? Just wondering if you can speak to maybe how many students ultimately ended up enrolling it, K12 schools?

Yeah, we try not to disclose on a per school basis, what's going on in each individual school. I can just tell you though it's a couple of thousands students that have enrolled from ECOT into our schools. It's been - a lot of students that are struggling to try to find a solution and more than a couple of thousand have come to us.

Okay. Thanks. That's helpful. And you had also mentioned during the last call, from last quarter that some teachers from ECOT were also contacting you. So just wondering if you can maybe speak to that a little bit. Maybe specifically did you end up bringing any on? And if so, any sense of what expenses this might drive?

I don't know the exact numbers. But, yes, we did hire teachers from ECOT. We went through a very sort in-depth analysis of each teacher's background. We interviewed those. And when you're taking on that many students from one school, you obviously need more teachers. So, yes, it drove up some expenses in the quarter. It's not just the expenses from teachers by the way. When you take - you got to think of this as - in the beginning of the school year when we bring students into our program, we have to have materials, computers, teachers. And then, for the rest of the year, we enjoy the revenue, but all those expenses are upfront. And that's what happens here. We got some expenses from students who came on from ECOT, from teachers and material early on. And so, yeah, we did get some increase in expenses from that.

Okay. Thanks. That's really helpful. And maybe just one more quick one and then I'll jump back in the queue. So just again on ECOT, I assume that the updated revenue guidance increase any of the upside.

Yes, that's correct.

Okay. Great. Thanks a lot.

Thanks, Ken.

Operator, next question, please.

[Operator Instructions] Our next question comes from the line of Henry Chien with BMO Capital Markets. Please proceed with your question.

Hey, guys. Good afternoon.

Hi, Henry.

Hey, just thanks for sharing the strategic vision of the four - I guess, the four legs that you're focusing on. I was wondering if you could chat a little bit about the first one and then growing the core business. There are some reports out there of schools being closed. I was wondering if you could just kind of elaborate on just kind of the dynamic between school closures and school openings and any kind of trends you're seeing there.

Yeah, I covered that in my comments a bit, because we do see from time to time, more schools you have, the more schools you're going to see opening and closing. We have people come to us all the time if they can open a new school. We also help some folks who decide they want to move a school to their own management. And by the way, for whatever reasons we also see schools are closed. So you know already that one of the insights - I'm sorry, one of the schools that Hoosier closed and one of the Insight Ohio schools closed. So we do have school closures from time to time. We also opened up two new schools this year. And we have schools expanding in the enrollment. Tennessee for example expanded as well. So it's about at every year - and this has been the same way by the way since I've been around the business for, I don't know, nine years. There's always been some school that was closing for a reason and new schools are opening in the states throughout. So we think it's a balance. But yeah, we did experience a couple of closures in Hoosier and Insight Ohio.

And, Henry, this is James I would just - I would add, in the past couple of years we've seen, as Nate said, some schools closing and reopen new schools. Part of our strategy that I think we've talked to you guys about before is that in many states we have a multi-school strategy. It helps buffer any sort of - any closure sometime. And over the past couple of years, while we've had the same thing happen, we've grown in spite of it. And I think Nate mentioned it, we think we're set up well for growth in next year as well. So we don't see it as a new thing or a new trend necessarily. And we think we're going to grow through it.

And just to add to that, Henry, one last point. I mentioned one of our Hoosier schools closed. But at the same time Indiana Digital Learning School opened. So right there, we have school that closed and school opened in the same stage and it balances out. So this is just the ebb and flow of our business.

Yeah, got it. Okay. Yeah, that's helpful. And sorry to point or sort of dig in this, the non-managed side as well. But I was just wondering if you could share a little bit more color on what's sort of driving the softness in the non-managed. And I know you mentioned a large customer there show some weakness there. I'm just curious why that's sort of extending and what's kind of driving that?

Well, the first thing you remember is that, in some cases we have responsibility for the marketing effort for a school, in other cases we don't. So some of these - and I'm talking in the Fuel Ed area in the non-managed category. Some of those schools have taken on their own marketing responsibility. And when they do, we don't control whether they can grow or not grow, because they're doing their own marketing. In the cases, where we do, do marketing for them, it's very budget limited. In other words, did they have the budget to spend on marketing, we spend it and we try to go school. One of our large partners, I think it's just was in the past year in a position where they didn't want to spend this much money, so they weren't growing as much. But I think they will be spending a little bit more going forward. But there is certainly - those ups and down happen and are out of our control, because we're just the provider of their marketing. But it's up to them how much they spend.

Henry, I will just state similar to what Nate said around the marketing. We also in most cases don't control their efforts to reregister kids from one year into the next or retain the kids in the course of the year. And so, those are really - largely managed by the schools that are clients of ours. And so, we did see in those two vectors as well some softness. And again, those are a little bit up to each school to manage and monitor themselves.

And it's difficult to predict what will happen in the next year. But I got to tell you that, I actually sat down with at least two of these folks in the non-managed category. And I am actually optimistic. I feel a lot of stability in the programs we're putting in place. I think they understand where they want to go. And I think we'll see a little bit of growth in a couple of months, so I actually like what some of them are doing.

They're good partners, Henry.

Okay, cool. That's good to hear. Great. And just last one to clarify with the union agreements. So I understand that, it mostly have an impact to I guess the charter. Is there any impact to K12 at all?

Yeah, so they're - because we do help manage these schools and we operate pretty closely with them supporting those boards, there will be some residual carry-over impact to K12, the company, when something like this happens. And as Nate mentioned, we're hugely supportive of, in this case, the CAVA board and teachers and what the CAVA board has tentatively at least reached an agreement with the teachers. But as we indicated from our guidance, where our guidance - we're holding firm to our guidance. So we don't think it's been material enough to us at least to change our guidance. But certainly, it does have some residual impact. But we're hugely supportive of the decision that they're making.

That impact is financial and happens in the second half of the year. But we also, we're able to reduce expenses to offset it though. It hasn't had a dramatic impact in our bottom line, as James said, not material. But we did see cost increase, because of teacher expenses that we have.

Got it. Okay, great. Thanks, guys.

Thanks, Henry.

Hey, operator, is there - we're ready for another question if there is one.

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Davis for closing remarks.

I just want to thank everybody for getting on the call today. Questions were very insightful and hope that explains to our investors where we are. I appreciate all investors who hung in there and I'm pleased that we are able to give you good results this quarter, and we'll continue to do so. Thank you for your time today and have a great day.

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