Press release

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

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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
(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 23, 2019 at
8:00 p.m. ET through May 23, 2019 at 8:00 p.m. ET, at (877) 660-6853
(domestic) or (201) 612-7415 (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.