K12 Inc. Reports Third Quarter Fiscal 2019 with Revenues of $253.3 Million

HERNDON, Va.--(BUSINESS WIRE)--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, 2019.

Financial Highlights for the Three Months Ended March 31, 2019 (Third Quarter Fiscal Year 2019)

• Revenues of $253.3 million, compared to revenues of $232.9 million in the third quarter of FY 2018.
• Operating income of $23.3 million, compared to $19.7 million in the third quarter of FY 2018.
• Net income attributable to common stockholders of $18.5 million, compared to $13.1 million in the third quarter of FY 2018.
• Diluted net income attributable to common stockholders per share of $0.44, compared to $0.32 in the third quarter of FY 2018.

To supplement our financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP), we are also presenting adjusted operating income (loss) and adjusted EBITDA. Management believes that these additional metrics provide useful information to our investors as an indicator of performance because they exclude stock-based compensation expenses. Non-GAAP Financial Highlights for the three months ended March 31, 2019 (Third Quarter Fiscal Year 2019) are as follows:

• Adjusted operating income of $27.2 million, compared to $24.3 million in the third quarter of FY 2018.
• Adjusted EBITDA of $44.3 million, compared to adjusted EBITDA of $42.7 million in the third quarter of FY 2018.

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

Financial Highlights for the Nine Months Ended March 31, 2019 (Year-to-Date Fiscal 2019)

• Revenues of $759.4 million, compared to $678.9 million for the first nine months of FY 2018.
• Operating income of $42.8 million, compared to $15.7 million for the first nine months of FY 2018.
• Net income attributable to common stockholders of $33.9 million, compared to $18.3 million for the first nine months of FY 2018.
• Diluted net income attributable to common stockholders per share of $0.84, compared to $0.45 for the first nine months of FY 2018.

Non-GAAP Financial Highlights for the Nine Months Ended March 31, 2019 (Year-to-Date Fiscal 2019) are as follows:

• Adjusted operating income of $54.9 million, compared to $30.5 million for the first nine months of FY 2018.
• Adjusted EBITDA of $108.2 million, compared to $88.1 million for the first nine months of FY 2018.

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

Liquidity

As of March 31, 2019, the Company had cash, cash equivalents, and restricted cash of $236.0 million, an increase of $2.9 million compared to $233.1 million reported at June 30, 2018. On a year-over-year basis, cash, cash equivalents, and restricted cash increased $8.1 million compared to March 31, 2018.

Capital Expenditures

Capital expenditures for the nine months ended March 31, 2019 were $36.7 million, an increase of $3.4 million from the prior year’s first nine months, and was comprised of:

• $2.4 million for property and equipment,
• $20.6 million for capitalized software development, and
• $13.7 million for capitalized curriculum development.

Revenue and Enrollment Data

Revenue

The Company’s lines of business are: Managed Public School Programs (programs which offer an integrated package of systems, services, products, and professional expertise that K12 manages to support an online or blended public school, including administrative support, information technology, academic support services, online curriculum, learning system platforms, and instructional services), Institutional (Non-managed Public School Programs – programs which provide instruction, curriculum, supplemental courses, marketing, enrollment and other educational services where K12 does not provide primary administrative support services 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 the Company 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 2019 / 2018					Nine Months Ended March 31,				Change 2019 / 2018
	2019		2018		$			%		2019		2018		$			%
	(In thousands, except percentages)
Managed Public School Programs	$	222,645	$	200,580	$	22,065		11.0	%	$	665,981	$	572,478	$	93,503		16.3	%
Institutional
Non-managed Public School Programs		12,776		13,250		(474	)	-3.6	%		37,398		44,401		(7,003	)	-15.8	%
Institutional Software & Services		8,530		9,605		(1,075	)	-11.2	%		29,515		34,500		(4,985	)	-14.4	%
Total Institutional		21,306		22,855		(1,549	)	-6.8	%		66,913		78,901		(11,988	)	-15.2	%
Private Pay Schools and Other		9,301		9,429		(128	)	-1.4	%		26,544		27,481		(937	)	-3.4	%
Total Revenues	$	253,252	$	232,864	$	20,388		8.8	%	$	759,438	$	678,860	$	80,578		11.9	%

Enrollment Data

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

	Three Months Ended March 31,		2019 / 2018			Nine Months Ended March 31,		2019 / 2018
	2019	2018	Change	Change %		2019	2018	Change		Change %
	(In thousands, except percentages)
Managed Public School Programs (1,2)	117.1	110.8	6.3	5.7	%	117.0	109.8	7.2		6.6	%
Non-managed Public School Programs (1)	24.5	24.3	0.2	0.8	%	24.0	24.1	(0.1	)	-0.4	%

(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 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 period indicated.

	Three Months Ended				Change				Nine Months Ended				Change
	March 31,				2019 / 2018				March 31,				2019 / 2018
	2019		2018		$		%		2019		2018		$		%
Managed Public School Programs	$	1,901	$	1,810	91		5.0	%	$	5,692	$	5,214	478		9.2	%
Non-managed Public School Programs		521		545	(24	)	-4.4	%		1,558		1,842	(284	)	-15.4	%

Outlook

The Company is reaffirming, and tightening, the forecast for the full year, fiscal 2019

• Revenue in the range of $1,005.0 million to $1,010.0 million.
• Adjusted operating income in the range of $58.0 million to $60.0 million. (3)
• Capital expenditures of $47.0 million to $50.0 million. Note: Capital expenditures include the purchase of property and equipment, and capitalized software and curriculum development costs as presented in our Statements of Cash Flows.

(3)	In addition to providing guidance on revenue and capital expenditures, adjusted operating income is provided as a supplemental non-GAAP financial measure as management believes that it provides useful information to our investors.

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 a sufficient level of new enrollments to sustain our business model; failure to enter into new managed school contracts or renew existing contracts, in part or in their entirety; failure of the schools we serve or us to comply with federal, state and local regulations, resulting in a loss of funding, an obligation to repay funds previously received or contractual remedies; governmental investigations that could result in fines, penalties, settlements, or injunctive relief; declines or variations in academic performance outcomes of the students and schools we serve as curriculum standards, testing programs and state accountability metrics evolve; harm to our reputation resulting from poor performance or misconduct by operators or us in any school in our industry and/or in any school in which we operate; legal and regulatory challenges from opponents of virtual public education 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; entry of new competitors with superior technologies and lower prices; 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; 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, 2019, 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 2019 financial results during a conference call scheduled for Tuesday, April 23, 2019 at 5:00 p.m. eastern time (ET).

The conference call will be webcast and available at http://public.viavid.com/index.php?id=133286. 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 [phone] (domestic) or [phone] (international) at 4:45 p.m. (ET). No passcode is required.

A replay of the call will be available starting on April 23, 2019 at 8:00 p.m. ET through May 23, 2019 at 8:00 p.m. ET, at [phone] (domestic) or [phone] (international) using conference ID 13687637. A webcast replay of the call will be available at http://public.viavid.com/index.php?id=133286 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, 2019, and are presented below without footnotes. Readers are encouraged to obtain and carefully review K12 Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, including all financial statements contained therein and the footnotes thereto, filed with the SEC, which 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,			June 30,
	2019			2018
				(audited)
	(In thousands except share and per share data)
ASSETS
Current assets
Cash and cash equivalents	$	234,025		$	231,113
Accounts receivable, net of allowance of $9,008 and $12,384 at March 31, 2019 and June 30, 2018, respectively		238,614			176,319
Inventories, net		17,195			31,134
Prepaid expenses		17,958			10,278
Other current assets		14,181			10,388
Total current assets		521,973			459,232
Property and equipment, net		32,778			28,868
Capitalized software, net		51,693			55,488
Capitalized curriculum development costs, net		51,160			53,558
Intangible assets, net		15,723			17,951
Goodwill		90,197			90,197
Deposits and other assets		45,486			36,669
Total assets	$	809,010		$	741,963
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations	$	24,499		$	13,353
Accounts payable		23,208			29,362
Accrued liabilities		17,706			14,345
Accrued compensation and benefits		30,549			36,050
Deferred revenue		52,827			23,114
Total current liabilities		148,789			116,224
Capital lease obligations, net of current portion		6,698			12,665
Deferred rent, net of current portion		2,524			3,270
Deferred tax liability		18,211			12,577
Other long-term liabilities		8,048			10,038
Total liabilities		184,270			154,774
Commitments and contingencies		—			—
Stockholders’ equity
Common stock, par value $0.0001; 100,000,000 shares authorized; 45,542,026 and 44,902,567 shares issued; and 40,207,283 and 39,567,824 shares outstanding at March 31, 2019 and June 30, 2018, respectively		4			4
Additional paid-in capital		708,269			703,351
Accumulated other comprehensive loss		(181	)		(252	)
Retained earnings (accumulated deficit)		19,130			(13,432	)
Treasury stock of 5,334,743 shares at cost at March 31, 2019 and June 30, 2018		(102,482	)		(102,482	)
Total stockholders’ equity		624,740			587,189
Total liabilities and stockholders' equity	$	809,010		$	741,963

K12 INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	Three Months Ended March 31,						Nine Months Ended March 31,
	2019			2018			2019			2018
	(In thousands except share and per share data)
Revenues	$	253,252		$	232,864		$	759,438		$	678,860
Cost and expenses
Instructional costs and services		168,260			148,878			487,574			435,408
Selling, administrative, and other operating expenses		59,382			62,267			222,143			220,507
Product development expenses		2,343			2,002			6,916			7,276
Total costs and expenses		229,985			213,147			716,633			663,191
Income from operations		23,267			19,717			42,805			15,669
Interest income, net		754			261			1,547			535
Other income (expense), net		556			—			(40	)		—
Income before income taxes, loss from equity method investments and noncontrolling interest		24,577			19,978			44,312			16,204
Income tax benefit (expense)		(5,842	)		(6,935	)		(9,858	)		1,869
Loss from equity method investments		(273	)		—			(562	)		—
Net income		18,462			13,043			33,892			18,073
Add net loss attributable to noncontrolling interest		—			27			—			200
Net income attributable to common stockholders	$	18,462		$	13,070		$	33,892		$	18,273
Net income attributable to common stockholders per share:
Basic	$	0.47		$	0.33		$	0.87		$	0.46
Diluted	$	0.44		$	0.32		$	0.84		$	0.45
Weighted average shares used in computing per share amounts:
Basic		39,008,990			39,644,074			38,753,236			39,366,497
Diluted		41,753,323			40,766,203			40,548,959			40,771,437

K12 INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	Nine Months Ended March 31,
	2019			2018
	(In thousands)
Cash flows from operating activities
Net income	$	33,892		$	18,073
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		53,259			57,612
Stock-based compensation expense		12,114			14,853
Deferred income taxes		5,327			(4,978	)
Provision for doubtful accounts		2,854			605
Other		5,291			4,757
Changes in assets and liabilities:
Accounts receivable		(65,147	)		(16,220	)
Inventories, prepaid expenses, deposits and other current and long-term assets		4,620			(24,138	)
Accounts payable		(3,134	)		(9,215	)
Accrued liabilities		5,211			(7,364	)
Accrued compensation and benefits		(5,501	)		111
Deferred revenue, rent and other liabilities		24,510			21,134
Net cash provided by operating activities		73,296			55,230
Cash flows from investing activities
Purchase of property and equipment		(2,397	)		(6,580	)
Capitalized software development costs		(20,580	)		(18,852	)
Capitalized curriculum development costs		(13,746	)		(7,770	)
Sale of long-lived assets		389			—
Acquisitions and investments		(11,652	)		(3,274	)
Net cash used in investing activities		(47,986	)		(36,476	)
Cash flows from financing activities
Repayments on capital lease obligations		(13,898	)		(10,313	)
Payments of contingent consideration		(1,027	)		(1,819	)
Proceeds from exercise of stock options		2,183			184
Repurchase of restricted stock for income tax withholding		(9,656	)		(9,763	)
Net cash used in financing activities		(22,398	)		(21,711	)
Net change in cash, cash equivalents and restricted cash		2,912			(2,957	)
Cash, cash equivalents and restricted cash, beginning of period		233,113			230,864
Cash, cash equivalents and restricted cash, end of period	$	236,025		$	227,907
Reconciliation of cash, cash equivalents and restricted cash to balance sheet as of March 31st:
Cash and cash equivalents	$	234,025		$	227,907
Deposits and other assets (restricted cash)		2,000			—
Total cash, cash equivalents and restricted cash	$	236,025		$	227,907

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with 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 income (loss) from operations as adjusted for stock-based compensation and depreciation and amortization.
• 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 financial 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 additional measures of operating performance because they assist 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 review the same measures used by management to compare our current operating results with corresponding prior periods.

Other companies may define these non-GAAP financial measures differently and, as a result, our use of these non-GAAP financial measures may not be directly comparable to adjusted EBITDA and adjusted operating income (loss) used by other companies. Although we use these non-GAAP financial measures to assess the performance of our business, the use of non-GAAP financial measures is limited as they include and/or do not include certain items not included and/or included in the most directly comparable GAAP financial 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 financial 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,
	2019		2018		2019		2018
	(In thousands)
Income from operations		23,267		19,717		42,805		15,669
Stock-based compensation expense		3,950		4,557		12,114		14,853
Adjusted operating income		27,217		24,274		54,919		30,522
Depreciation and amortization		17,038		18,426		53,259		57,612
Adjusted EBITDA	$	44,255	$	42,700	$	108,178	$	88,134

About K12 Inc.

K12 Inc. (NYSE: LRN) takes a personalized approach to education by removing barriers to learning, reaching students where they are, and providing innovative, high-quality online and blended education solutions, curriculum, and programs to charter schools, public school districts, private schools, and families. In total, this work serves more than 70 public and private schools, more than 2,000 school districts, and students in all 50 states and more than 100 countries. The company, which has delivered millions of courses over the past decade, is taking a leadership role in career readiness education through K12-powered Destinations Career Academies and Programs which combine traditional high school academics with Career Technical Education (CTE). K12 is a proud sponsor of the Foundation for Blended and Online Learning, a nonprofit organization dedicated to closing the gap between the pace of technology in daily life and the pace of change in education. More information can be found at K12.com, destinationsacademy.com, jobshadowweek.com, and getfueled.com.