K12 Inc. Reports Second Quarter Fiscal 2012 Results

K12 Inc. (NYSE: LRN), a leading provider of proprietary, technology-based curriculum, software and education services creating individualized learning for students primarily in kindergarten through 12th grade, today announced its results for the second fiscal quarter ended December 31, 2011.

Summary Financial Results

• Revenues for second quarter FY 2012 grew to $166.5 million, an increase of $37.5 million or 29.1 percent over the prior year, due to organic revenue growth in our core business of providing curriculum, technology and management services to K-12 schools and to acquisitions completed in the past year. These acquisitions include the American Education Company, International School of Berne and certain K-12 assets of Kaplan Virtual Education (“KVE”), which together added $10.4 million of the growth. Revenue was negatively impacted in the period by adjustments related to potential state funding reductions totaling over $8 million.
• EBITDA for second quarter FY 2012 (see reconciliation below) was $21.8 million, a decrease of $2.5 million or 10.3 percent as compared to $24.3 million for the prior year, reflecting the noted revenue adjustments and increased instructional and general and administrative expenses to support the growth in the core business. The primary drivers of this increase in instructional and general and administrative expenses were: personnel costs, including salaries, benefits and incentive compensation, and professional fees including student support center costs, and the ERP and CRM implementations. The professional fees increases were partially offset by lower transaction and merger integration expenses in the quarter. The capitalization rate of spending on infrastructure, product development and software development was lower this period due to timing and nature of the projects, resulting in higher current period expense.
• Operating income was $7.1 million, a decrease of $7.1 million or 50.0 percent as compared to $14.2 million for the prior year, reflecting the factors described above plus an increase of $4.6 million in depreciation and amortization due to new product launches, new system implementations, systems releases, and transaction related purchase accounting.
• Net income to common and Series A shareholders was $4.2 million as compared to $7.8 million in the prior year, a decrease of 46.2 percent, reflecting the factors described above. The decrease in net income was primarily attributable to increased instructional costs, general and administrative costs and product development costs offsetting the increase in revenues year over year.
• Diluted earnings per share were $0.11 as compared to $0.23 in the prior year.

Review of Significant Business Activities

Ron Packard, Chief Executive Officer of K12 Inc., commented: “Despite some challenges in the quarter, we saw healthy growth in revenue of almost 30 percent across our business with most of it being organic and the performance of our new initiatives. We are pleased that we did not let the acquisitions distract us and our core business continues to perform well and grow rapidly. K12 remains undeterred in its mission of maximizing a child’s potential regardless of circumstance. We continue to build great curriculum and manage schools while building the infrastructure necessary to scale.”

• We are delighted to serve so many more children as our average full time enrollment for the second quarter 2012 has grown from approximately 98,300 students to over 143,900 students in our three main business groups in the past year (see table).
• The Washington State Board of Education conferred upon the Washington Virtual Academies a prestigious 2011 Washington Achievement Award.
• Our private school business, which now serves students in 85 countries, is growing steadily, particularly our K12 International Academy and Keystone Schools.
• One year ago, we made an investment in Web International English, a private-pay English language learning company in China. Since then, Web’s performance has been strong and it has expanded to 103 learning centers in 53 cities.

Mr. Packard concluded, “Looking ahead to the remainder of fiscal year 2012, we are encouraged by the strong growth this year in every part of our business and maintain a positive outlook for the remainder of fiscal year 2012.”