Stride, Inc. (LRN) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, greetings, and welcome to K12's Third Quarter Fiscal 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, this program is being recorded. It is now my pleasure to introduce your host, Mike Kraft, Senior Vice President, Corporate Communications. Thank you. You may begin.

Thank you, and good afternoon. Welcome to K12's Third Quarter Earnings Call for Fiscal Year 2019. 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. These statements are made pursuant to the safe harbor's provision of the Private Securities Litigation Reform Act of 1995. They 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 operational performance and results, please refer to our reports filed with the SEC. These reports include, without limitation, cautionary statements made in K12's 2018 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; James Rhyu, Chief Financial Officer and President, Product and Technology; and Dr. Shaun McAlmont, President of Career Readiness Education. Following our prepared remarks, we will answer any questions you may have. I'd now like to now turn the call over to Nate. Nate?

Thank you, Mike. Good afternoon, everyone. Thanks for joining us on the call today. As you saw on today's press release, revenue was $253.3 million in the third quarter of fiscal year '19, an increase of 8.8% year-over-year. This is the third quarter in a row we've delivered strong revenue growth, primarily as a result of our fall enrollment season's performance. Tied to strong revenue growth, adjusted operating income for the quarter was $27.2 million, an increase of 11.9% compared to the prior year. Once again, our revenue, operating income and capital expenditures met or beat the guidance we provided last quarter. We've also tightened up our guidance for the fourth quarter and anticipate delivering results at the high end of the guidance range for the full year. Revenues are anticipated to be between $1,005,000,000 and $1,010,000,000 for the year, with adjusted operating income in the range of $58 million to $60 million. James will provide more detail on our results in a few minutes. I believe that this year's results clearly indicate a strong demand for full time, blended and online programs, which remains the cornerstone of our business. However, as I said before, while I remain optimistic about the strength of our core business and its potential for growth, that doesn't mean we won't face headwinds from time to time that can blunt some of that opportunity. Given that we now manage more than 70 schools in 30 states, one could expect in any fiscal year, there will be school closures at some periods of time and then we will have the addition of new schools at other periods with expansion of existing schools. We often face new enrollment caps, issues with per pupil reimbursement, school boards who choose to directly manage their own programs, or state law changes that positively or negatively affect us. Simply stated, this is just the ebb and flow of this business at this stage of its maturity. However, today, we are more than just a core business and are better able to continue growing in the face of these external factors. Our career readiness efforts provide the unique opportunity with growth projections that are in stark contrast to the ebbs and flows of the core business. All market indicators reinforce that we've entered the career readiness education business at the right time. In recent remarks, Jamie Dimon, Chairman and CEO of JPMorgan, pointed out that the American economy is growing 20% in the last decade, but he argued that it should have grown 40%. He said, and I'm paraphrasing a bit, "There were many reasons for the shortfall, but a big one is lack of skills." He cited that there may be 7 million jobs available in America today, but students aren't graduating with the necessary skills to fill these jobs. It's worth noting by the way that about 75% of the roles posted at JP Morgan did not require a four year college degree. And it's not just this one set of comments. You can't read the news today without seeing something on the skill gap or related topics. In each case, it points to a growing need for students to be exposed to career readiness education in high school and in earlier grades. So you can see why I'm so excited about the business and its potential for driving growth at K12 for years to come. To provide more detail on our progress in building out this business, I'm going to do something a little different today on this call. I have asked Dr. Shaun McAlmont, President of Career Readiness Education at K12, to join us on today's call to discuss implementation status in more detail. Shaun joined us last year to lead K12's career readiness education business. His experience in career and technical higher education is well documented. He previously served as CEO and President of Neumont College of Computer Science and CEO of the Lincoln Tech Schools. He is now leveraging those experiences for the benefit of K12 powered schools. So now let me turn the call over to him. Shaun?

Thanks, Nate, and good afternoon, everyone. The program we're building is a comprehensive and innovative virtual approach to career readiness that, I believe, will allow us to serve tens of thousands of middle and high school students within the next 3 to 4 years. So let me go through some status updates. First, we're working with existing and new partners to expand the number of schools that offer career readiness. As Nate mentioned last quarter, we currently operate 13 schools across the nation. We anticipate increasing our footprint to 17 to 20 programs of varying types and sizes by the new school year starting this fall. All of the schools are called Destinations Career Academy, or DCA, which is the brand name that we will use to replicate and promote career readiness in the marketplace. Thus far this year, we've already opened new DCA programs for high school students in Missouri, California, Minnesota and Washington. This will afford nearly 3 million students in those states access to a K12 powered career readiness option. We're also working to open programs at the middle school level, so that students can start their career journey with early career exploration courses and be ready to embark on more comprehensive career studies in high school. We also believe that if students are engaged at a younger age, it will improve student retention and importantly their academic outcomes. We'll be launching this approach in Colorado this fall and provide access to more than 200,000 middle school students from across the state to a career readiness education. For both high schools and middle schools, we've created a DCA implementation map for schools to follow. This process includes measurements at every stage to ensure that schools are fully implementing the DCA design we prescribed. This will ensure students have a comprehensive and consistent career readiness experience across the schools we support. Over the next 3 to 4 years, we plan to roll out DCA programs in all of the states in which we operate. In some states, we may even look to open more than one program. In addition to full-time online high school or middle school programs, we'll also roll out new models that will address a broader set of students. Research we've done shows that about 10% of families are open to a full-time online career readiness school option. However, that acceptance rate jumps to more than 20% of families when the online career readiness classes are a part of a brick-and-mortar school experience. As such, we're developing blended options which would allow public school districts to send a handful or even all of their students to a K12 powered DCA program. This would allow students to experience career readiness classes in an online setting, while delivering core curriculum in a more traditional classroom environment. We've already rolled this option out in Wisconsin in partnership with school districts from across the state. This fall, we'll roll out another blended program in the state of Utah. While the deployment of this model is in its nascent stage, we see the potential to support brick-and-mortar schools around the nation with various career readiness models. This may include a part-time program like Wisconsin and Utah or it could include supplementing an existing district program by expanding their pathway offerings. It also may include entirely white labeling our solution for a district, so it looks much more like a regular course elective. The key takeaway is that while we're leading our efforts today with the rollout of full-time online programs that mirror our core business, this is just the first step in our expansion plans. Second, our program includes leveraging existing content and developing new courses that are built for project-based learning delivery. This quarter, we rolled out an initial project-based learning pilot course for the business pathway in the Wisconsin, Colorado and Nevada academies. Classes leverage tools used by people in their everyday work, including messaging, document creation and sharing, cloud storage, virtual conferencing and group work and other tools. Our initial observations found that students are learning differently and are more engaged and classes are more collaborative. At the same time, teachers are changing their instructional practice. There's more emphasis on live class sessions to ensure students are connected and interacting with the material and each other. We also found that students felt validated and energized by presenting their outcomes to industry experts as a part of the overall class program. It's also worth noting that we're working with various organizations to validate our pathways, adding both industry certifications and badges to promote student success and also working with college dual credit partners. The key takeaway is that we're building a comprehensive, engaging and validated curriculum framework. Third, an important part of the program involves opportunities for students to explore careers through industry expert chats delivered on the Nepris virtual platform. In addition to leaving their homes to engage in real-world workplace experiences in the form of job shadowing and internships, this allows students to complete the work readiness cycle by seeing real-life examples of what they've been studying and implementing skills they've learned in virtual class sessions. While we've just started reaching out to companies about participating in this year's job shadowing week and our inaugural DCA summer experience, the initial response has been positive. Thus far, about a dozen companies have signed up for the program. I expect many more will elect to participate before we're done. But frankly, this is a great initial response for a program we've just rolled out. Keep in mind that job shadowing week is just the first step toward working with many companies on internships and other hands-on work experiences for DCA students. Fourth, as we've mentioned last quarter, our career networking partner rebranded from STEM Premier to Tallo to embrace their more inclusive role of matching student talent with college and career opportunities. As a part of their rebranding process, Tallo launched a new website and a new scholarship opportunity. At the same time, they are laying the groundwork for a Tallo ambassador program to increase peer to peer outreach as well as a teacher giveback program that incentivizes teacher referrals. This past quarter, Tallo added more than 60,000 new users to their platform. 13% of those new users are college students or college graduates. So while the majority of students are in high school, the platform is attracting students from higher ed as well. This increase brings Tallo's total user count to nearly 0.5 million users. Students reside in all 50 states and represent more than 24,000 middle schools, high schools and colleges. As the total number of users on the Tallo platform continues to grow, the number of users with diverse talents and backgrounds increases as well. Tallo is working with students who represent all types of career fields, from technicians and engineers to future leaders in nursing and business. Tallo is also aggressively adding partners to the platform to support the growing student population. Last quarter, they increased the number of companies and college partners to more than 400. Tallo's partnership growth included seven new international colleges and 24 new companies. The companies include eight from Fortune 500, such as Walmart, Honda, United Technologies and Michelin. And it's not just about adding students and partners, it's about how these constituencies are leveraging the platform. During the last quarter, Tallo made more than 11,000 direct engagement matches between talent seekers and talent on the Tallo platform. Again, this is just the beginning. In the future, I see great growth opportunities and new applications of the platform as we mature the overall career readiness experience. Finally, we're in the process of developing our unique brand and advertising approach. The primary website will be destinationsacademy.com with school-specific websites searchable from the main site. Career enrollment counselors have been certified and trained to advise prospective students and families interested in career readiness programs. We started paid media advertising this month in preparation for fall enrollments. The campaign's theme will be around the concept, "follow your passion, find your destination", which ties together student desire and interest with real-world application and careers. This advertising will run parallel to ads for our core business. So in summary, we've made significant inroads to expanding K12's DCA footprint. Our work to shift the learning experience to student group collaboration using project-based learning has already begun. Industry partnerships are being created and more will be forthcoming. Tallo is quickly becoming one of the nation's leaders in connecting talent to opportunity, particularly for high school students. And we're kicking off enrollment season with an entirely new go-to-market campaign. Taken in total, K12 is uniquely positioned with a strong head start to take advantage of the growing need for career readiness education across the country. Whether students' paths lead them directly into the workplace, to the military or to higher education, our career readiness programs will provide them with the skills they need. Thank you very much for your time today. And now I'll turn the call over to James Rhyu. James?

Thanks, Shaun and good afternoon, everybody. First, a quick recap of our results. Revenue for the quarter was $253.3 million, increased 8.8%. Adjusted operating income was $27.2 million, an increase of 11.9%. And capital expenditures were $9.4 million, which were largely flat from last year. As Nate mentioned, in each case, these results met or beat the expectations we provided in our guidance last quarter. For the quarter, Managed Public School Programs' revenue increased $22.1 million or 11% to $222.6 million. The growth in this business was driven by a year-over-year increase in enrollments of 5.7% and an increase in revenue per enrollment of 5%. While revenue per enrollment in the first half of the year benefited from the changes in revenue recognition, this quarter's performance is more in line with our expected full year increase of 4% to 6%. In our Institutional Business, revenues declined 6.8%. Nonmanaged Public Programs revenues declined 3.6%, primarily due to lower revenue per enrollment, driven by just some changes in school mix. The Institutional Software and Services revenues were down 11.2% as a result of softer sales we've talked about in previous calls. We expect our fourth quarter revenues in the Institutional Business to be flat plus or minus a few percentage points. For the full year, the business will finish down 15% plus or minus a few percentage points, which is in line with our original guidance. Private Pay revenues were $9.3 million, and the business remains on track to finish the year relatively flat compared to last year. Gross margins were 33.6%, down 250 basis points from the third quarter of last year. Margins were impacted by the changes to revenue recognition, coupled with our continued investment in school initiatives to support academic outcomes. We still expect gross margins to finish the year flattish compared to last year. Selling, administrative and other expenses were $59.4 million, a decrease of $2.9 million from last year. Keep in mind that we are just now kicking off the enrollment season for fiscal '20, so you should expect the expenses to rise in the fourth quarter seasonally as in prior years. Product development costs were $2.3 million compared to $2 million in the prior year. EBITDA for the quarter was $40.3 million, and adjusted EBITDA was $44.3 million compared to $38.1 million and $42.7 million, respectively, in the prior year. Operating income was $23.3 million, and adjusted operating income was $27.2 million compared to operating income of $19.7 million and adjusted operating income of $24.3 million in the prior year. Some other items to note. We ended the quarter with cash, cash equivalents and restricted cash of 20 -- of $236 million, an increase of $8.1 million. We expect to increase our cash balance in the fourth quarter in line with previous year's trends. CapEx, which included curriculum and software development infrastructure, was $9.4 million, relatively flat compared to last year. Once again, we came in at the low end of our guidance range, although we still expect to finish the year with CapEx of between $47 million and $50 million. Our effective tax rate for the quarter was 23.8% compared to 34.7% last year. The decrease is largely attributable to reduction in the federal statutory tax rate. For the full year, we expect our tax rate to come in at the low end of our initial guidance of 25% to 30%. So, to repeat, our updated guidance for the full year is revenue in the range of $1,005,000,000 to $1,010,000,000. Adjusted operating income in the range of $58 million to $60 million, capital expenditures of $47 million to $50 million. Thank you, and I'll turn the call back now to the operator for any questions.

[Operator Instructions]. Our first question comes from the line of Alex Paris from Barrington Research.

This is Chris Howe for Alex. Good quarter, guys. I have a few questions here in regard to the career readiness. As far as its future growth and your expectations for its growth, if we were to characterize short-term versus long-term potential across the five areas that I have noted here, course work pathways, blended versus supplementation, additional states, further penetration in existing DCAs and industry partnerships, how should we think about these five areas as you continue to drive the momentum in this area?

When you say -- this is Nate speaking. When you say how should you think about it, meaning, some kind of weighting, I assume, Not sure...

Yes, as far as -- yes, a ranking or waiting, yes.

I think the majority of the growth will come from -- in the short term will come from greater penetration in the schools that Shaun already talked about. So in the 17 schools and maybe 20 by the end of -- by the time we open up the school year next year, I think we're going to see greater penetration in those. Over the intermediate term, meaning 1 to 3 years, and I think it's going to come down to new states and new schools within states. Because as Shaun mentioned, our intention is to open up a DCA in every state that we're operating in. So that's at least probably 10 more -- 10 to 12 more states at that point. I think that's where the intermediate term opportunity is. From there, it's, as one of my old bosses told me, if anybody can predict what happens at 4, 5 years out, they're better than all of the rest of us. I think it's difficult to predict what happens from there. I do think that one has to look at the overall market opportunity, both internationally as well as in the states that today don't allow virtual schools. Because some of which Shaun talked about are blended schools. And blended schools would be operating in some of the states that we are not in today. As you know, as you heard Shaun talk about, we very much believe in blended programs for this kind of program, a lot more hands-on experience, and that's maybe more accepted in those states. So I think new states, greater penetration in existing states in short-term, new states in immediate term, and quite honestly even international long-term. I hope that helps you.

That does, that does. And one follow-up, just in regard to that. On the last conference call, you had referenced the market potential or the access that you would have being around 30% and the potential for that to rise to 50%. I guess, of the percentage of high school and/or middle school students in the future that have access to career readiness, what are you seeing right now in terms of rate of adoption and where that can go moving forward? And if it does go to 50%, how should we quantify the potential or the material impact this should have on the success of career readiness?

Repeating some of the steps that Shaun highlighted, I think when you hear people say 10% to 20% of them are open to the idea, I expect us to get a couple of the percentage points of those. So when you start looking at 50% of the students in high school are available, the math would say something like 2% to 4% of those would actually be a take rate. I don't think we know for sure, it could be greater than that. I think it all depends on how good our programs are going to be and what kind of support we get from the state. In my conversations with Governors, my conversations with State Departments of Education, they all seem to want to support having more career readiness content in their state, and therefore, I think we'll get greater support and those numbers could be higher than the ones I just quoted. But I think we're looking at pretty good penetration rate. The other part of your question is, what are we seeing today. It's very early in the process today. So it's a nascent level. You know that last year, we had about 7,000 enrollments and that was across a fairly small base. So while we are seeing a lot of excitement about it, I think this enrollment season will tell us more about penetration rates, hard to project it.

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

Few questions. First, the -- your prepared remarks at the beginning, Nate, were very sort of balanced and sounds like you are wanting to make sure people don't get ahead of themselves. But I just wanted to make sure, is there anything specific happening that you'd highlight that is resulting and you're striking that sort of balance, keep in mind that there -- things can happen on the state level or individual program that could be headwinds. Is there anything behind that?

No, there is nothing specific. Whenever I talk to lawyers, they make me put these risk factors in, and so I make sure some were in there, but it's not. There is nothing specific. I just wanted to contrast that versus the career readiness space, which I don't think has the ebbs and flows. I think it has more of an upside. And in the core business, we can have some ebbs and flows, but there is nothing specific that I'm highlighting.

Okay. And so a couple of questions on that latter point. As the lens that you're looking at this through, at least the way you're talking about it, it's sounding potentially more and more expansive. And by the way, good to talk to you, Shaun. Is there anything we should be thinking about in terms of upfront investment that may be sort of out of the range of what we would expect from the core business, so fiscal 2020, should we be thinking about an increase in SG&A or CapEx or anything associated with that greater investment in all those pieces of career readiness?

No, I think that we've been able to shift a lot of our investment into this space. So I think you're going to see in the same range. We could be plus or minus a couple million dollars, but you're not going to see a dramatic increase in CapEx. Now, what you could see is some of the cash we're sitting on getting deployed by acquiring because we do believe in inorganic growth, but not anything to announce, but that's the place you might see it. But in terms of our CapEx or SG&A, I don't see any dramatic change in those numbers for the long-term projections we've been talking about.

So -- and within the -- in terms of marketing, you don't expect you'd have to sort of increase -- you would reshuffle spend, you wouldn't increase spend because now you've got more programs to market?

Not in any dramatic way. I mean, we -- you could see small changes here or there, small increases, but nothing that's going to change the direction of the business. So I could spend a few hundred thousands more, but you won't see that in any change in percentages. I mean, the long-term projections we've given are still going to hold.

Okay. And given the, at least, to my mind, more expansive way you're talking about the opportunity there, can you just tell us how you're thinking about the competitive set. And I don't want to name names, but some of the things you're saying sound more potentially competitive with community colleges, although you could partner, some of it actually sounds like it's getting into more Chegg territory. So can you just talk about who you view as the key competitors for that career readiness business?

Quite honestly, in the high school, and Shaun, you can jump in on this in a second. But in the high school and in middle school areas, I really think the competition is the brick-and-mortar schools. Others are providing content, others are providing schools, but at the end of the day, we are all small relative to brick-and-mortar schools. So the real competition here is, can we provide a product that's more engaging, more technologically advanced and more widely available than the brick-and-mortar schools do. That's really where the competition is. I even think it's a bit of coopetition in the sense that we'll provide some competition, but we'll also be able to provide our content to the brick-and-mortar schools and partner with them. And in fact, I know Shaun is working on such a deal right now, where students would be allowed to enter as a brick-and-mortar student to come into our programs and take 1, 2, or 3 courses. And one of the states is actually moving toward an unlimited number of courses in our program. So I think you're going to see more teaming, but it's going to be around the brick-and-mortar. The post-secondary guys, I don't really see us strongly competing with them across the board. We may have specific content in IT or specific content in a particular area, but overall, I don't see them as being the big competition. I see it as brick-and-mortar.

Corey, I would agree wholeheartedly. And I think that our goal is to move this readiness effort earlier and earlier into the high school students career, into middle school as well. And I think that the way we expand our market really is expanding through the brick-and-mortar schools as they adopt programs, et cetera.

Our next question comes from the line of Henry Chien from BMO Capital Markets.

I wanted to ask about the career readiness program, just to tack on another question. For the kids who are taking career readiness, in terms of the value that they get, are they typically going straight to the workforce and getting jobs? Or is this like an additional preparation to go to college?

Yes, it's additional preparation, Henry. I mean, if you think about it, this whole career readiness effort is to expand their opportunities, and so it's college and career readiness. If they decide to go on to work, we want them to be better prepared to do that. If they decide to go on to college and work while they're in college, they'll also be better prepared. So we're really increasing opportunity post high school graduation.

Got it. Okay. And the job matching service, that's for college grads? Was that, that you guys were talking about?

No. The Tallo platform really is unique to high school students. We also have college students on that platform, but it really is a great opportunity for high school students to display a digital portfolio of their work, badges that they've earned, certifications, et cetera. And by the way, they're exposed to employers and colleges who are seeking talent. So it's great platform for them.

I want to add something. This is Nate speaking. I don't know if it was Chris or it was Corey that asked a question about will we see the expansion opportunity. But in the area of Tallo, the product you're talking about is Tallo, we actually see Tallo as starting off and very heavily being used by high school students to help them get summer jobs and internships and scholarships. But I also see it expanding into the postsecondary world and expanding into adult learners. Because anybody who's got a specific skill can go onto this platform and find a job with the employers that are looking for people with certain skills. So whether those skills be in computer science or technology and programming or they be in nursing or any other field, we want this to be a platform that's available to all three of those markets: adult learning, postsecondary and high school.

Got it. Okay. Yes, that's really interesting. And that is Talo, that's T-A-L-O?

T-A-L-L-O.

T-A-L-L-O. Got it. Okay. Great and that's -- okay, so Tallo is the networking platform. And I guess, kind of like broadly speaking, when you're teaming up and providing like the education that's related to the skills or the workforce, it -- how are you marketing or communicating like the results that students get? And -- I mean, I'm just thinking, I guess, in the frame of usually it's like job placements on the postsecondary side is, I wonder how it's communicated on the, I guess, the pre-postsecondary side of things, high school, I guess.

Look, I think right off the bat, high school graduation is a key outcome. Post that, if a student is looking to go to work, to go into the military or to go to college, I mean, we'll also track those outcomes. And so I think we'll track outcomes across the board based on student interest at that time.

We also want a tool to follow the student. So if we have a high school student that is on Tallo, it's not just about their first job. It's about helping them with their second and third job and continuing to update their skills. So if you're a student and you've worked on projects, you can upload your projects and your resume. But when you go to work, in your first job, you can upload things that you've worked on there as long as it's, obviously, not company confidential, but upload your skills and continue to build the profile, so that by the time you're an adult learner, you've got a more comprehensive profile of all the things you've been doing. So it's meant to stay with them. And there's a lot of marketing effort in Tallo that's meant to market to the person that you should continue to update your skills and continue to look for better and better jobs.

Our next question comes from the line of Greg Pendy from Sidoti.

I just wanted to clarify, when you mentioned in the call, you have 13 schools, ramping up to 17 to 20, is it at 17 to 20 you'd be exposed to 3 million students or is that currently at 13?

It's incremental for those four intakes.

Yes. So today we're at 13 -- and apologies, we've actually added four schools at this point. So we were at 17. Those four schools open up an incremental market of 3 million potential students.

Okay. Got it. Got it. And then can you just kind of give us any color on just you mentioned the industry certifications, is that existing right now in some of the pathways? And can you kind of -- is there any specifics you can give on that?

Yes. I mean, there are a number of certifications offered via different organizations. And so we by pathway have certifications available to students that will essentially validate what they've learned on a high school level and then they can have a badge for that within that Tallo system that we described earlier. But I think many people are familiar with CompTIA. So Microsoft certifications, et cetera, are available to students. And then there are other industry-specific certifications through a number of organizations that we're putting together, so that the students have that validation. I would say there are probably 10 or 11 certifying organizations that we'll use over time. And as those are put into place, we'll make sure that everybody is aware of what they are specifically.

Okay. That's helpful. And then just one final one. Just on the revenue per enrollment. I know the change in revenue recognition, but I guess, when we think about the fourth quarter, should that be more consistent? And then should that be more consistent, I guess, next year when we think about the out year, just -- the variations from quarter-to-quarter? Should the new revenue recognition make it more smoother, I guess, is -- or in a tighter range?

Yes. So this is James. So I think when you're going to -- in order to hit the 4% to 6% range that we gave as guidance, it sort of implies that Q4 revenue per enrollment for the Managed Programs year-over-year is going to be more or less flat. That's what the guidance would imply. So no, it's not going to be consistent with this quarter or previous quarters. For the upcoming year or years, we're certainly not suggesting that we're going to have full year average revenue per enrollment gains of 4% to 6% a year. I think Nate's been pretty consistent in saying that it's going to be down in the 0% to 2% on average sort of long term. But what I think that it will, starting next year, once we lap this revenue recognition, the year-over-year gains will sort of even out a little bit more. So you'll have a little more consistency across year-over-year, quarter-over-quarter gains.

[Operator Instructions]. Our next question is a follow-up from the line of Corey Greendale from First Analysis.

Just quickly, and I think this is a question for James. If you -- the quarter was very good and the career pathway sounds exciting. The one question I can see coming out of the quarter is the guidance implies, it looks like some costs were shifted from Q3 into Q4, so the Q3 beat -- looks like it somewhat translates into Q4 adjusted operating income guidance that's a little bit below what people were expecting. Is that timing or anything you would -- can you just explain that?

Yes. So I think right now the guidance -- so the short answer, I think, is a little bit of yes. The guidance right now implies that we'd be just a tad under, I think, the consensus for Q4. And I do think there's just probably a little bit of timing there, nothing that unusual, but there's always a little bit of Q3, Q4 timing, particularly depending on when we roll -- start rolling some things out and when we really start going heavier into the quarter and things like that for marketing, so...

Nothing changed in terms of the kind of thing I was asking about before? No new investments, no change in tone of business or anything like that?

No, Nate's answer still stands. There's nothing material that's going to change in the fourth quarter.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing.

All right. Well, I appreciate and being respectful of everybody's time, we don't have any additional comments. To Barrington, to Corey, Henry, Greg, all of you guys, I appreciate you being on the call, I appreciate your engagement. And thanks, everybody. Have a great evening. Bye-bye.

Thank you, ladies and gentlemen. This does conclude your teleconference for today. You may now disconnect your line at this time. Thank you for your participation, and have a wonderful day.