Mike Kraft - VP, Investor Relations Nate Davis - Chief Executive Officer, Chairman Tim Murray - President, Chief Operating Officer James Rhyu - Chief Financial Officer.

Trace Urdan - Wells Fargo Securities Henry Chien - BMO Capital Markets Nick Nikitas - Robert W. Baird. Jason Anderson - Stifel Corey Greendale - First Analysis.

Greetings, and welcome to the K12 Fiscal 2015 First Quarter 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 sir you may began..

Thank you, and good morning. Welcome to K12's first quarter earnings 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 in 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 made 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 general accepted accounting principles in the U.S for 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 turn the call over to Nate.

Nate?.

Thank you, Mike. Good morning and thanks for joining us on the call today. First let me start by highlighting a few results for the quarter. Revenue was $236.7 million of [indiscernible] year-over-year and within the range of our most recent guidance. Excluding the businesses we sold last year, revenue rose 5.2% versus last year.

Revenue growth was largely driven by gains in our public school programs as well as our international and private based schools. For the last quarter, we posted operating loss of $13.2 million compared to an operating loss of $8.5 million in the prior year.

Operating losses in the first quarter relate to seasonality of SG&A cost at the beginning of the every school year, which is largely driven by enrollment center and promotional expenses.

Importantly, our release this morning provides more details on our new disclosure, including trends from the prior fiscal year for our Managed and Non-managed Programs, as well as our institutional software revenues. James Rhyu will be providing insight on our financials after Tim Murray provides highlight on operations.

Before hitting into more discussion about academics, I wanted to again reinforce K12’s direction for the year. First, I don’t want anyone to misinterpret our recent comments about this new category called Non-managed Programs.

Our core business is still managing online and blended public charter schools and we intend to remain focused on the quality of the education we provide, as well as growing these managed programs despite the near term shrinkage in enrollments.

We will also focus on business development and public efficacy required to gain access in new states and expand schools in existing states. This year we are focused on potential new schools in North Carolina and Maine as well as the potential for a second school in other state.

And finally supporting a new law in Tennessee that makes virtual charter schools a permanent fixture in that state. Second, you will see increased growth from our institutional business where we sell software, enrollment services and quiz catalogs to public school districts.

As we have mentioned in the past once we completed the minimization of perpetual license sales our growth in annual sales will become more clear. Unlike FY'14, you should now expect growth to come through this segment. Whether it’s a K12 managed or non-managed program our overall mission is to improve academic outcomes for all students we serve.

While our maniacal focus on the quality of education we provide has contributed to slower growth in our managed schools, we believe it will improve our corporate reputation and provide what our charter boards have asked of us. I'm very proud of my team and a turnaround is now happening in this area.

To build the best long term business we'll now have to work with the boards to strike the right balance between enrollments growth and maintain the quality of education we provide. We want to attract students who realize that this is hard work, whether they are advance learners or behind grade level and who want to succeed by putting in this work.

In this way we expect to not only improve the academic result but also reduce withdraw rates and improve the long term economics of the businesses we run. Now let me turn to the topic of academics and share some results that have just become available. Thus far, 21 of our schools have reported results representing 76% of our students.

These preliminary results show that after three years of relatively flat and even sometimes declining test course, students in many K12 managed schools have increased their proficiency in both reading and mathematics. Proficiency equates to a student’s percentage add or above a cut off score, on a state annual assessment test.

Keep in mind that these tests are state specific, and are administered to all public schools. The cut off scoring effect constitutes to states designated passing score on the test.

Despite continuing challenges with student mobility and despite many new students coming to our managed schools significantly below grade levels in reading and math, we saw a stable result in reading in an overall 5% point improvement in mathematics. In reading 70% of the students were proficient versus 69% to previous year.

In mathematics 52% were proficient versus 47% the prior year. And the math gains are especially encouraging for us as more than 50% of the students came to K12 last year below proficiency for their grade.

To put the 5 percentage point gain in math into perspective, nationwide proficiency gains were only 1% to 4% based on national assessment of educational progress testing.

In addition, when you look at schools in comparable districts, that would be the public schools with similar geographic areas and similar demographics improvements are even more apparent.

For instance, in our Louisiana Virtual Charter School or the LAVCA high school, test scores in English proficiency is 11 to 26 percentage points better than a comparable school district. A high school also outperformed state proficiency levels in English. In algebra, the LAVCA high schools improved proficiency from 47% to 50%.

And our 50% proficiency is 7 points better than the 43% for the comparable school district. The academic results put LAVCA in the top 6% of all these Louisiana charter schools and in the top 11% of all public schools across the state for growth. In our Georgia Cyber Academy or GCA we also saw similar positive trends.

GCA’s test course for reading outpaced the comparable city schools performance by 2 to 4 percentage point across Grades 3 to 8, the school has now steadily improved in its reading proficiency over the last three years and now stands at 95% proficiency. In fact GCA 6th Grade students even outpaced the state public school proficiency levels.

In mathematics, GCA has steadily improved proficiency increasing from 67% two years ago to 74% in the last school year. All these gains are tremendous, school still has to continue to improve to meet our own internal desired proficiency levels for all Grades.

Because state administrative test vary widely on the standards, students in K12 managed virtual academies also take Scantron performance series tests, in reading and mathematics for -- because we want a national comparison on gains. This testing is to measure the student gains over the school year.

For the 2013 to 2014 school year students in K12 virtual academies exceeded the national norm mean gain measured by Scantron in tests for both reading and mathematics, and they did it in all grades tested.

For reading in 2013 - '14 across grades three to 10, K12's student not only exceed the national norm group gain, but more than doubled it in Grade 6, 7 and 9. For math in the same school year across Grades 3 to 10 again, K12 students exceeded the national norm group gain more than doubling it in Grade 9.

These results are evidence that the investments we continue to make in our programs to focus on academic achievement, which we internal cost to disperse are beginning to bear fruit.

This program which was implemented 18 months ago is focused on curriculum, better student assessment, student empowerment programs, teacher tools and teaching approaches and other activities to enhance academic performance. The test results also showed a continuation in trends that we saw in the prior year.

Specifically K12’s partner schools continue to have a higher percentage of students that were eligible for free of these lunches compared to the national average. In fact 62% of our students are eligible for free or reduced price lunches compared to 49% nationally.

Again this is important because students were eligible for meal subsidies tend to academically underperform those who were not eligible. This is true across the nation.

When you have a high percentage of students who traditionally underperformed in their schools before joining K12 our average static test scores are bound to be lower than traditional schools.

But even with this higher percentage of students who are often considered at risk, in many instances our academic performance is now better than school districts with light characteristics as I mentioned earlier. We are very proud of our results and proud of our students and teachers.

We also saw the persistence continues to make a difference, the data again this year reinforces the fact that students performed better on state assessment tests, the longer they stay in the K12 program. Students enrolled three and more years in K12 managed public schools, achieve higher proficiencies compared to student enrolled one year or less.

Based on the most recent school year data available, they have 13% higher reading and 19% higher in mathematics if they stay three years. But it is also very interesting is that persistence made a different for all categories of students, in all subjects, in all grades measured in state tests.

Test scores increased most in Grade 3 to 5, which is expected. In higher grades, learning gets more complex and the content is broader, so it's more difficult to make improvements. Also in the later grades the students entered with a gap in their educational background, it’s more difficult to remediate that gap.

Therefore, the impact of persistence is lower as you get the higher grades. A complete set of academic results will be completed in the next few months and we will be publishing our annual academic report in the February-March time frame, which will be the third year of our full disclosure of results.

Now you might say this is an earnings call mate and the CEO is spending all of this talking about academic performance and why is that? Because I've said for 18 months that our focus had to shift to quality. If the quality of our product is strong then we have a great base, on which to build a great company.

I want K12, its students, its parents and especially our board to be proud of our quality. Some didn't hang in there long enough to see this quality turnaround, but for all the once who did, they are now being rewarded.

We will get back to growth in our core business of managed schools, but that growth will be built on quality and a reputation as a great education company. That's what I am most proud of. Thank you for so much of your time this morning and I'll now hand the call to Tim Murray.

Tim?.

Thanks Nate and good morning to everyone. This morning I would like to talk about two key topics. First, Nate talked to about our academic results, I'd like to address the investments we are making to support continued improvement in student outcomes.

In addition to systems and infrastructure investments such as the new learning management system for our high schools, we are actively investing in our people and programs. For our teachers, we have enhanced support levels so that there are more coaches and more one-on-one mentorship opportunities.

We also hired new teachers three weeks prior to first day of school to allow proper onboarding and training with a focus on data driven instruction. This time allowed teachers to acclimate to an online instructional model and be ready to start at the beginning of the school year.

We have also expanded our Strong Start in family academic support teams to ensure students who are engaged and ready to learn as well as to address the issues that are impacting the students' learning environment. Strong Start provides onboarding support for families.

The programs begins from the moment students are approved for enrollment and includes getting started with K12 materials, introduction to our systems, fun summer activities and interaction with parents. We've seen a strong correlation between Strong Start participation and those students who remain active and engaged in K12 partnered schools.

This year 92% of students completed the Strong Start program, a 10% increase from the previous year. The family academic support teams or FAST as we call them, are school based teams focused exclusively on managing the cases of disengaged students.

FAST members work with home mom and the content area teachers and other essential staff to implement a plan with the family for achieving engagement and academic success. This year we've extended this program from three pilot schools last year to 18 across the nation, and we will continue to expand this program to more schools.

As we've said many times, an engaged student performs better academically. The academic gains we've seen thus far are not only a cause for celebration, but also confirmation of our overall direction. And just as we are asking teachers to be data driven, we are also data driven as an organization.

The data on academics will help us refine our instructional models, improve teacher hiring and training, improve the learning experience for students and families and allow us to better segment the promotions we do to attract students who are most likely to best benefit from our programs.

And second I want to provide some color on how our Fuel Ed business is doing. As we explained last year, we have been transitioning this business towards a software-as-a-service model and assuring perpetual sales for annual recurring revenue sales.

With much of this transition behind us, we kicked off this year with strong growth across our district managed programs, online courses and education programs for hospitalized or home bound students.

For online courses, we saw strong enrollments in peak with our new middle school curriculum and Middlebury Interactive Languages courses showing the biggest gains. Overall, excluding those perpetual sales and the businesses we sold last year, Fuel Ed revenues rose over 10% year-on-year.

This is a significant turnaround compared to the trends we saw throughout last year and more indicative of the type of growth potential this business can produce overtime.

During this quarter, we also helped to establish district managed programs in two new states, Indiana and Nevada, while at the same time expanding existing district managed programs in Pennsylvania and Wisconsin. Overall, district managed revenues rose 21% year-over-year.

Again this is another indication of the health of this business and echoes the industry trend of more and more school systems adding virtual learning platforms as Nate referenced earlier.

We continue to see trends amongst school districts with increased interest in textbook replacement with an even mix of schools using a Fuel Ed instructor or those using their own teachers.

Fuel Ed's ability to offer teacher services continues to be a differentiator in the marketplace and helps win business as schools are leaving their current vendors for companies like us who can offer live instruction.

Form a product perspective, we gained approval for 95 courses from the University of California which audits course requirements to ensure the students have attained a body of general knowledge that will provide a breadth and perspective to enable success for more advanced study in the California University system.

K12 now has 30% more courses approved in California than any other provider. This approval is a differentiator for in state bids and recently resulted in an RFP award for a district managed public school program to Fuel Ed. Additionally, our PEAK application won eSchool News Readers' Choice Award.

This builds on the recognition of other key products we are receiving, including the 19th Annual EDDIE Award and the Creative Child Magazine award. K12's Algebra, Embark12, Chalk It Up and Noodleverse products were also recognized.

These industry recognitions call out innovative and content rich programs including educational apps for iPad and Android and Web sites that augment the classroom curriculum to improve teacher productivity and provide parents and teachers with a technology to foster educational excellence.

And K12's technology team continues to deliver key releases for our peak platform to enable better management of student performance, greater flexibility for our customers to create and manage their own content and product analytics.

And now before closing, I want to share some news on academics that you don't typically hear about from us since it’s a district managed school program. Long time school partner PSD Global Academy topped Colorado growth scores. Ranking among the highest in the State of Colorado for student growth across all grades for the 2013 - '14 school year.

PSD Global's reading, writing and math scores were in the top 5%. This is a blended school in Poudre School District in Colorado Springs.

We are very proud of the performance of our district partner in these results and they reinforce the investments we continue to make in our curriculum systems and resources to deliver an outstanding educational experience for students. Thanks very much. Now I will hand the call over to James..

Thanks Tim, and good morning everybody. Before I begin, I wanted to recap some updates to our disclosures that have seen in our release today.

First of all, we are providing revenue and enrollment information in our new disclosure format that we discussed on our last call, as well as the calculation of the average revenue per enrollment for your information.

In the appendix, we provided some supplementary information including revenue and enrollment data in our historical format, followed by enrollment revenue numbers in our new format for the four quarters of last fiscal year.

And lastly, we’ll show you a table of the pro forma revenue by quarter in our new format excluding the businesses we sold last year, to give you a better apples-to-apples comparison for the rest of the quarters of the year.

For purposes of the discussion this morning, I'm going to focus on our results versus the pro forma results from last year which would exclude the businesses we sold and that is the most comparable view for our business. As Nate already mentioned, we reported revenues of $236.7 million for the first quarter.

This represents an increase of 5.2% over the pro forma Q1 2014 revenue of $224.9 million. Growth in the quarter was largely driven by 5% increase in the public school program revenues. Managed program revenue grew 4.6% over the last year. This was in contrast to an enrollment decline of 4.7% on a year-on-year basis.

The increase in revenues resulted from a 9.7% improvement in revenue per enrollment, relating to a combination of factors including school mix and improved planning environment in certain states, activity specific funding and other variables. We expect the full year revenue increase to be more modest of around a few percent.

Non-managed program revenues rose 15.5% to $10.5 million. At the same time, non-managed programs enrollments rose 39.2%. The revenue per enrollment is largely result of school mix. We expect non-managed program revenue to have solid double digit revenue growth during the rest of this year.

As we've discussed non-managed program revenue per enrollment is lower than managed programs, but at the higher margins. The impact was not material in this quarter but may become more material as the non-managed piece of this business grows faster than the managed piece.

Institutional software and services, which includes core software, technology, professional and other educational services sold by our Fuel Ed team, posted revenues of $12.6 million for the quarter. This is a decrease of $0.5 million on a year-over-year basis. Again remember this excludes some businesses we sold last year.

Also included in last year's revenue, it was approximately $1.1 million of onetime perpetual sales that did not repeat this quarter. Excluding those sales, institutional software revenues would've increased approximately 5%.

As we have previously discussed, we have been transitioning away from perpetual sales which are lumpy onetime non-recurring revenues in favor of annual license sales which provide a more consistent ongoing revenue stream.

Whereas last year, perpetual sales comprised approximately 11% of institutional software revenues, today they comprise less than 3%. We feel good that the year-over-year growth in this business will accelerate in the remainder of the year.

Our international private pay schools revenue rose $2 million or 22% on a year-over-year basis, this increase was due to strong sales at our Keystone and iCademy private schools, as well as the addition of new school in the UK, Queen Elizabeth Academy. Gross margin declined from 41.8% last year to 38% this year.

This change was due to a number of factors which we highlighted on our previous guidance call. Firstly, we continue to invest in teacher and academy programs including hiring teachers earlier this season and to ensure that they were acclimated in the K12 program.

Second, some of the rate increases that contributed to our managed program revenue growth relate to programs where K12 incurs significant costs. Keep in mind that the incremental funding is often tied to specific activities and cost which means there are little or no margin related to those revenues.

Selling administrative and other expenses increased 1.3% year-over-year to $99.5 million. Product development expenses for the quarter were $3.5 million compared to $5.7 million in the prior year. This is actually a bit higher than our exiting run rate for last year and we expect it to remain in this range or slightly higher for rest of the year.

The operating loss for the quarter was $13.2 million versus $8.5 million last year. Let’s turn to some other items. We ended the quarter with cash-and-cash equivalents of $109 million, a decrease of $54.3 million from the prior year.

This was largely a result of lower cash from operating activities due to some seasonal payable and receivable cycles as well as our continued buyback shares in the marketplace. Accounts receivable rose 9.4% year-over-year to $285 million which is largely in line with revenue growth.

Our receivable balances peak in the first quarter and decline throughout the year. DSOs remain largely in line with the first quarter of last year. The company continued to repurchase shares during the quarter, investing $26.5 million to repurchase 1.3 million shares of common stock.

This quarter we concluded the $75 million stock repurchase program authorized by the board in the second quarter of fiscal 2014. At this time there is no plan to increase the authorization to buyback additional shares.

While this alternative is always under discussion and review, we continue to see opportunities to invest in our business and to improve our operations and accelerate our academic outcomes. While we are mindful of the current levels of our share price, we see opportunities to prudently invest and drive long term value for our shareholder elsewhere.

CapEx as we’ve historically defined it, which includes curriculum and software development, computers and infrastructure, was $22.9 million for the quarter which is basically flat year-over-year. Our tax rate for the quarter was 50% due to tax benefit relating to sale of our businesses in fiscal 2014.

Our guidance for the full fiscal year 2015 tax rate remains in the range of 38% to 40%. Now turning to our expectations for the second quarter, we expect revenue of $225 million to $235 million, operating income between $14 million and $20 million, and capital expenditures of between $18 million and $22 million. Thank you.

And I will now hand the call back over to Nate. .

Thank you James, operator we are now ready to take questions..

Thank you. At this time we will be conducting a question and answer session (Operator Instructions). Our first question comes from the line of Trace Urdan with Wells Fargo Securities. You may proceed with your question..

Trace, are you there?.

Yes I’m sorry, good morning.

Nate, you expressed your sort of continued belief in the managed school business going forward in your prepared remarks, but I’m wondering if you could sort of speak to us about what you see as the long term growth rate in that business relative to the non-managed school business, and how you’re thinking about allocating resources to each of those lines of business going forward?.

Thanks Trace and good morning. Good question. I don’t know that I can predict beyond this year what the managed public growth will be, because it’s so depended on this new states category.

If we see certain states like North Carolina, New Jersey, Illinois, New York, Connecticut, Kentucky -- we see those states hard to open up, then the growth rate starts to accelerate. And I think we are well above the 5% to 10% range. But without those new state opening up I see it maybe 5% kind a range in longer term.

It’s really difficult to predict because there are so many factors that making uncertain.

As we think about the investment second part of your question, as we think about the investments that we make in the managed business as well as the institutional business, I think you're going to see -- continue to see more investment in the managed public schools than you’ll see in institutional.

Because our base is so large there, and that's still 85% of our business, that’s the business that is the bulk of revenue and I think that we have to continue to invest in that. I don’t think that investment is -- I think it’s in a bubble, it's the best way to describe it.

We will probably have a two year or so, maximum three year bubble and we'll need to remediate and fix a number of things. Mobility, learning management systems, content management systems, so many of those things will be put in place in the next two years, we have always started.

And then I think you'll see CapEx at least start to decline in those areas. In terms of expenses investments like hiring more teachers, I think we’ve done a lot of work this year to improve the number of teachers, hiring them at the right time.

We'll probably have a reduced reduction in the incremental investment over a long period of time in that part of the business. So I hope that answers your question..

Yes, that's helpful. Thank you..

Next question?.

Our next question comes from the line of Jeff Silver with BMO Capital Markets. Please go ahead with your question..

Hey, good morning, it's Henry Chien calling in for Jeff..

Hi Henry..

Hey. I had a question on the Fuel Ed business. Have you given any thought to the TAM for the business, and any color on the dynamics, sort of as it relates to the managed school business? Thanks..

Henry, its Tim could you repeat the first part of your question was it relative to TAM, total --..

Yes, I'm sorry, the addressable market. I don't know if you put any estimate of how you're looking at the overall market..

We do. What's attractive about the market to us is we envision the entire traditional brick and mortar school market as an area of opportunity for the Fuel Ed business.

So to go back to Trace's question a moment ago, many of the investments we are making especially in curriculum, our investments that we would expect to be able to earn a return on both Fuel Ed business and the managed public schools business and we see opportunity across the entire public school system to sell and we see opportunities outside of the U.S.

for some of those assets as well. So it’s not just a domestic market.

Does that answer your question?.

Yeah, it does. That's helpful, thank you..

Our next question comes from the line of Nick Nikitas from Robert W. Baird. Please go ahead with your question..

Yes, thanks. Nate, you mentioned the improving test scores you're seeing at some of the schools.

Can you just talk about whether that's maybe a product of slower growth in some schools and a more stable student base, or do you believe that maybe has more to do with the additional services and remediation programs that you guys are providing?.

I think it has much more to do with the programs we put in place and not a slowing base -- more stable base and we’d like to say that this year we still have a lot of new students coming into the program and students who signed up early on and -- then early in the cycle meaning the first month of school, still deciding it was too hard for them and some backing out.

So the base isn't so much stable as we think the improvement is coming from the programs we put in place. I think the most important program we put in place was this thing we internally call data driven instruction, where we put much more focus on looking at exactly what that individual student maybe struggling with.

And having a teacher intervene as opposed to having the curriculum do the work itself and student do work with the curriculum, more teacher intervention and more what we call synchronized session, that means students have to be online at a certain time with the teacher.

So those programs are making the greater difference than anything else, than the type of students mix. As a matter of fact we actually saw a slight increase in amount of students that were free of these lunch, so we know the mix is not going to changing dramatically. It’s really, we think the programs. .

Okay, that's helpful, thanks. Then just one more from me. You mentioned the potential new schools in North Carolina and Maine.

If those were approved, are you expecting them to be managed, or non-managed? And then just in general can you talk more about the trend you're seeing there with any existing schools outside of Agora?.

Yes. So the Maine school and the North Carolina School we are working with the charter board and the charter boards are actually the ones who made the application and did the interviews and are working with the state to get their charters approved.

Once their charter is approved we have, I mean you file for charter, you generally file with a management contract attached to it. And so our management contract has already been attached to it for the authorization. So those will be managed schools if they are approved to answer your first question.

In terms of schools that are -- that could be at risk, we have this year about six schools that are up form some kind of contract renewal and charter renewals. And while I don't see it being a massive trend like Agora, I think Agora was an outlier. There is always a risk that a school can decide to go self-managed.

The economics might change for them, they might have a change in the board leadership. And so if those things happen, we could see a change there.

But the good news is what we found is that when they made those changes they have stayed with K12 curriculum which is the highest margin part of the business for us and the part of the business that we believe it is a core of the services we provide.

The lower margin businesses where we may provide financial services and technology service, they are important and they drive revenue but the core of our business is curriculum. So I don’t think there is huge risk for the other state but I got to admit, there is always a state that can make -- a school board that can make that decisions. .

Our next question comes from Jason Anderson with Stifel. Please go ahead with your question..

Thanks for the commentary on academics and the results and seeing improvement there, but I know in various schools you've seen improvement and maybe not as broadly as you’re seeing now, but could you talk about maybe over the last couple years, kind of the sentiment from the departments divided by states, or the Federal, their I guess buy in on how your results are presented, and are they better recognizing the improvement you’ve shown? And kind of along with that, have you made the adjustments, you feel like you’ve fully made the adjustments you need to make to show I guess the right metrics? I mean, I know you’ve talked about that at length in the past, but just maybe getting an update on that?.

Good morning Jason. So I’ll start by saying I am still disappointed that there is not enough recognition for the good work that we are doing. So no I don’t think if there has been recognition of the work but I will also admit that, I don’t think that change has been a long term change yet.

In other words, you are an administrator of department of education you look back at virtual chartered schools and you question, you're just beginning to understand that whole issue of free reduced lunch mix, the amount of mobility in our program, just begin to understand the dynamics of an online school program.

They’ve always compared us for example to the state averages and not to the demographics at schools that are like our schools.

Graduation rate is another issue, a student comes to us in the 10th grade but it is really only operating at the 8th or 9th grade level, they still expect us to graduate that student in three years to take it in their four year cohort group.

Well that student is already operating at a five year graduation rate and we are supposed to graduate him in three years. So there are still those kind of issues that we face that still need to work to explain the regulators and we’re out doing that work towards the federal and state level.

But I think there is greater recognition but it’s not where I wanted to be yet, I want to be honest with you about that. We need continue to talk about it, we need to continue to exposed and have full disclosure with regulators and I think they will eventually get there. .

Great, thanks, and then one other -- you were here in the election season here, so in any of the potential new states you’ve talked about, New Jersey, Connecticut, so on.

Are there any political or election issues there that maybe would impact this potential success of opening up those states?.

Yes there are. In two particular states, I would say there is a slight potential in Illinois, there is a bigger potential in Virginia, from some bills that we see. But I would be speculating if I kind of got to what each regulator and each election might do and what their positions might be.

But I am optimistic I know of two states maybe a difference in and maybe a third so we are optimistic at this point. I don’t -- I want to be clear I don’t see a significant change in New Jersey and New York in the near term so don’t want to put that out, they state that we think will work on over the long term.

But I don’t see those in the next 18 months - 24 months and those are the biggies. I would love to see us be able to operate in. .

Our next question comes from the line of Corey Greendale with First Analysis. Please go ahead with your question..

First, just wanted to go back to a question I asked on the call when we spoke earlier this month. I had asked about what you expect the impact of the Agora change to be in fiscal '16 and I think James said, why don’t we talk about that on the Q1 conference call? So, I'm hoping we could talk about that..

Good morning, Corey and you're good at follow up. I hope I'm the kind of manager as you are.

James, you want to address that?.

I think if you look at the public disclosures for Agora, you will see that they have paid to us in this past year between $65 million and $70 million in management fees.

I think as most of you know the way we account for Agora also includes consolidating in the essentially zero margin services that we also provide which are predominantly teacher related services and we’ll discussed if that would be almost doubling the revenue into K12 and most of those is -- if you look at the board discussions with Agora, most of those no margin revenues to us will essentially go away.

They are going to manage their own teachers, there are going to manage their own staff a lot of back of this function et cetera. They are going to manage themselves and so a lot of that revenues goes away. So when you think about the revenue picture, a big chunk of it will go away, specifically related to those little margin aspects of the contract.

The remaining pieces we will retain a significant portion and as Nate mentioned earlier in a lot of cases the highest margin pieces of admission really relates to the curriculum and software services that wrap around the curriculum. Of the contract that remains it’s about half of it in those pieces and again those are very high margin pieces.

We don’t break out margin by contract obviously, but those are very high margin pieces. I think that you be able with frame work to how to think about '16 relative to Agora..

Okay, then I'll send my follow-up with a couple specifics offline. Then my second question is along the lines that Jason was just asking about -- so first of all, nice progress on the outcome.

Do you think -- what's the likelihood of a continuation of outcomes improvement next year, and can you do that without another step up in investment or should we expect kind of increased investment in '16 again over '15 in order to achieve better outcomes?.

I don’t think that we are going to see a significant step up in investment next year to continue to achieve the outcomes, the programs that we’re putting in place now, are programs that are going to bear fruit, not just this year but next year. So no I don't expect it to be a step up.

I think what we will call the gross margin, revenue minus the instructional cost and services should remain relatively flat into next year. And so the investments it our remaking our grade and curriculum, that as Tim said will benefit both the institutional business and non-management services, curriculum improvements there.

We will invest and we will also improve the managed public schools and that's already baked into the capital numbers we have given and already baked into the trends. So I don't think you are going to see a step up in investment. .

Okay. And then just one last one for me, Nate. You said in your script, you talked a lot about outcomes and then kind of talked about the fact that you were talking about outcomes and how important that was.

What's your current thinking on how you balance in communications, those kinds of things with what the investment community would be looking for, which is growing in profitability and what's your current thinking on in light of that balance, whether it makes sense to be a public company given the business that you're in?.

Well we are a public company and I don’t think there are any near term plans to do anything different in that. So our thinking is that that's probably not going to change and that's not where we are spending our energy. Investors do look for returns on investment, they look for operating income and growth.

And so it's our job as management to deliver on both of those. Yes there is a balance, I think that the pendulum swung in the last year and half to two years since I’ve been in this job towards more focus on academics and that was purposeful. I now have to make the pendulum swing back a little bit more towards the middle to balance growth.

But I can't ever loose site of the fact that the company's reputation was at risk based on what we were before and while I am happy to fix that, some of the outcomes we've got to continue to prove it. I am not claiming success completed yet, I am claiming progress. And I think we still have to improve that.

So that balance is always going to be delicate and yes it gets in a way some times when we swing the pendulum too far toward academics. We do think there are some things we can do to improve economics as the Agora situation works its way out of our financials, then I think we are going to again start seeing improvement.

As I mentioned there is some focus on new schools in existing states and some new states. I also think there are some things that we are going to do that will continue to help improve retention and all of those things should have an impact.

I don't think we are going to go back to date the double digit enrollment growth and double digit revenue growth, I don’t want to signal that. But I also don't think that we are going to be declining business over the long run, I think the pendulum swung one way and we realized it, we’re looking forward to make a better balance..

And Corey just keep in mind that I don't think we divorce academics from economics as we look at the business. As Nate I think mentioned a lot of the academic performance that we are driving in fact ultimately will work to improve by time value of students and those economics are very positive for us over a period of time.

So I actually think they'll work in concert with each other overtime. Nate mentioned there -- we're looking to reduce churn dramatically through a lot of these investment that we make in academics. We think that if we bring on the right engaged students, again it goes back to that life time value equation.

So I don't think we divorce them, I think we see them in important conjunction over a long period of time. .

And James, I totally buy into that. It's more a question about how you balance communication given that different constituencies tend to see things differently, the same state that could be seen differently. But anyway, I appreciate the thoughts, and I will turn it over. Thanks..

Thanks, Corey.

Operator anymore questions operator?.

(Operator Instructions). There are no further questions at this time. I would like to turn the floor back over to Mr. Davis for closing remarks. Okay, I don’t have any more closing remarks. .

Okay, I don’t have any more closing remarks. I think we’ve said enough today and I appreciate everybody’s time this morning, thanks for following. Take care, have a good day. .

Ladies and gentlemen, this concludes your teleconference for day. You may now disconnect your lines at this time. Thank you and have a great day..