News Release

<< Back
K12 Inc. Reports Third Quarter Fiscal 2018 with Revenues of $232.9 Million

Enrollments for Managed Public School Programs Rise to 110.8 Thousand

HERNDON, Va.--(BUSINESS WIRE)--Apr. 24, 2018-- K12 Inc. (NYSE: LRN), a technology-based education company and leading provider of online curriculum and online school programs for students in pre-K through high school, today announced its results for the third fiscal quarter ended March 31, 2018.

Financial Highlights for the Three Months Ended March 31, 2018 (Third Quarter Fiscal Year 2018)

  • Revenues of $232.9 million, compared to $222.5 million in the third quarter of FY 2017.
  • Operating income of $19.7 million, compared to $12.8 million in the third quarter of FY 2017.
  • Net income attributable to common stockholders of $13.1 million, compared to $9.1 million in the third quarter of FY 2017.
  • Diluted net income attributable to common stockholders per share of $0.32, compared to $0.23 in the third quarter of FY 2017.

To supplement our financial statements presented in accordance with Generally Accepted Accounting Principles (GAAP), we are also presenting adjusted operating income and adjusted EBITDA. Management believes that these additional metrics provide useful information to our investors as an indicator of performance because they exclude non-cash stock-based compensation expense. Non-GAAP Financial Highlights for the three months ended March 31, 2018 (Third Quarter Fiscal Year 2018) are as follows.

  • Adjusted operating income of $24.3 million, compared to $18.0 million in the third quarter of FY 2017.
  • Adjusted EBITDA of $42.7 million, compared to $38.0 million in the third quarter of FY 2017.

Financial Highlights for the Nine Months Ended March 31, 2018 (Year-to-Date Fiscal 2018)

  • Revenues of $678.9 million, compared to $672.8 million for the first nine months of FY 2017.
  • Operating income of $15.7 million, compared to $8.4 million for the first nine months of FY 2017.
  • Net income attributable to common stockholders of $18.3 million, compared to $6.9 million for the first nine months of FY 2017.
  • Diluted net income attributable to common stockholders per share of $0.45, compared to $0.18 for the first nine months of FY 2017.

Non-GAAP Financial Highlights for the Nine Months Ended March 31, 2018 (Year-to-Date Fiscal 2018) are as follows.

  • Adjusted operating income of $30.5 million, compared to $23.0 million for the first nine months of FY 2017.
  • Adjusted EBITDA of $88.1 million, compared to $79.3 million for the first nine months of FY 2017.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures for these periods is provided below.

Liquidity

As of March 31, 2018, the Company had cash and cash equivalents of $227.9 million, an increase of $33.2 million compared to the third quarter of FY 2017.

Capital Expenditures

Capital expenditures for the nine months ended March 31, 2018 were $33.3 million, largely unchanged from the prior year’s first nine months, and was comprised of:

  • $6.6 million for property and equipment,
  • $18.9 million for capitalized software development, and
  • $7.8 million for capitalized curriculum.

Revenue and Enrollment Data

Revenue

The Company’s revenues are generally in three categories -- Managed Public School Programs (where K12 provides substantially all management, technology and academic support services in addition to curriculum, learning systems and instructional services), Institutional (Non-managed Public School Programs – curriculum, technology and other educational services where K12 does not provide primary administrative oversight, and Institutional Software and Services – educational software and services provided to school districts, public schools and other educational institutions), and Private Pay Schools and Other (private schools for which it charges student tuition and makes direct consumer sales) – The following table sets forth the Company’s revenues for the periods indicated:

       
Three Months Ended March 31, Change 2018 / 2017 Nine Months Ended March 31, Change 2018 / 2017
2018   2017 $   % 2018   2017 $   %
(In thousands, except percentages)
       
Managed Public School Programs $ 200,580 $ 187,418 $ 13,162 7.0 % $ 572,478 $ 554,353 $ 18,125 3.3 %
 
Institutional
Non-managed Public School Programs 13,250 16,031 (2,781 ) -17.3 % 44,401 51,960 (7,559 ) -14.5 %
Institutional Software & Services   9,605     10,234   (629 ) -6.1 %   34,500     38,968   (4,468 ) -11.5 %
Total Institutional 22,855 26,265 (3,410 ) -13.0 % 78,901 90,928 (12,027 ) -13.2 %
Private Pay Schools and Other   9,429     8,850   579   6.5 %   27,481     27,480   1   0.0 %
Total $ 232,864   $ 222,533 $ 10,331   4.6 % $ 678,860   $ 672,761 $ 6,099   0.9 %
 

Enrollment Data

The following table sets forth average enrollment data for the periods indicated. These figures exclude enrollments from classroom pilot programs and consumer programs.

       

Three Months Ended
March 31,

  2018 / 2017  

Nine Months Ended
March 31,

  2018 / 2017
(in thousands) 2018   2017 Change  

Change %

2018   2017 Change  

Change %

 
 
Managed Public School Programs (1,2) 110.8 103.8 7.0 6.7 % 109.8 105.5 4.3 4.1 %
Non-managed Public School Programs (1) 24.3 29.3 (5.0 ) -17.1 % 24.1 28.8 (4.7 ) -16.3 %
 
(1)   If a school changes from a Managed Public School Program to a Non-managed Public School Program, the corresponding enrollment classification would change in the period in which the contract arrangement changed.
(2) Managed Public School Programs may include enrollments for which K12 receives no public funding or revenue.
 

Revenue per Enrollment Data

The following table sets forth revenue per average enrollment data for students in Public School Programs for the periods indicated.

       

Three Months Ended
March 31,

Change
2018 / 2017

Nine Months Ended
March 31,

Change
2018 / 2017

2018   2017 $   % 2018   2017 $   %
Managed Public School Programs $ 1,810 $ 1,806 $ 4 0.2 % $ 5,214 $ 5,255 $ (41 ) -0.8 %
Non-managed Public School Programs 545 547 (2 ) -0.4 % 1,842 1,804 38 2.1 %
 

Outlook

The Company is reaffirming, and tightening, the forecast for the full year, fiscal 2018:

  • Revenue in the range of $906 million to $912 million.
  • Adjusted operating income of $46 million to $50 million (1).
  • Capital expenditures of $43 million to $47 million.
 
(1) These amounts exclude the costs associated with transitioning the company’s former CEO in the third quarter of FY 2018.
 

Special Note on Forward-Looking Statements

This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have tried, whenever possible, to identify these forward-looking statements using words such as “anticipates,” “believes,” “estimates,” “continues,” “likely,” “may,” “opportunity,” “potential,” “projects,” “will,” “expects,” “plans,” “intends” and similar expressions to identify forward looking statements, whether in the negative or the affirmative. These statements reflect our current beliefs and are based upon information currently available to us. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties, factors and contingencies include, but are not limited to: reduction of per pupil funding amounts at the schools we serve; inability to achieve sufficient levels of new enrollments to sustain or to grow our business model; failure of the schools we serve to comply with regulations resulting in a loss of funding, an obligation to repay funds previously received or contractual remedies; declines or variations in academic performance outcomes as curriculum and testing standards evolve; harm to our reputation resulting from poor performance or misconduct by operators or us in any school in our industry and in any school in which we operate; legal and regulatory challenges from opponents of virtual public education, public charter schools or for-profit education companies; discrepancies in interpretation of legislation by regulatory agencies that may lead to payment or funding disputes; termination of our contracts with schools due to a loss of authorizing charter; failure to enter into new school contracts or renew existing contracts, in part or in their entirety; unsuccessful integration of mergers, acquisitions and joint ventures; failure to further develop, maintain and enhance our technology, products, services and brands; inadequate recruiting, training and retention of effective teachers and employees; declines in enrollments due to teacher union activities; infringement of our intellectual property; entry of new competitors with superior competitive technologies and lower prices; disruptions to our Internet-based learning and delivery systems resulting from cyber-attacks; and other risks and uncertainties associated with our business described in the Company’s filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All information in this release is as of March 31, 2018, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations.

Conference Call

The Company will discuss its third quarter fiscal year 2018 financial results during a conference call scheduled for Tuesday, April 24, 2018 at 5:00 p.m. eastern time (ET).

The conference call will be webcast and available at http://public.viavid.com/index.php?id=129020. Please access the web site at least 15 minutes prior to the start of the call.

To participate in the live call, investors and analysts should dial (877) 407-4019 (domestic) or (201) 689-8337 (international) at 4:45 p.m. (ET). No passcode is required.

A replay of the call will be available starting on April 24, 2018 at 8:00 p.m. ET through May 31, 2018 at 8:00 p.m. ET, at (877) 660-6853 (domestic) or (201) 612-7415 (international) using conference ID 13678222. A webcast replay of the call will be available at http://public.viavid.com/index.php?id=129020 for 30 days.

Financial Statements

The financial statements set forth below are not the complete set of K12 Inc.’s financial statements for the three and nine months ended March 31, 2018, and are presented below without footnotes. Readers are encouraged to obtain and carefully review K12 Inc.’s Form 10-Q for the quarter ended March 31, 2018, including all financial statements contained therein and the footnotes thereto, filed with the SEC. The Form 10-Q may be retrieved from the SEC's website at www.sec.gov or from K12 Inc.’s website at www.k12.com.

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 
  March 31,
2018
  June 30,
2017
(audited)
(In thousands except share and per share data)
ASSETS
Current assets
Cash and cash equivalents $ 227,907 $ 230,864
Accounts receivable, net of allowance of $9,978 and $14,791 at March 31, 2018 and June 30, 2017, respectively 207,998 192,205
Inventories, net 18,051 30,503
Prepaid expenses 14,422 8,006
Other current assets   13,767     12,004  
Total current assets 482,145 473,582
Property and equipment, net 29,468 26,297
Capitalized software, net 55,729 62,695
Capitalized curriculum development costs, net 53,299 59,213
Intangible assets, net 18,694 20,226
Goodwill 90,197 87,214
Deposits and other assets   31,592     6,057  
Total assets $ 761,124   $ 735,284  
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations $ 13,727 $ 11,880
Accounts payable 17,548 30,052
Accrued liabilities 13,304 21,622
Accrued compensation and benefits 29,489 29,367
Deferred revenue   49,039     24,830  
Total current liabilities 123,107 117,751
Capital lease obligations, net of current portion 13,983 10,025
Deferred rent, net of current portion 3,511 4,157
Deferred tax liability 11,572 16,726
Other long-term liabilities   9,519     11,579  
Total liabilities   161,692     160,238  
Redeemable noncontrolling interest       700  
Stockholders’ equity
Common stock, par value $0.0001; 100,000,000 shares authorized; 44,664,798 and 44,325,772 shares issued, and 41,162,200 and 40,823,174 shares outstanding at March 31, 2018 and June 30, 2017, respectively 4 4
Additional paid-in capital 697,762 690,488
Accumulated other comprehensive loss (562 ) (170 )
Accumulated deficit (22,772 ) (40,976 )
Treasury stock of 3,502,598 shares at cost at March 31, 2018 and June 30, 2017   (75,000 )   (75,000 )
Total stockholders’ equity   599,432     574,346  
Total liabilities, redeemable noncontrolling interest and stockholders' equity $ 761,124   $ 735,284  
 

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Three Months Ended March 31,   Nine Months Ended March 31,
2018   2017 2018   2017
(In thousands except share and per share data)

Revenues

$ 232,864 $ 222,533 $ 678,860 $ 672,761
Cost and expenses
Instructional costs and services 148,878 136,431 435,408 418,072
Selling, administrative, and other operating expenses 62,267 69,828 220,507 236,826
Product development expenses   2,002     3,511     7,276   9,446  
Total costs and expenses   213,147     209,770     663,191   664,344  
Income from operations 19,717 12,763 15,669 8,417
Interest income, net   261     641     535   1,247  
Income before income taxes and noncontrolling interest 19,978 13,404 16,204 9,664
Income tax benefit (expense)   (6,935 )   (4,522 )   1,869   (3,520 )
Net income 13,043 8,882 18,073 6,144

Add net loss attributable to noncontrolling interest

  27     233     200   790  

Net income attributable to common stockholders

$ 13,070   $ 9,115   $ 18,273 $ 6,934  
Net income attributable to common stockholders per share:

Basic

$ 0.33   $ 0.24   $ 0.46 $ 0.18  

Diluted

$ 0.32   $ 0.23   $ 0.45 $ 0.18  
Weighted average shares used in computing per share amounts:
Basic   39,644,074     38,376,984     39,366,497   38,145,671  
Diluted   40,766,203     39,328,127     40,771,437   38,956,081  
 

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Nine Months Ended March 31,
2018   2017
(In thousands)
Cash flows from operating activities
Net income $ 18,073 $ 6,144
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 57,612 56,325
Stock-based compensation expense 14,853 14,557
Excess tax benefit from stock-based compensation (250 )
Deferred income taxes (4,978 ) (259 )
Provision for doubtful accounts 605 4,196
Provision for excess and obsolete inventory 1,319 395
Provision for student computer shrinkage and obsolescence 103 256
Impairment loss on other assets 586
Expensed computer peripherals 3,335 3,412
Changes in assets and liabilities:
Accounts receivable (16,220 ) (61,000 )
Inventories 11,134 13,149
Prepaid expenses (6,416 ) (7,516 )
Other current assets (2,963 ) (2,781 )
Deposits and other assets (25,893 ) 9,811
Accounts payable (9,215 ) (9,813 )
Accrued liabilities (9,183 ) (7,608 )
Accrued compensation and benefits 111 (5,922 )
Deferred revenue 23,848 24,833
Deferred rent and other liabilities   (2,714 )   (1,140 )
Net cash provided by operating activities   53,411     37,375  
Cash flows from investing activities
Purchase of property and equipment (6,580 ) (1,391 )
Capitalized software development costs (18,852 ) (19,345 )
Capitalized curriculum development costs (7,770 ) (12,427 )
Acquisition of Big Universe, Inc., net of cash acquired (2,774 )
Purchase of noncontrolling interest   (500 )   (9,134 )
Net cash used in investing activities   (36,476 )   (42,297 )
Cash flows from financing activities
Repayments on capital lease obligations (10,313 ) (11,879 )
Proceeds from exercise of stock options 184 1,518
Excess tax benefit from stock-based compensation 250
Repurchase of restricted stock for income tax withholding   (9,763 )   (4,236 )
Net cash used in financing activities   (19,892 )   (14,347 )
Effect of foreign exchange rate changes on cash and cash equivalents       (12 )
Net change in cash and cash equivalents (2,957 ) (19,281 )
Cash and cash equivalents, beginning of period   230,864     213,989  
Cash and cash equivalents, end of period $ 227,907   $ 194,708  
 

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with Generally Accepted Accounting Principles (GAAP), we have presented adjusted operating income (loss) and adjusted EBITDA. These measures are not measurements recognized under GAAP.

  • Adjusted operating income (loss) is defined as income (loss) from operations as adjusted for stock-based compensation.
  • Adjusted EBITDA is defined as net income (loss) attributable to common stockholders as adjusted for interest income (expense), net; impairment of investment in Web International Education Group, Ltd.; income tax benefit (expense); noncontrolling interest; stock-based compensation; and depreciation and amortization. Interest income (expense) primarily consists of interest expense for capital leases and interest income on customer receivables.
  • Adjusted EBITDA and adjusted operating income (loss) exclude stock-based compensation, which consists of expenses for stock options, restricted stock, restricted stock units, and performance stock units.

This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Management believes that the presentation of these non-GAAP measures provides useful information to investors regarding our results of operations because it is an indicator of performance with the removal of stock-based compensation which assists both investors and management in analyzing and benchmarking the performance and value of our business.

We believe adjusted EBITDA is useful to an investor in evaluating our operating performance because it is both widely used to measure a company's operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of our capital structure and the method by which assets were acquired.

Our management uses adjusted EBITDA and adjusted operating income (loss):

  • as an additional measurement of operating performance because it assists us in comparing our performance on a consistent basis;
  • in presentations to the members of our Board of Directors to enable our Board to have the same measurement basis of operating performance as is used by management to compare our current operating results with corresponding prior periods and with the results of other companies in our industry; and
  • as consistent with lending covenants on our line of credit.

Other companies may define these non-GAAP measures differently and, as a result, our use of these non-GAAP measures may not be directly comparable to adjusted EBITDA, and adjusted operating income (loss) used by other companies. Although we use these non-GAAP measures as financial measures to assess the performance of our business, the use of non-GAAP measures is limited as they include and/or do not include certain items not included and/or included in the most directly comparable GAAP measure.

Adjusted EBITDA and adjusted operating income (loss) should be considered in addition to, and not as a substitute for, income or loss from operations, net income or loss, and earnings or loss per share prepared in accordance with GAAP as a measure of performance. Adjusted EBITDA is not intended to be a measure of liquidity. You are cautioned not to place undue reliance on these non-GAAP measures.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is provided below.

   
Three Months Ended March 31, Nine Months Ended March 31,
2018   2017 2018   2017
(In thousands)
Net income attributable to common stockholders $ 13,070 $ 9,115 $ 18,273 $ 6,934
Interest income, net (261 ) (641 ) (535 ) (1,247 )
Income tax (benefit) expense 6,935 4,522 (1,869 ) 3,520
Noncontrolling interest (27 ) (233 ) (200 ) (790 )
Stock-based compensation expense   4,557     5,265     14,853     14,557  
Adjusted operating income   24,274     18,028     30,522     22,974  
Depreciation and amortization   18,426     19,950     57,612     56,325  
Adjusted EBITDA $ 42,700   $ 37,978   $ 88,134   $ 79,299  
 

About K12 Inc.

K12 Inc. (NYSE: LRN) is driving innovation and advancing the quality of education by delivering state-of-the-art, digital learning platforms and technology to students and school districts across the globe. K12’s award winning curriculum serves over 2,000 schools and school districts and has delivered millions of courses over the past decade. K12 is a company of educators providing online and blended education solutions to charter schools, public school districts, private schools, and directly to families. The K12 program is offered through more than 70 partner public schools, and through school districts and public and private schools serving students in all 50 states and more than 100 countries. More information can be found at K12.com.

Source: K12 Inc.

K12 Inc.
Investor and Press Contact:
Mike Kraft, 571-353-7778
VP Finance and Communications
mkraft@k12.com