Greetings and welcome to K12 Fiscal 2015 Fourth Quarter and Year End Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Mike Kraft. Thank you, you may now begin.

Thank you and good morning. Welcome to K12’s fourth quarter earnings conference call for fiscal year 2015. 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, made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and 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 operating performance and results, please refer to our reports filed with the SEC, including, without limitation, cautionary statements in K12’s 2014 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; Tim Murray, President and Chief Operating Officer; and James Rhyu, Chief Financial Officer. Following our prepared remarks we will answer any questions you may have. I’d like to now turn the call over to Nate. Nate?

Thank you, Mike and good morning everyone. Thanks for joining us on the call today. I am pleased to report that K12 ended fiscal year 2015 with solid financial results, both for the quarter and for the full year. Excluding certain charges recorded in the quarter that James will review with you later we slightly exceed our guidance for both revenue and operating income. Revenue for the year was $948.3 million, up 5.1% year-over-year. We recorded revenue growth in managed public school programs despite a slight decline in enrollment. We posted strong double-digit revenue growth in the non-managed public school programs and importantly these non-managed programs produced consistent double-digit revenue growth each quarter this year. This is a testament to the strength of that business and to the underlying industry trends. In addition we delivered solid double-digit gains in our international and private pay schools as well as institutional software and services. Operating income for the year, excluding the charges recorded in the fourth quarter was $43.7 million, down 19.9% year-over-year. This decline was a result of our ongoing commitment to investments we believe will deliver us better academic gain. These investments include hiring more teachers with better training and professional development and implementing student and family support programs that focus on improving academic results. Capital expenditures were $76.5 million for the year. The majority of that went toward upgrading software and curriculum to improve the student online learning experience. Notably we produced $46.5 million in free cash flow and ended the year with nearly $200 million in cash on our balance sheet. These results are precisely in line with the guidance we provided last fall, performance in the quarter and for the full year consistently met or even beat the guidance we provided. Now let me turn to some…

Thank you, Nate and good morning everybody. As you saw on our press release we reported net income for the year of $11 million. Included in this were $28.4 million of charges that I am going to describe in more detail. But I wanted to point out that they are not part of core operations for the fiscal year 2015. Excluding those charges we would have reported net income of $29.4 million and operating income of $43.7 million. Let me start by giving you some color on the $28.4 million of charges. We had a lot [ph] of things happen in Q4 that precipitated these charges. First we’d invested in previous years in our UK curriculum that we realize is not going to give us the return we wanted. So we sunset that, along with some other product as we switched to our new LMS. This resulted in a charge of approximately $3.1 million. Second, we made some decisions with regard to the computers and related peripherals that are distributed during enrollment season. Some of the equipment has changed and we are no longer going to distribute or refurbish certain devices and we therefore decided we needed to write-off approximately $6.4 million of inventory. Third, in an effort to improve some operational processes we will no longer be using some older internal software that was developed years ago and never reached its proper potential. So we are going to write-off approximately $4.8 million of those assets. Fourth we updated our estimate of the collectability of some of our receivables and we have recorded a charge of $10.7 million associated with schools that closed this year and could not pay us, a funding issue in one state from a couple of year ago that we are trying to work through with…

Thanks James. I think that we are finished with our prepared remarks so we can move into Q&A David.

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Corey Greendale from First Analysis

Hi good morning.

Good morning Corey.

So congratulations on the progress during the year. I just had a few questions. So first I have to ask -- I know you are going to give the guidance later this fall but any indications you can give on kind of how the managed and non-managed enrollment is trending relative to this time last year?

It's always interesting, the questions you've asked me weighs, and I appreciate you asking, Corey. We're pleased with the results but it would be inappropriate for me to give any kind of indications where we are going. I can only say that we think the new marketing program is working. It's certainly is a different kind of program. It expects fewer lead but greater ability to convert students and students are going to stay longer and so far we're seeing the things that we wanted to see, but it's still in the middle of the season and so it’s hard to predict where we will end up for the full year.

Okay. I had to try you -- met my expectations on what you could say now but let me -- I think you can probably more directly address. So on the institutional software and services business James, you gave a growth number that first of all I missed and second of all sounded like it was higher than the reported numbers. Were you excluding divested business in the year ago number?

Yes. It excludes the divested businesses in the year ago, that's correct. And just to reiterate if you didn’t hear it. My comments included revenues for institutional software and services of $13.1 million for the quarter, fourth quarter and $48.8 million for the year.

Okay. And you said it was up 10%?

10% for the quarter and 9% for the year.

So that is good growth but it's decelerated, I think last quarter was up more than 30% ex-divested business, could you just talk about the moving pieces there?

Yeah. You will remember last quarter, the year-over-year comp was very soft. So last fiscal year ‘14, Q3 had institutional business at around $12 million and which was sort of the lowest level we had for the year.

Okay. And then just again not asking for guidance here, but I saw some data recently that suggested overall schools spending on instructional materials was up 9% this year. So you said nice -- recovering nicely. So if can you just talk generally about kind of where your long term thoughts are on the growth rate of that business, and whether you expect to grow above market growth rates or inline?

Tim is here and so Tim is managing that business. I’m going to let Tim answer that and I’ll chime in as well. Go ahead Tim.

Hey, Corey, we're seeing the same things you are in terms of improved environment for spending and particular increases spending in the digital environment. Our goal is to grow faster than the industry. So to take share in this market as we look at our current pipeline, our pipeline is up well over where we work at this time last year, especially for new customer opportunities. So we're very, very comfortable about how the market is developing here and our position in that.

And you must be using a skilled sales force for inside sales and can you talk about just the size of your sales force relative to this time last year?

I don't want to give you specific numbers for competitive reasons but for our sales force is about the same size as last year. Think of this being two-thirds external sales people, feet on the street one-third inside sales, relatively small but long standing footprint with a couple of independent re-sellers who have been with us for long time. Our productivity -- most of our growth this year has been achieved through increases in growth -- in sales productivity as opposed to increases in sales force.

And is that more driven by process or sales force maturity or by product set being larger.

I think in particular, these last couple of quarters we've really focused on entire sales process, sales management system. So I would say we had benefit of tenure. Our sales force has matured. Although many of our sales people have been with us good number of years and have a great amount of experience in this industry. So it’s both tenure as well as sales process and sales execution.

And Corey, this is Nate speaking. I had asked Tim to focus on making sure that we grew the productivity of the sales force and once we saw that we would be able to expand it. So just this year we're going into FY ‘16, we are going to explain sales force by about 20% based upon the fact that I've now seen us improve the sales productivity. So I think we are going to more and more markets and we're trying to do that with a greater sales force. So we are increasing the size this year.

Okay. And I hope you don’t mind my spending a little bit of time on this business, because I think it’s an interesting one. So with that in mind do you need to have the sales people in place, sales people you hire starting now will they more impact fiscal ’17, because of the timing of the selling season or could they still impact '16.

Yes, for the most part they are going to impact fiscal year '17, by the time they're trained and they go through the bookings. But remember that the sales for the next fiscal year will primarily happen in the second half of this fiscal year. So sales activity that impacts '17 will all happened in the spring. That’s when schools are making decisions. They're little bit into the summer but primarily in the spring. So we have to get the folks onboard now to be able to impact that sales selling season.

Okay. I'm going to ask one more now and then I'll jump back in the queue if my other questions don't get answered. My other question is I guess I'll ask James, can you just talk a little bit about how the mix shift, which I think will be just given what's happened with Agora are more pronounced potentially next year. What that does to your CapEx relative to your -- I'm assuming that some of these other businesses are less capital intensive because of computer purchases in the managed school business. But can you just confirm whether that's right and directionally talk about what happens to CapEx as the mix shifts.

Yeah so, let me try to address it in a couple of ways for you Corey. First of all, Agora specifically doesn’t change really our sort of capital expenditure make up significantly. It will have some impact but it's not really that dramatic. Secondly is the investments that we're making, which are sort of multi-investments in the neighborhood to one of the big ones which is really the desire to [indiscernible] rolling up a high-school now. We're going to migrate sort of middle-school and then elementary school in the coming years. So those investments are sort of multi-year investments. I don't think that at least for the next year, while we we're not giving guidance yet for the next year and we haven't sort of finalized our guidance for next year around CapEx. I wouldn't see a dramatic shift. We've seen now about three or four years of pretty consistent CapEx. I would expect that to be in that similar range in the coming year.

Thanks. I will get back in the queue.

Thanks.

Thanks Corey. Good to talk to you.

Our next question is from Jeff Silber from BMO Capital Markets.

Hey good morning guys. It's Henry Chien calling in for Jeff. Can you talk a little bit more about the marketing program? You mentioned what sort of the changes and what kind of, I guess new type of students that you're looking for. I'm just trying to get a sense of how that also impacts your enrollment growth.

Yeah, that's an important question. And I'll be as specific as I can but without giving all my competitors who jump on our calls and listen in. Our focus has been to try to move to more digital communication, more social media, more viral communication with respect to customers, number one. And number two to make sure that they have a chance to understand what they're getting into early and earlier in the season. So the more they understand the program, the more they understand the work that's required to have us take them as a student, the better chance they're going to have when they walk on. In addition, our marketing programs try to focus on not just helping them get into the Q4, the coming enrollment but also helping them make it through the queue faster meaning there is more self-enrollment process there instead of us always calling somebody and talking to them on the phone. We give them a chance to button a basic enroll now, give them a chance to go through a self-enrollment process, processes documents faster, makes the entire process simpler. That's part of what we do as well. And then lastly we try to have a very strong admission toward the end of marketing process beginning of the school operations process, a very strong what we called strong start process, which helps the students and the parents as they migrate from being an enrollment -- that did the enrollment online to actually get all their material, getting the tuitions setup getting their courses setup. So what that happened early and getting introduced to the teachers earlier. So that entire process, from how we reach them through our marketing program and by the way the last thing is the messaging. You are probably seeing a net set of commercials centering around the campaign that we called Uniquely Brilliant, communicating with parents that this program is all about the individuality of your student, it's not my sitting in the classroom of verified students and everybody is at same page. This is really is about your child’s unique speed. And so those messages are in our marketing campaign as well. So how we've reach them, the message that we deliver and how we get them enrolled is all our part of the new programs we introduce.

Got it. Okay, thanks for the color. So I mean just looking at the managed program enrollment looks like the year-over-year declines are improving organic [indiscernible] pretty nicely. I mean just trying to understand what was the Agora impact. Can we still, without giving explicit guidance are we sort of nearing the potentially turning around for growth maybe in ‘17 in the managed program enrollment?

I am not sure I got all of your question but I think you are asking when Agora goes out of the program are we seeing potentially growth cycle in managed public schools, is that what you’re asking?

Yes, exactly.

So again without giving guidance, I would say one of the reasons I mentioned a number of states that are coming on and some of the activity we’re seeing, states like Alabama, a bill that’s passed Virginia that just now has to go through the funding process, we see some trials in New Jersey, we are seeing Connecticut begin to open up a little bit, North Carolina of course is now on. So the answer to your question is we’re seeing more states, we’re also seeing more schools within existing states. We haven’t talked a lot about our career readiness program, career readiness program gets kind of another curriculum that students we think will benefit from. So all of those things together make us optimistic about the future. It’s difficult for me to tell you that there is going to be a specific amount of growth in FY ‘17 but you can see I think from the tone of my comments and from the specific states, I mentioned that we’re optimistic about the kind of growth that can happen in this industry, demand is there.

Got it, okay. And if you could just last question, could you touch a little bit upon your revenue students have increased in impart, I know you mentioned in the past of basically or essentially a positive or favorable funding environment, can you talk a little bit about what your kind of expectations are for ‘16 on that front from the funding side?

Yes, I will remind you that some of the funding increases come along with the expenditure commitment. So states might increase funding for specific programs like they want you to put more money into teaching or they want you to put more money in the areas but that notwithstanding we do see a continually strong economy and when the economy is strong one of the things that all communities ask for is let’s put the money into education. Every politician stands up and says let’s put more money in education. So we think that the public schools as well as the charter schools benefit from a stronger funding environment. So we continue to see a positive funding environment. It may not be as strong as the 6% we saw this year but overall we definitely see a strong funding environment.

Okay, thanks for the color.

[Operator Instructions]. Our next question comes from Chris Gasser from Faircore Valuation [ph].

Good morning. The first question relates to the charges that you took in the fourth quarter for the reserves and write-downs related to end of life products and a reserve for the accounts receivable. Would you consider these to be very unusual types of charges or are these the types of charges that you would expect to take from time to time on an ongoing basis because of the nature of the business that you are in?

So I think we evaluate every period, every quarter sort of say our [ph] balance sheet generically all of our asset classes. The accounting rules sort of help dictate when we would takes charges. The nature of those two charges for this quarter, the receivable pieces of it were pretty unusual. I won’t comment on these actual frequency but we really haven’t seen these types of receivable write-downs in a long time that I am aware of. So dating back to prior of my joining the company. So I don’t really think that these are, certainly not common events. We don’t really see we think that the quality of our receivable is very high. We actually have some very unusual circumstances. One of the biggest components of this actually relates to an event that happened back in 2013, with this particular state that they had a certain funding snafu. So certainly don’t see those as being things that we see happen very often. On the asset write-down pieces of it we evaluate the longevity of our curriculum. In general what we’ve seen is we depreciate or amortize our assets over what we think is an appropriate of time, meaning as we amortize them they get fully written off sort of in the time that we use them and we don’t see a lot of these type of charges. So again, while I won’t comment on the frequency of them we certainly don’t think that these are things that -- they are not happening all the time and we try to manage our balance sheet and sort of the asset light say as per their useful life but we start to do the property accounting determinations every period.

Well, let me ask a more general question. With advances in technology in general has it been your experience that the actual economic or useful life of your software products is greater or less than what you originally anticipate when you start your depreciation schedules?

So I think in general we find that they’re greater and general speaking, I’d say substantially greater but we tend to -- I’ll give you the best example actually, which is something that we’re changing over but the LMS that we invested in probably aborted 10 or 12 years ago which we continue to develop and maintain et cetera over the course of those years, is something that we continue to use today. So probably one of our singular biggest investment on curriculum, which again we started investing in over 10 years ago. Much of that curriculum and many of those assets we continue to use this day even though they are depreciated. So…

Chris one of the things that -- and James is 100% right. I believe that if we look at all of the assets we have in place they have actually lasted longer generally in the periods that we depreciated them. But one of the things that happens with every company is when you start new technology approaches which the company started several years ago, and then we decided to go different directions. The main direction change that we’ve made was decided we would lease or license more content and more especially more technology then we build ourselves. We weren’t sure that is going to work and so we continued a set of software that we’re using until we got the desired learn implementation process. Once that went in place some of the programs that we have started some years ago, we didn’t really need anymore. And so that was an event that occurred, once we actually started using the desired learn implementation. So some things are driven by the change we made and actually the changes started its implementation in this quarter.

Not to get too far on the details but I'm somewhat curious when you set up a depreciation and amortization schedule for curriculum, do you make a distinction between let’s say the curriculum for math, which would not likely change very much from year-to-year, or even for long periods of time versus other curriculums that would require significant revisions on short term basis such as computer technology those types of cases?

Sure, I think the short answer to your question is yes we do try to track at a reasonably -- project type of level. In your specific example it’s not we don’t really have just I’d say one math. We do stay customization and things like that in order of scope in sequencing differently, so we invest in things that’s it’s probably a little less of a straight forward than a simple, first year’s a simple math of course, so we sort of look at that project level basis and track it that way.

Okay, but some [indiscernible] you would say then that you guys spend a fair amount of, let’s say time and effort in trying to come up with a depreciation or amortization schedule which you would take, would be as accurate as possible given?

Yes.

Given the circumstances.

Yes and it depends on not just the circumstances but the type of asset. So you mentioned computers, they have a much shorter life and different life than well math courses which will be a different life by the way than the technology we use to sell to public school districts, the PEAK platform form and the things we do there which would have a different life span. Some of the information we use for student information system. All of the systems each one is looked at on a very specific basis to say how long do we think this is going to last given the technologies in the market place, given technology changes we’re making.

Okay that would lead to my last question then related to your capital expenditures, do you have a budget that you’d be willing to share for the next fiscal year for property equipment, capitalized software, capitalized curriculum and where do you see the longer term trend in terms of the amount of money that you're going to need to remain competitive throughout in the business?

Chris, these are all great questions. I think the first piece of it is we don't yet -- we're not yet providing guidance for fiscal year '16. So we don't have any numbers for you, for that. Longer term, I think we have a belief that we're investing now over a certain cycle. And that longer term we do actually think the trends will go down. But we haven't provided any specific guidance on the timeframe of that longer term and how much sort of -- if we think it will go down, but yes we do think it will go down.

Why so?

Well because I think we have a certain set of investments that we're doing now and Nate referred to a couple of these in his remarks, pivoting to a new LMS is a big one. And that is fairly significant investment this year. It will continue into next year. And so I think we will as that sort of -- as that investment matures over the next year or two, that significant investment will actually come down. And we'll provide -- I think this is maybe the first time, at least in my experience, that you’ve come onto the call. So our normal cadence will be that we'll provide some greater guidance come October when we have enrollment numbers and at that point we'll give some better guidance around the OpEx as well.

Thank you very much.

You are welcome.

The follow-up question from Corey Greendale from First Analysis.

Hey, thanks for taking the follow-up. I'll just ask one quick follow-up which is you're continuing to generate cash nicely and Nate I heard you talk about inorganic and organic growth. It was about -- I think it still about a year ago you were repurchasing shares. Can you just talk about whether the repurchase is potentially on the table and just kind of how you're thinking about potential uses of cash?

Uses of cash will be share repurchases, dividends, CapEx, internal CapEx programs as well as obviously acquisitions. And I would say that we believe that there is opportunities in the inorganic market to acquire. We believe that investing in our own capital programs is the smart way to grow the business. We see a number of improvements we want to make in the business. And that would be the two places we would spend cash. We do not see at this point in time a need to do dividends or a need to do a share repurchase program. The Board always looks at these things every year. We have the conversation and then we decide, based on the time. Right now though the view is that it's more important to put this cash into the areas I just mentioned. So there are no plans for share repurchase on that basis.

Very helpful, thank you.

Any other questions David?

There are no more questions at this time. I like to turn the call back to Nate Davis for closing remarks.

I don't have much else to say I think it was a great set of questions. I appreciate everyone's time this morning. I would say this is probably a paid commercial massage to not just investors but to everybody else. I am really proud of the team on what they've accomplished this year. It's been a year in which we put a lot of effort into making sure that our culture is focused on students. And I hope the investors see that we are building the business for the long term, a business that is strong, fundamentally strong and sound in its underlying principles. And if you can see that I think you're going to see that we're continuing to get better and better. Thank you for your time and I appreciate you listening to us and have a great week.

This concludes today's… [Call Ends Abruptly].