Ladies and gentlemen, and thank you for standing by and welcome to the K12 First Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Mike Lawson, Head of Investor Relations. Thank you. Please go ahead.

Thank you, Chintol and good afternoon. Welcome to K12's first quarter earnings call for fiscal year 2021. 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 provisions 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 2020 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 Tim Medina, Chief Financial Officer. Also, on the call today is Mike Kraft, our former Head of Investor Relations who remains with the company as Senior Vice President of Corporate Communications. Following our prepared remarks, we will answer any questions you may have. I'd now like to turn the call over to Nate.

Thank you, Mike. You did that very well, first time. Good afternoon, everyone, and thanks for joining us on the call today. With so much uncertainty in our lives right now, I feel fortunate. Our business is stable. It's growing, is well positioned for the future. As you know the pandemic is helping to drive a shift to more online learning, where our great results are not just because of the COVID-19 crisis, independent as a pandemic as we've said in the past, there is an evolving view of online learning as a quality option for many families. This trend started before the pandemic, and will continue after the pandemic. A new study commissioned in partnership with a third-party researcher called Qualtrics shows that more than 60% of parents believe the quality of education students receive from an online school is equal to what they receive in a traditional brick and mortar school. In fact, independent research recently published by Dr. Ian Kingsbury corroborate these findings. Dr. Kingsbury's studies concluded that the virtual schools often outperform brick and mortar schools when it comes to key learning experiences which includes promoting active learning, communicating effectively, managing the classroom and providing high quality instruction. Key takeaway is this, while the pandemic may have accelerated this trend, the awareness and the acceptance of online and blended learning has been increasing every year. Again, we believe this shift has been a key contributor to our growth this year. So, how this growth impact our financial results? Specifically, first quarter fiscal year 2021 revenues were $371 million up 44.3% from revenues of the same period in FY '20. Adjusted operating income was $39.2 million, up 275% from the loss in the same period of fiscal '20. And similarly, adjusted EBITDA was up even more on…

Thank you, Nate, and good afternoon everyone. We are pleased with our very strong first quarter results. The tremendous growth we are experiencing demonstrates the strength of our business model and innovative approach to education. We are proud to serve more students, parents and school districts than ever before with our industry-leading online and blended learning programs and solutions. In the next few minutes, I will review the results of the first quarter, our Q2 and full-year guidance and some of the key initiatives we are executing on to sustain revenue growth, margin expansion and strong cash flow into the future. First though, I want to draw your attention to the changes, and how we report revenue. The successes we are enjoying in Career Learning results from the execution of a strategic vision over the past several years. Our operating structure is designed to support high, sustainable growth in the Career Learning business, while continuing to grow and reinvest cash flow from the core General Education business. Given the long runway we see with this growth strategy we decided now is the time to adapt how we report our revenue. Specifically, our reporting has shifted from a product-based focus such as manage schools and institutional sales to a market-based focus on the revenues we earn from the two markets we are addressing, General Education and Career Learning. This line of revenue change fits better with how we run our business. It also will provide investors with greater insight into the business and more clarity around the key drivers of growth. To help investors understand the transition from our old to new lines of revenue reporting, we have provided a short presentation that accompanies our earnings release. Slide 3 and 4 provide reconciliations from our old to new reporting for revenue…

Thanks Tim. We obviously are covering a lot to do with the change in reporting, the guidance, the new numbers. So I hope it's all being absorbed well. We're here to answer your questions. So, let's open the floor to questions, operator.

[Operator Instructions] Our first question comes from Henry Chien with BMO. Your line is open. Henry, your line is open.

Thanks for the update. And it's very helpful to hear or to refer to the new segmentation. I was wondering, if you can talk a little bit about, I guess two things is one, one in terms of the enrollment. I guess what's sort of your - I mean just trying to disaggregate a little bit. How much of it is way to pandemic versus how much of your expanding services or you're expanding TAM, if you can provide any insight to that? And if you could also speak as well now, that with the new segmentations, how leverage in the model would work? Understanding, it's at probably has a decent amount of leverage as a tech and software model that, I was wondering if you could speak a little bit that as well. Thanks.

Okay. Well, let's try to tackle those. In the enrollment, disaggregating the enrollment growth. We talked about the fact that the Career Readiness growth, and I don't think that has much to do with the pandemic. There may be some people out there who said, I'm going to dive into Career Learning because my normal high school is closed, but for the most part, we think that growth due solely to the new programs we put in place. Certainly the Galvanize growth was not associated with pandemic, although you do see it sometimes Henry, people who are when they're not working, and they've lost their job, they go spend a little more time getting educated. So we may have a little bit of that leading in there, but we think the vast majority of the enrollment growth in Career Learning and the revenue growth and Career Learning is really associated with the program itself. It's hard to tell on the General Education side to be honest with you. I hesitate to give you any number or try to split that out because I just don't think we know. I don't think we know how many people made which kind of decision. I would say this though, is one way to think about it. When we looked at the kind of growth, the nominal growth, we were getting in the last couple of years, we were getting well into the 14000, 15000 student growth, and it was growing. So you can assume that of our growth this year, it would have been somewhere north of 15,000, south of 90,000. I can't tell you what number would be though. It is the best way I could disaggregate. It's just, it's hard to tell because parents make these decisions on the basis of many things, and some of it safety for sure, some of it was also, what we just seen as an exposure in the marketplace.

Got it.

The leverage Tim, you want to add to the leverage.

Yes, Henry for the last several years we've been focused on improving profitability and free cash flow. And this year, we did see some benefit from scale, and really on both lines of revenue Career Learning and General Education, of course. And, so I'm not sure exactly where you wanted to go with that question. You may want to clarify it.

Before you clarify, I'll give you a couple of points to understand. When we saw more people interested in online learning we didn't have to spend as much money in media and advertising. So the market demand went down. The spend for enrollment center however had to keep pace. But the marketing spend promotions all alone could go down. We didn't have to increase most of the corporate departments. Our accounting department didn't increase. Our finance reporting department didn't have to increase, our logistics department didn't have to increase. You know all of those departments are sized whether we double enrollments or triple the enrollments doesn't increase the number of support there. Yes, we have to buy more computers. Yes, we have to buy more materials. But those things are the variable costs. The fixed cost associated with the size departments was already there. And in fact we had started in FY '19 - I'm sorry FY '20, we started in FY '20 with a cost reduction program that we put in place, it saved us some money in FY '20 and it kicked on a run rate basis going into '21. So those are the reasons why I think you're seeing margins get better and leverage is there, because most of the growth that we're getting doesn't require additional expenses that are at our corporate departments. It really requires extra teachers, extra computers and extra material, beyond that for the most part we don't really have to increase expenses to take on more loans.

Yes. I was also thinking that the growth in career - the career side of things, and whether that different leverage profile versus, you know General Education.

I think it's a different leverage profile than the early years because in General Education we've pretty much built all the content that we need to build. We're going to try to upgraded with some artificial intelligence, and newer technologies like that. But we're still building project-based learning courses, which is the interactive course allow the student to career courses. So we're building more content there. So, I think is little less leverage in the Career Learning business, because it hasn't reached its scale curve yet. So, I think there's less leverage than in General Education.

Our next question comes from Greg Pendy with Sidoti. Your line is open.

So I mean, if I'm not mistaken then, essentially not to harp on the prior question, but the SG&A only going like say $10 million. It's your student acquisition costs, I assume is really what's driving or coming down. And if that is the case, can you just give us a little bit more color on sort of what a normalized rate would be you think maybe going forward, assuming maybe the media, one-offs and everything kind of came in?

Well, first of all I'm going let Tim talk about what the run rate, kind of costs might be, but I would draw your attention to the fact that I don't think it was just acquisition costs for student. I think it was also our corporate costs, were not going up, because and we've kept SG&A at the corporate level flat for a number of years. We had a little bit of an increase this year, but not nearly the kind of increase compared to what enrollments were. So I don't think it was just acquisition costs, I think it's also overall corporate costs. We have produced a pretty efficient finance department, logistics department, legal departments all of those departments did not really see any increase. A little bit of increase that we did see came primarily from the area of focusing our retention. We put a customer experience department in place, small increase there, but we did add some hit there. Just about all the other departments remained flat. So, I don't think it was just acquisition cost. Tim?

Yes, Greg we don't disclose that metric. However, it is accurate that our overall media spending like many other companies was down this quarter, and we had so much enrollment driven by more generally into our company. So, our acquisition costs especially on the media side were much lower than in prior year, but we don't disclose that metric.

And then just one more, I guess, the world has changed a lot since the Galvanize acquisition. Can you just kind of give us, I guess, big picture, maybe some of the areas maybe it's exceeded, and maybe some of the areas where you know it's been a little bit behind just in your opinion, since you did the deal?

Yes. And let's start with the areas that are behind, most clearly and most visibly, there are three parts of this business. One is the community business. It's not the reason we purchased it, but it came along with it. It looks like the – little like to be work business. You have physical facilities where people are leasing space, especially entrepreneurs, young entrepreneurs and they are leasing a wide-open kind of friendly space. Obviously with COVID, people are not coming into that space and so that community business not only wasn’t growing, but also shrank during the COVID period. So that business is not performing as we thought it would, when we did the acquisition. The enterprise business is growing, but is not growing at the pace we thought it would, and that's primarily because as you know many companies whether you're a airline or you're a hotel company or you're a retail companies, they're little cash strapped right now to say the least. They're not getting the kind of revenue that they thought they were going to get. So, they're not spending money on the things such as training employees and building more IT system. So, we're seeing a slowdown in the spend there. Other companies who are in a place like a telecom companies are still growing. So, we mentioned T-Mobile deal last time. So, that business is sort of slightly growing and not nearly going as fast as we thought. The upside business has been the - first one is the community business. The upside business is the consumer business. And that's where the individual decide that they want to get an immersive training in software engineering or in data science. That business is growing much faster than we actually thought it was, I thought it would at the time we did the acquisition. And even though we're not in the physical classrooms, we're still getting more, what we call remote, more online learning going on. So as I mentioned in my script, there are more students enrolled in that program than ever before by a factor - by a factor or two. So it is actually performing much better than we thought it would, and we think if we were back into a brick and mortar environment between the remote and the brick and mortar environment together it'll grow even faster. The final piece of the puzzle that is growing faster than we thought is the military business. It was a nascent little opportunity and now we're finding that the federal government and military also wants to train it's personnel as they leave the military service to help make sure they get jobs, and obviously IT jobs are a very well-paying job. So they want to make sure they're getting the training. So that's another one that's performing better. So summary, military, consumer performing better. Enterprise is performing less fast than we thought, growing as fast than we thought. And community business is declining.

[Operator Instructions] Our next question comes from Stephen Sheldon with William Blair. Your line is open.

Wanted to ask first, what you roughly assumed in the full year guide for starting pending enrollments in both General Education and Career Learning? Yeah, it looks like - it's been down I think mid-single digits in aggregate, the past few years start to end, would that be a fair assumption for this year?

Yes. So, I'm also - I don't think we actually give a point to point number there, but – what I will say is that, we saw much higher re-registration in the spring semester students coming into this year. And so we - at the same time, on the other side of the pandemic, we're modeling higher withdrawals, and so we don't give a pinpoint number. As you mentioned, it usually does slightly decline, and we would expect this year would have a similar slight decline as the year progresses. We'll have to see as time goes by, we'll have to see some of the factors Nate mentioned about the virus, the vaccine. Those are all uncertainties that make that prediction difficult.

If we just looked at the first two months of the year already from September until, we're almost at the end of October, so the end of October. Our internal reports tell us that we're not declining as fast as we did last year, but we don't think that will hold. We think that over time, we'll start to see some more deterioration, but right now retention is better than it was last year. It's actually improved from last year. And you can imagine some of that is COVID, as people start to hear that this year COVID to COVID rates are already going up in colder state and the expectations that we're going to see go up through the winter, we may in fact see better retention than we thought we would. Normally we see some deterioration during the year, we may not see that this year. But as Tim said, he said appropriately, we just don't know. At this point in time, I challenge anybody to predict what's going to happen with COVID, and how it's going to impact.

And as more of your revenue comes from middle school and high school Career Learning, how could that impact overall retention rates and marketing efficiency over the next few years? So yeah, looking at Career Learning enrollments versus General Education?

Well in Career Learning I think the best way to look at it is we will likely see some, the cost of teachers a little higher. The retention is a little bit better. So, there's sort of an offsetting there, but we expect to see retention better because that's what our - that's what all the early data from the first couple of years of the program is told, since that retention is better in those programs, therefore the cost of acquisition, we won't have to acquire as many because we are now - as replacing as many, not like an order of magnitude, it's not two to one, but we're seeing percentage point improvements, for Career Learning over what Generally Education has done. So, I expect to see over the next couple of years that the cost of acquisition for Career Learning, will probably go up a little bit and then stabilize. Up a little bit only because we're going to spend some time exposed in the market to it. The second big factor is scale. We have 31 states in which we operate for our General Education programs, but we're only at 20 states or so for our Career Learning. When that gets to 30, I think we are going to be able to leverage national advertising programs of digital in on-air, and we'll start to see more efficiency in that program. Now the General Education sort of has a different mix. The General Education, we already are at scale on the customer acquisition side, and I think that you will see it, it probably won't change much. We did have a dip as Tim talked about this year, but I don't think it's going to go back to where it was because the visibility of online education is still greater than it was before COVID. So that's sort of my - I didn't give you any numbers there, because I can't give you numbers, but I can tell you directionally that's how I see it shaping out.

And just last one for me. As you think about kind of the opportunity for hybrid Career Learning options. I know you have some small hybrid offerings out there right now, and basically west conference one, but how are you thinking about the more broadly a rollout hybrid offering over the next few years? And what would be the challenges I guess to do that?

Everybody in the management team that's sitting in the room or anybody it's on the calls, probably laughing right now because they know this is a hot button for me. I so strongly believe that face to face needs to be a component of everything we do. I don't know that we will go to full blended schools were a student goes to a classroom 5 days a week and takes just the online digital content. But I do think that students who go to an online school need to go to someplace periodically where they're facing the rest of their peers and facing their teachers. And so I believe it's a big part of what we're going to do, especially Career Learning because there is going to need to be more hands on experience. We accomplished some of that through a lot of a virtual tools today. We've talked before about Nepris which allows a student to communicate with a mentor, and have the project evaluated, understand what the industry is all about through a virtual learning experience, but I think there has to be more physical learning experiences there as well. So I expect to see more blended programs, more face to face opportunities become a part of this. How do we fund that? And why doesn't it change our models funding? It doesn't, because we've been working with a lot of national organizations. So, national churches, the YMCAs, washing boys and girls clubs, theme parks, libraries all of those are opportunities for us to spend just a little bit of money using some of their facilities, especially the facility they sit idle during the day. You go to a boys and girls clubs, the kids are generally there in the clubs in the evenings and the weekends right. So, what's happening during the day when we've got kids in classes, it's empty. So for them its incremental revenue, for us it's a low-cost way of having these blended operations occur. So I think that you're going to see more and more of that in our programs, which is going to give our teachers more of a chance to interact with their students face to face. Again I want to be 100% clear that's not going to be five days a week, seven hours a day, but it might be one day a week, it might be two days a week, it might be just mornings on Thursday, where the teacher or the counselor gets a chance to interact with the student, and students interact with their peers, and students interact with corporations or partners. So I think it's a highly important part of where we're going as an organization. It improves retention, it improves student engagement. And I'll stop there because everybody is laughing at me, because they know I can wax on for this for hours. I believe in it.

Our next question comes from Alex Paris with Barrington Research. Your line is open.

I just have a quick question. I got on the call late, so if you just as pardon me. But revenue per student was down 7.6% in General Education. I'm sure you commented on it down a little bit more than that in Career Learning. I think that's down a little bit more than I had expected although not entirely surprising given what's going on with tax revenue at the state level, and that sort of thing. Could you just give a little additional color on that? And where you may be see it for the full year?

Hi, Alex.

Tim you want to go?

Sure. Hi, Alex. The current results are due to state budgetary pressures related to COVID-19, particularly in California. Also the impact of school mix was a significant factor given all of the growth that we've had occurring in lower funded states. I commented, Alex, that we do expect to see continued pressure on state budgets from the pandemic, and the risk of some recessionary pressures in the overall economy. But over the longer term consistent with the long-term history in the U.S. of increasing funding for K-12 grade levels increasing, typically 1% to 2% in the past 20 years, that's we still - we expect over the longer term, looking forward, we expect the overall trend to be upward.

And Alex, I don't know if you understand what happened in California. We are so proud of this enrollment growth, but it could have been much better had we not had a ruling in California where they were not funding growth enrollments. So whatever you enrollments whereas of a certain date, if you grew pass those enrollment, the state wasn't going to fund that enrollment. We did a little growth anyway because we had so much demand, but we shut down a lot of the growth we could had in California. That meant that were - the revenue per student in California went down, and then the mix changes because California is a decently funded state not only funded but certainly decently funded, and when we couldn't grow there, but we were growing in states with lower revenue per student, that means you're lower revenue per student states are growing faster than California, and that affected the rate as well the overall revenue per student. So those two things combined ruling in California and the fact that we couldn't grow in California, I think drove this number down further, it should have been, and further than we expected quite honestly, but we just like you.

Good. Well, that's helpful. I appreciate the color there. Any different explanation for Career Learning? Is that because some of the things that are in Career Learning like Galvanize, and things like that? Or is that a similar set of reasons?

No. Yeah, not Galvanize. We are not including any of the Adult Learning in our enrollment figures, and it's really the same drivers has general had.

Mr. Davis there are no further questions at this time.

All right. Well, once again, I want to thank everybody who had a chance to sit in. This is - it's a great time for us in terms of the results. It's a tough time for the country, but we're doing our best to make sure we've good business - in the process of delivering shareholders a good business. Thank you everybody for attending, and look forward to chatting with you further. Bye-bye.

This concludes today's conference call. You may now disconnect.