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K12 Inc. Reports Second Quarter Fiscal 2016 With Revenue of $208.8 Million

January 28, 2016

HERNDON, Va., Jan. 28, 2016 (GLOBE NEWSWIRE) -- K12 Inc. (NYSE:LRN), a technology-based education company and leading provider of proprietary curriculum and online school programs for students in pre-K through high school, today announced its results for the second fiscal quarter ended December 31, 2015.

Financial Highlights for the Three Months Ended December 31, 2015 (Second Quarter Fiscal Year 2016)

  • Revenues of $208.8 million, compared to $231.3 million in the second quarter of FY 2015.
  • EBITDA, a non-GAAP measure (see reconciliation below), of $31.2 million, compared to $38.1 million in the second quarter of FY 2015.
  • Operating income of $14.7 million, compared to $20.5 million in the second quarter of FY 2015.
  • Net income attributable to common stockholders of $8.5 million, compared to $12.3 million in the second quarter of FY 2015. 
  • Diluted net income attributable to common stockholders per share of $0.23, compared to $0.33 in the second quarter of FY 2015. 

Financial Highlights for the Six Months Ended December 31, 2015

  • Revenues of $430.0 million, compared to $468.0 million for the first six months of FY 2015.
  • EBITDA, a non-GAAP measure (see reconciliation below), of $27.3 million, compared to $41.8 million for the first six months of FY 2015.
  • Operating loss of $5.7 million, compared to operating income of $7.3 million for the first six months of FY 2015.
  • Net loss attributable to common stockholders of $4.3 million, compared to net income of $5.6 million for the first six months of FY 2015.
  • Diluted net loss attributable to common stockholders per share of $0.11, compared to diluted net income of $0.15 for the first six months of FY 2015.

Changes to the year-over-year financial results, for the three and six months ended December 31, 2015, are primarily due to the transition of the Agora Cyber Charter School contract from a managed to a non-managed program.

Comments from Management                         

“After two years of increased investment in academic support programs, content, and support systems, we are beginning to see tangible improvements in student persistence which is a critical element to academic success,” said Chairman and CEO Nate Davis.  “While our journey is not yet complete, I am confident that we are on the right path toward improving academic outcomes and delivering products that will both excite virtual schools and our blended and brick and mortar school partners.”

Cash, Capital Expenditures and Capital Leases

As of December 31, 2015 the Company had cash and cash equivalents of $171.3 million, a decrease of $24.6 million compared to the $195.9 million reported at June 30, 2015. This decrease is largely the result of normal seasonal trends.

Capital expenditures for the six months ended December 31, 2015 were $25.8 million, a decrease of $5.3 million from the prior year’s first six months, and was comprised of:

$2.0 million for property and equipment,
$16.9 million for capitalized software development, and
$6.9 million for capitalized curriculum

Capital leases financed additional purchases of $4.1 million during the six months ended December 31, 2015, primarily for student computers.  This compares to capital leases financed during the six months ended December 31, 2014 of $6.9 million.

Revenue

The following table sets forth the Company’s revenues -- Managed Public School Programs (curriculum and services sold to managed public schools), Institutional (curriculum, technology and services provided to school districts, public schools and other educational institutions that the Company does not manage), and Private Pay Schools and Other (private schools for which the Company charges student tuition and makes direct consumer sales) – for the periods indicated.

Beginning in fiscal 2016, the Company has presented revenue from Non-managed Programs as part of the Institutional line of business, along with the Institutional Software and Services, which together constitute total Institutional revenue.  In the prior year these revenues were presented as part of the Public School Programs line of business, which included both Managed and Non-managed Public School Programs. We believe this revised presentation clarifies and better aligns the disclosure of Non-Managed Program revenues with the Company’s operational and sales structure.

  Three Months Ended Change Six Months Ended Change
  December 31, 2015 / 2014 December 31, 2015 / 2014
($ in thousands)   2015     2014   $ %   2015     2014   $ %
                 
Managed Public School Programs (1) $   170,346   $   196,735   $   (26,389 )   -13.4 % $   347,801   $   399,114   $   (51,313 )   -12.9 %
Institutional                 
Non-managed Public School Programs (1)     15,590       11,440       4,150     36.3 %     31,296       21,685       9,611     44.3 %
Institutional Software & Services      12,200       11,833       367     3.1 %     25,488       24,716       772     3.1 %
Total Institutional     27,790       23,273       4,517     19.4 %     56,784       46,401       10,383     22.4 %
Private Pay Schools and Other     10,675       11,296       (621 )   -5.5 %     25,456       22,502       2,954     13.1 %
Total $   208,811   $   231,304   $   (22,493 )   -9.7 % $   430,041   $   468,017   $   (37,976 )   -8.1 %
                                         
(1) Managed Programs include schools where K12 provides substantially all of the management, technology and academic support services in addition to curriculum, learning systems and instructional services. Non-managed Programs include schools where K12 provides curriculum and technology, and the school can also contract for instruction or other educational services.  Non-managed programs, however, do not offer primary administrative oversight. 
 

Enrollment Data

The following table sets forth enrollment data for students in Managed Public School Programs and our Non-managed Public School Programs for the periods indicated.  These figures exclude enrollments from classroom pilot programs and consumer programs.

  Three Months Ended
December 31,
2015 / 2014 Six Months Ended
December 31,
2015 / 2014
   2015   2014   Change   Change %   2015   2014   Change   Change % 
                 
                 
Managed Public School Programs (1,2)   103,751   116,258     (12,507 )   -10.8 %   103,920   116,850     (12,930 )   -11.1 %
Non-managed Public School Programs (1)   27,513   20,249     7,264     35.9 %   27,709   20,472     7,237     35.4 %
 
(1) If a school changes from a Managed to a Non-managed program, the corresponding enrollment classification would change in the period in which the contract arrangement changed.
(2) Managed Public School Programs 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   Change   Six Months Ended   Change
  December 31,   2015 / 2014   December 31,   2015 / 2014
    2015       2014     $   %     2015       2014     $   %
Managed Public School Programs $   1,642     $   1,692     $   (50 )     -3.0 %   $   3,347     $   3,416     $   (69 )     -2.0 %
Non-managed Public School Programs     567         565         2       0.3 %       1,129         1,059         70       6.6 %

 

Third Quarter Outlook

The Company is forecasting the following for the third quarter of FY 2016:

  • Revenue in the range of $215 million to $225 million.
  • Operating income in the range of $16 million to $20 million.
  • Capital expenditures, which includes curriculum and software development, computers and infrastructure, of $20 million to $25 million.

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 or an obligation to repay funds previously received; 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; infringement  of our intellectual property; non-compliance with laws and regulations related to operating schools in a foreign jurisdiction; entry of new competitors with superior competitive technologies and lower prices; 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 January 28, 2016, 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 second quarter fiscal year 2016 financial results during a conference call scheduled for Thursday, January 28, 2016 at 8:30 a.m. eastern time (ET).

The conference call will be webcast and available at http://public.viavid.com/index.php?id=117722.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 8:15 a.m. (ET). No passcode is required. 

A replay of the call will be available starting on January 28, 2016 at 11:00 a.m. ET through February 28, 2016 at 11:00 a.m. ET, at (877) 660-6853 (domestic) or (201) 612-7415 (international) using conference ID 13627926. A webcast replay of the call will be available at http://public.viavid.com/index.php?id=117722 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 months and six months ended December 31, 2015, and are presented below without footnotes. Readers are encouraged to obtain and carefully review K12 Inc.’s Form 10-Q for the quarter ended December 31, 2015, 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
 
  December 31, June 30,  
    2015     2015    
  (In thousands, except share and per share data)  
ASSETS      
Current assets      
Cash and cash equivalents  $   171,277   $   195,852    
Accounts receivable, net of allowance of $9,842 and $9,657 at December 31, 2015 and June 30, 2015, respectively      229,589       188,246    
Inventories, net      17,858       29,571    
Deferred tax asset      4,661       8,989    
Prepaid expenses      21,239       11,428    
Other current assets      25,105       24,877    
Total current assets      469,729       458,963    
Property and equipment, net      28,661       34,407    
Capitalized software, net     66,360       62,683    
Capitalized curriculum development costs, net      57,311       58,696    
Intangible assets, net     19,964       21,195    
Goodwill      66,160       66,160    
Deposits and other assets      6,806       6,495    
Total assets  $   714,991   $   708,599    
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY              
Current liabilities      
Current portion of capital lease obligations  $   14,369   $   16,635    
Accounts payable      16,760       29,819    
Accrued liabilities      10,893       12,486    
Accrued compensation and benefits      17,301       26,790    
Deferred revenue      57,083       24,927    
Total current liabilities      116,406       110,657    
Capital lease obligations, net of current portion      10,059       13,022    
Deferred rent, net of current portion      7,179       7,692    
Deferred tax liability     27,529       22,456    
Other long-term liabilities     8,714       8,233    
Total liabilities      169,887       162,060    
Commitments and contingencies     -       -    
Redeemable noncontrolling interest      9,801       9,601    
Stockholders’ equity              
Common stock, par value $0.0001; 100,000,000 shares authorized; 42,423,963 and 41,837,894 shares  
issued and 38,921,365 and 38,335,296 shares outstanding at December 31, 2015 and June 30, 2015, respectively 
  4      4    
Additional paid-in capital      665,807       663,461    
Accumulated other comprehensive loss     (791 )     (1,065 )  
Accumulated deficit      (54,717 )     (50,462 )  
Treasury stock of 3,502,598 shares at cost at December 31, 2015 and June 30, 2015     (75,000 )     (75,000 )  
Total stockholders’ equity      535,303       536,938    
Total liabilities, redeemable noncontrolling interest and equity  $   714,991   $   708,599    
               

 

K12 INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
  Three Months Ended   Six Months Ended  
  December 31,   December 31,  
    2015       2014       2015       2014    
  (In thousands, except share and per share data)  
Revenues  $   208,811     $   231,304     $   430,041     $   468,017    
Cost and expenses                                
Instructional costs and services      129,616         145,029         268,619         291,872    
Selling, administrative, and other operating expenses      61,440         62,557         160,710         162,101    
Product development expenses      3,028         3,245         6,441         6,727    
Total costs and expenses      194,084         210,831         435,770         460,700    
Income (loss) from operations      14,727         20,473         (5,729 )       7,317    
Interest (expense) income, net      (190 )       151         (495 )       182    
Income (loss) before income tax expense and noncontrolling interest      14,537         20,624         (6,224 )       7,499    
Income tax (expense) benefit     (6,653 )       (8,663 )       1,444         (2,125 )  
Net income (loss)     7,884         11,961         (4,780 )      5,374    
Adjust net loss attributable to noncontrolling interest      654         370         525         183    
Net income (loss) attributable to common stockholders $   8,538     $   12,331     $   (4,255 )   $   5,557    
Net income (loss) attributable to common stockholders per share                                
Basic and Diluted $   0.23     $   0.33     $   (0.11 )   $   0.15    
Weighted average shares used in computing per share amounts:                                
Basic     37,559,999         37,096,480         37,496,747         37,396,081    
Diluted      37,680,879         37,160,829         37,496,747         37,599,930    

          

K12 INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
  Six Months Ended December 31,
    2015       2014  
  (In thousands)
Cash flows from operating activities      
Net (loss) income $   (4,780 )   $   5,374  
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
     
Depreciation and amortization expense      33,035         34,509  
Stock-based compensation expense      9,541         8,969  
Excess tax benefit from stock-based compensation      (6 )       (7 )
Deferred income taxes      5,745         5,203  
Provision for doubtful accounts      2,766         836  
Provision for excess and obsolete inventory      456         459  
Benefit for student computer shrinkage and obsolescence      (389 )       (226 )
Expensed leased computer peripherals     1,995         -  
Changes in assets and liabilities:      
Accounts receivable      (44,104 )       (72,415 )
Inventories      11,257         13,856  
Prepaid expenses      (9,812 )       (4,255 )
Other current assets      (228 )       (3,558 )
Deposits and other assets      (42 )       (466 )
Accounts payable      (13,059 )       (14,377 )
Accrued liabilities      (2,063 )       (10,683 )
Accrued compensation and benefits      (9,488 )       1,684  
Deferred revenue      32,156         39,630  
Deferred rent and other liabilities     (31 )       2,476  
Net cash provided by operating activities      12,949         7,009  
Cash flows from investing activities              
Purchase of property and equipment     (2,024 )       (6,687 )
Capitalized software development costs     (16,925 )       (17,093 )
Capitalized curriculum development costs      (6,867 )       (7,267 )
Investment in LearnBop, Inc.     -         (6,512 )
Net cash used in investing activities      (25,816 )       (37,559 )
Cash flows from financing activities              
Repayments on capital lease obligations      (9,370 )       (11,487 )
Purchase of treasury stock     -         (26,452 )
Proceeds from exercise of stock options      14         161  
Excess tax benefit from stock-based compensation      6         7  
Retirement of restricted stock for income tax withholding     (2,340 )       (1,468 )
Net cash used in financing activities      (11,690 )       (39,239 )
Effect of foreign exchange rate changes on cash and cash equivalents     (18 )       (2,086 )
Net change in cash and cash equivalents      (24,575 )       (71,875 )
Cash and cash equivalents, beginning of period     195,852         196,109  
Cash and cash equivalents, end of period $   171,277     $   124,234  
               

 

Non-GAAP Financial Measures

EBITDA

EBITDA consists of net income (loss), plus net interest expense, plus income tax expense, minus income tax benefit, plus depreciation and amortization and non-controlling interest charges. Interest expense primarily consists of interest expense for capital leases. We use EBITDA in addition to income (loss) from operations and net income (loss) as a measure of operating performance. However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net income (loss) as determined in accordance with GAAP. Not all companies use identical calculations for EBITDA, therefore our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management's discretionary use, as it does not consider certain cash requirements such as capital expenditures, tax payments, interest payments, or other working capital.

We believe EBITDA is useful to an investor in evaluating our operating performance because it is 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 EBITDA:

  • as an additional measurement of operating performance because it assists us in comparing our performance on a consistent basis; and
  • 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.

The following tables provide a reconciliation of net income (loss) to EBITDA.

    Three Months Ended December 31,    Six Months Ended December 31, 
      2015     2014       2015     2014  
    (In thousands)   (In thousands)
Net income (loss) — K12 Inc.    $   8,538   $   12,331     $   (4,255 ) $   5,557  
Interest expense (income), net        190       (151 )       495       (182 )
Income tax expense (benefit)        6,653       8,663         (1,444 )     2,125  
Depreciation and amortization        16,474       17,628         33,036       34,509  
Noncontrolling interest        (654 )     (370 )       (525 )     (183 )
EBITDA    $   31,201   $   38,101     $   27,307   $   41,826  
                             

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 more than four million courses over the past decade. K12 is a company of educators with the nation's largest network of K-12 online school teachers, providing instruction, academic services, and learning solutions to public schools and districts, traditional classrooms, blended school programs, and directly to families. The K12 program is offered through K12 partner public schools in 33 states and the District of Columbia, 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.

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

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