Mike Kraft - VP, Finance Stuart Udell - CEO James Rhyu - CFO.

Jeff Silber - BMO Capital Markets Chris Howe - Barrington Research Corey Greendale - First Analysis.

Greetings and welcome to the K12 First Quarter Fiscal 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mike Kraft, VP of Finance. Please go ahead..

Thank you and good afternoon. Welcome to K12’s first quarter earnings conference call for fiscal year 2018.

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 made in K12's 2017 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 Stuart Udell, Chief Executive 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 Stuart.

Stuart?.

Good afternoon, and thanks for joining us on the call today. Today I want to provide you with our guidance for fiscal 2018, as well as an update of our date enrollments and other developments in our business. As noted on previous calls, we continue to see demand across the nation for online and blended learning option.

As of the October 4, count date total enrollment in K12 managed public schools rose 2.4% year-over-year to more than 111,000 students. We saw growth in both our existing and new school. Importantly after three years of decline, this is the second year in a row in which we posted year-over-year gains in managed public school enrollment.

I also want to point out that due to our previously described retention issues last year, we ended fiscal '17 with about 97,000 enrollments which was 1000 lower than the prior year. Therefore, our jumping off point for the fiscal 2018 year was actually lower than prior year, yet we still managed to post higher count date enrollments.

This represented growth from fiscal year end to count date of about 14% which was a 4% improvement over prior year. Set differently, we grew from about 97,000 enrollment at the end of fiscal '17 to more than 111,000 enrollments by October 4 for a growth of about 14,000 enrollment.

This is strong performance and I believe it's not only an indicator of market demand but also out of our potential to grow in future years. Now as I review our performance, I see a number of factors that drove enrollment levels. First, we saw an increase in student reregistration rate. In fact, this is the highest reregistration rate in four years.

This year's reregistration effort started earlier and included an enhanced framework designed to provide families the information they needed to make well-informed decisions. The outreach included email campaign, parent information sessions, and personalized follow-up. Second, we saw strong demand from our more recently launch states.

As we have detailed previously in states in which a full time online school option has been offered for at least 10 years, market penetration seems to flatten at around 2% to 3% of the eligible student population.

In lower penetration states such as Florida, North Carolina, Alabama and Virginia we saw strong enrollment growth in the current year and judging from our experience in a more mature market, we believe this demand should continue for a number of years to come.

Third, our diversification efforts within our managed program are also paying early dividend. Specifically, we saw over 70% growth in enrollment for our Career Technical Education or CTE program. As part of our most recent expansion plans, one of our largest partners Ohio Virtual Academy opened a new CTE program this back-to-school season.

Now obviously we're still in the early stages of these programs, however we believe CTE offers a significant market expansion opportunity for K12. Not only does it allow us to expand with a new offering, early indications are that students enrolled in our CTE programs and courses tend to stay enrolled longer.

Most importantly, more students come out apparent for an employment, and ready to fill much-needed entry-level employment opening, or better prepared proposed secondary education. We will continue to grow the number and size of these programs during the current fiscal year.

We're also encouraged by our operational performance during the recent back-to-school season and what that portends for student retention through fiscal '18. We resolved the problems we experienced last year well before the '17 '18 back-to-school season with even way.

Also we further refined our students first program with particular focus on the student onboarding process ensuring family for the support they needed to get off to a strong start at the beginning of the school year.

The results of our efforts had an immediate impact with fewer customer care calls and a 7% improvement in overall satisfaction rates from the families we serve.

The improved family and student launch experience is critical to helping drive improve retention and enrollment levels throughout the year which also should positively influence both student academic outcomes, and our financial results.

Keep in mind that about two-thirds of our partner schools are funded by mechanisms other than a single fall semester count day, instead taking into account enrollment and/or attendance level throughout the school year.

In year student retention is impactful to not only our current year financial but could also result in higher ending enrollment level then in-turn could drive stronger revenue growth for fiscal '19 and beyond. Going forward, we believe that enrollment in managed public school programs should increase.

While in any given year we will face a headwind, we believe that there is increasing demand to support growth over the long-term. To that end, we are working closely with potential partners in states like Missouri, New York and West Virginia to help bring entirely new offerings to students.

While these efforts may take some time to develop and ramp, we believe the demand for additional educational choice by students and families will increase over the long-term. Turning to our institutional business Fuel Ed. We are disappointed that this business is going to materially decline this year.

This does not change our longer-term view and prospects for this business as we see digital education solutions gaining steam and transforming the classroom and increasingly teachers, parents and students are embracing this evolution with enthusiasm.

School districts are increasing their spend on educational hardware, software and online learning solutions and are ramping up the use of these digital tools for new instructional approaches and to provide a more personalized and mobile learning experience.

However, while we believe in the long-term revenue potential for this business, as we've said previously we need to reset our strategy approach and execution. We are unfortunately expecting revenues to decline about 15% this fiscal year due to several factors.

First and foremost, as we discussed in previous quarters our sales execution is not been as effective as it needs to be and as a result new sales especially during the recent summer selling season have slowed.

While we have changed leadership and honed our go-to-market strategy, the new team was not in place in time to impact this year's selling season causing us to fall short of our expectations for fiscal '18. That said, the team is ramping up and we will look to improve results in fiscal '19.

Second, non-managed enrollments came in nearly 14% lower year-over-year giving back to gains we made in fiscal '17. This resulted from the loss of one significant partner program along with an enrollment shortfall from another large program.

It's worth noting though that K12 does not provide marketing enrollment services for many of our non-managed schools. Again over the long-term, we expect Fuel Ed to be well positioned to grow again as the nation's school shift to digital learning option. We will continue investing this business going forward.

In private pay, we also continue to see the long-term potential for this business. We are actively working on international partners shift in the Asia-Pacific and Latin America region where we also leverage our core curriculum and capabilities to deliver unique in country education solution.

Domestically, we're looking to expand our private pay options for adult learners, as well as expanding our private pay CTE offering to the marketplace. However, much of this activity is in the early stages and will not have a material effect on current year result. As such, we expect current fiscal year private pay revenue to be relatively flat.

Taking in total for fiscal 2018, we expect total revenues of the range of $890 million $910 million which is a modest increase over fiscal '17. I am most pleased by the fact that the core business of managed public school which makes up the vast majority of our revenue is healthy and growing.

Now turning to our overall company profitability, we continue to focus on driving greater efficiencies across the business.

This includes streamlining and automating processes, enhancing backend systems, and reducing our cost structure while continuing to invest in student academic program, training and support initiatives for our teachers and school leaders, and growth opportunities like CTE.

A perfect example of our continuing investment in teachers and academic outcomes is this week's announcement of our landmark partnership with Southern New Hampshire University, a highly innovative leader in online higher education.

This partnership will include the development of our customized competency-based Masters in Education Degree with the unique focus on K12's virtual instruction. This Masters program will be offered in either a free or highly subsidized fashion to affiliated K12 educators.

The SNHU partnership will also create foundational professional development program for our own K12 and partner school boards teaching staff including a series of stackable training modules and micro-credential to update and strengthen teachers' skill.

We are very excited about this program and what it will mean to teachers and students in the years to come. Taken in total for fiscal 2018 we expect adjusted operating income in the range of $46 million to $50 million.

Regarding capital expenditures, we will complement our activities across the organization by focusing our investments in areas that help drive stronger student outcomes. This will include leveraging the wealth of assets at K12's disposal and continuing a multiyear program to refresh our catalog to make it even more compelling adaptive and engaging.

As part of this effort, we are integrating the stride practice and test readiness platform which we acquired last year into our core online learning platform. Similarly, we are pleased to announce the recent acquisition of Big Universe, a state-of-the-art SaaS based K12 digital literacy platform.

Big Universe offers a rich engaging reading experience with over 11,000 e-books titles including Spanish bilingual books for more than 40 publishers. The product includes embedded assessments of student recommendation engine, analytics to demonstrate reading growth, and engaging reading practice opportunity.

While the revenue from this acquisition is modest, we are very bullish about both the opportunity to leverage this asset to improve our core managed public school student experience, and to improve the Fuel Ed product offering for school districts.

We will look to integrate the Big Universe platform and to manage public schools elementary core curriculum with the objective of improving learning outcomes by making highly engaging reading practice an essential part of K12's core learning model.

Big Universe has found that students who read high-interest literature at appropriate readability levels are more motivated and engaged ultimately living to a love of reading, learning and improved educational outcomes. Also going forward Fuel Ed will be the exclusive distributor for Big Universe in the public and practical markets.

Across Big Universe, Stride, LearnBop and all of the products used in both managed programs and Fuel Ed offerings, we are creating a unified user experience that directly supports student outcomes and retention.

As we did last year, we will continue to focus on greater efficiency in how we create these products which allows to hold down total capital outlay. This translates into guidance on capital expenditures of $43 million to $47 million for fiscal '18. Now, one last but very important announcement.

I'm very pleased to share that Kevin Chavous will be joining K12 on November 8 as President of our academic policy in school's group. This brings into one group the team that drives the development of new school, establishes and monitor school academic policy and performance, and day-to-day operations of all managed school.

Kevin is a noted education reform leader with a well chronicle track record of driving change an opportunity for all children of all backgrounds and circumstances.

Kevin has worked to advance parent choice programs around the nation, most notably the education committee chair of the Council of the District of Columbia, in which he help shape innovative new educational models in the nation's capital.

Kevin has always placed children at the center working across the aisle as both the founder of Democrats for Education Reform and is a Founding Board member of the American Federation for Children.

Not only has Kevin been a member of the K12 Board of Directors but also the first chairperson of the K12 founded and supported foundation for blended and online learning, which awards scholarships to student's small blended and online schools across the nation and encourages the development of teacher training in blended school.

Additionally Kevin is an accomplished author, having published serving our Children Charter Schools and the Reform of American Public Education, Voices of Determination; Children that Defy the Odds and Building a Learning Culture in America.

Importantly, Kevin has worked to advance charter school and parental choice program and a host of jurisdictions around the country and is a leading national advocate for educational and parent choice. We are quite fortunate to have the opportunity to add Kevin to an already strong and tenure team.

His depth of experience and tension for innovation and education paired with an already strong K12 team should speed innovation and change across the organization especially in our support of student academic outcomes. In this new capacity, Kevin will be exiting the K12 Board of Directors.

In closing, we were encouraged by the continued growth in our core managed public school business. We believe that the demand for digital educational solution will continue to increase over time which will translate into growth for all of our business segments.

We're focused on working closely with teachers, school board partners in district to support improved academic outcomes for all the students we serve. We believe this focus will deliver consistent revenue and earnings growth, as well as increased shareholder value over the long-term. Thanks very much.

And I will now hand the call over to James to review first quarter results in more detail, as well as our second quarter guidance.

James?.

Thank you, Stuart and good afternoon. Turning to our results, revenue for the quarter was $228.8 million marginally lower than the $229.1 million from the prior-year. Increased revenue in our managed public school programs were offset by declines in institutional private pay businesses.

Revenue for managed public school programs increased 2.1% compared to the year ago quarter to $188.5 million. The increase was largely a result of 2.4% increase in student enrollments, somewhat offset by lower revenue per enrollment. School mix was the primary driver of the lower revenue per enrollment.

I also want to reiterate some of the comments Stuart made regarding how we are jumping off point for the enrollment in this fiscal year was actually lower than the previous year that we still posted higher enrollments.

Specifically we ended fiscal '16 with Q4 enrollments of 98.4 thousand and improved to accounting enrollment 108.5 thousand of approximately 10% growth.

In comparison we ended fiscal '17 with Q4 enrollments of 97.4 thousand what Stuart mentioned a 1,000 less than the previous year and grew to accounting enrollment number of 111.1 thousand or about 14% growth.

So while we saw 2% year-over-year accounting enrollment growth, we saw a four point growth in performance from our account at the prior end of school year. This reinforces our view that demand for our programs remain strong and we believe bodes well for future growth.

While we may face headwinds in any given year, we believe that this demand coupled with continued improvements in student retention which we should see this year compared to last year can translate into solid and improving enrollment and revenue growth for core business in fiscal '19 and beyond.

In terms of revenue per enrollment, we continue to see a positive overall per-pupil funding environment continuing through fiscal '18. However our revenue per enrollment will be somewhat pressured by school mix. That mix stamps from indexing a bit more newer states with the low average revenue per enrollment.

For the current year, given our mix and the current climate we believe per-pupil funding levels will on average be flat to 1%. In our institutional business which includes both non-managed public school programs, as well as our institutional software and services, revenues declined 10.6% on a year-over-year basis.

Non-managed public school program revenues decreased 6.2% as a result of enrollments declined 13.7%. Institutional software and services revenues declined 15.7% as with little softer sales.

As Stuart has already highlighted, we continue to see strong demand in the market and have made a personnel and structural changes to leverage the Fuel Ed portfolio to drive growth in future periods. However for the current year institutional revenues will fall 15% plus or minus.

In our private pay business, revenues declined from $10.3 million in the first quarter of fiscal '17 to $9.7 million in the first quarter of fiscal '18. The decline year-over-year is largely a result of some depressed conversion in our enrollment season driven by some operating issues that we have since addressed.

We have now seen conversion rates bounce back and expect sales to stabilize for the remainder of the year and we would expect year-over-year revenues to be about flattish for the year. Gross margins were 35.6% in the quarter down 150 basis points compared to the year ago quarter.

The decline in institutional revenues will drive down gross margins for the quarter and full-year and we expect gross margins to be lower year-over-year by between 100 and 200 basis. Selling, administrative and other expenses decreased 7.9% for the quarter to $96.3 million driven by continued focus on cost control.

And as a reminder, Q1 is our seasonally highest quarter and this cost will sequentially drop next quarter in a manner consistent with the prior year.

While we continue to face some inflationary pressures I mentioned last year, we continue to work to offset this by finding ways to allocate our dollars more effectively and efficiently, as you can see we achieved that in the first quarter by posting an approved loss of flat revenue even as gross margin shrunk.

And we are focusing our resources on the most critical investments including programs that address student academic and retention outcomes, training and support initiatives for our teachers and school leaders such as Southern New Hampshire University initiatives Stuart mentioned and targeted growth areas such CTE.

Moving to product development expenses, for the quarter expenditures were basically flat year-over-year at $2.9 million and for the full-year these costs should be at/or slightly lower than the prior year.

EBITDA for the quarter was $2.9 million compared to an EBITDA loss of $5 million in the first quarter last year and adjusted EBITDA for the quarter was $6 million compared to an adjusted EBITDA loss of $0.3 million in the first quarter of last year.

I want to point out that our baseline stock-based compensation expense for fiscal 2018 will be approximately $18 million. In addition, as we discussed last year we have some performance-based stock compensation which has the potential to impact this year and could translate some incremental variability in stock based compensation.

Potentially as early as the second or third quarter depending on when the performance metrics are likely to be met. This could result in incremental stock-based comp expense of up to $5 million to $8 million for the year.

And since stock-based compensation could be impacted in this way we have provide guidance for adjusted operating income which excludes stock-based comp and thus provide a clearer picture of our underlying operating performance.

For the quarter, our loss from operations was $17.8 million or $4.9 million less than the prior year loss and this improvement was driven by lower operating expenses in the quarter. Adjusted loss from operations was $14.7 million compared to $18 million loss in the prior year.

Turning to some other items, we ended the quarter with cash and equivalents of $147.3 million, a decline of $83.6 million compared to the fourth quarter and this decrease is the result of normal seasonal trends than we would expect to see our cash balance increased throughout the year.

CapEx which includes curriculum and software development infrastructure was $15.5 million, an increase of $1.5 million compared to last year and this is really the result of increased investment in IT hardware and leasehold improvements to consolidate facilities which were somewhat offset by lower curriculum investments.

For the year as Stuart said, we expect to invest in the range of $43 million to $47 million. This outlook is in line with our previous communication to begin to taper capital outlay and drive increased free cash flow with long-term. Our effective tax rate for the quarter was 53.4% compared to 38.9% a year ago quarter.

The current rate for the quarter includes the benefit from adopting the new accounting standard related to stock-based compensation. Without adoption of new accounting standards effective tax rate for the quarter would have been in line with last year's quarter.

We could potentially see quarterly fluctuations throughout the year as a result of adopting this new standard as it depends upon the underlying employee vesting exercise activity, as well as future stock prices.

Therefore, it's not something we can predict, so we will provide guidance excluding the impact of this accounting and report out each quarter the impact of the new standard it has on the tax rate. Now let me summarize our guidance against fiscal '18.

Revenue between $890 million and $910 million, CapEx between $43 million and $47 million and tax rate of 38% to 40% excluding the adoption of the new accounting, and adjusted operating income in the range of $46 million to $50 million.

And for the second quarter, revenue in the range of $217 million to $223 million, CapEx between $8 million and $10 million and adjusted operating come in a range of $17 million to $20 million. Thank you for your support. And I think we are ready for any questions.

Operator?.

[Operator Instructions] Our first question comes from Jeff Silber with BMO Capital Markets. Please proceed with your question..

Just a question on the enrollments side, I know in prior years and maybe with just last year we saw a shift in the type of contracts from managed to nonmanaged that impacted the enrollment counts on each line item.

Was there anything like that this year or is this kind of an apples-to-apples comparison?.

This is pretty much an apples-to-apples comparison there wasn’t really anything that shifted between the categories year-over-year..

And then in looking at nonmanaged programs, obviously you had the large enrollment drop yet revenues per average enrollment went up substantially.

Can you give us a little bit more color what's going on there specifically and is that something that you continue throughout the remainder of the year?.

Yes we had a pretty good mix within our client base obviously we're trying to mix into clients that are more profitable for us. We provide a little bit more for them.

Stuart mentioned that we have - we don’t provide the marketing services for all clients so where we can provide them that will give us a higher per enrollment revenue mix because we do charge for many of those. So overall I think that there was just a little bit of a better mix.

I think what you’ll see for the year to your other question I think is a similar trajectory of year-over-year revenue per enrollment. So as you know it's dips down in the fourth quarter but on the year-over-year basis we should see something similar throughout the year..

Now I know intraquater I believe you had some disclosure about or maybe you disclosed it - the papers about issues in one of your schools in Indiana, I was hoping you can address that for us..

Yes, we had some issues in the Hoosier Academy in Indiana which the board has elected not to pursue renewal of the charter which expires at the end of this year. So it’s not a matter of the school being closed, but they have decided not to pursue the charter.

Now the board still maintains two other charters in the state and we did launch an entirely new school in the state of Indiana this year.

So as we move through this year into the next back-to-school season we will have three schools up and running right now we have four in the interim, but the steady state has been three schools in Indiana and we will enter next school year with three schools as well. So we have other ways to continue to serve the students in the state of Indiana..

And then just one follow up final question, you mentioned your CTE programs how larger are those right now..

So we don’t disclose these items, they are pretty small over the past couple of years we said we just really answering from last year, they were just a set a few schools we just had a few programs. We didn’t really mark heavy to them.

We're still getting our fee raise, we saw Stuart had strong growth but they’re not materials to be overall number but the trajectory that we see both in the acquisition side and the retention side as Stuart mentioned are very promising and we look to further invest this year and into next year..

And are there any difference than your regular programs in terms of either revenue per student or potential profitability?.

They are not materially different. We are looking at opportunities to capture some additional revenue date with our CT specific funds available and things like that but for right now they are not materially different..

Our next question comes from Alex Paris with Barrington Research.

Please proceed with your question?.

This is Chris Howe sitting for Alex.

I was just wondering if could provide some additional color on the Southern New Hampshire University partnership kind of how it came about and maybe the difficulty in obtaining this partnership and what should be our expectation for a similar type of partnership moving forward?.

Well we think we’re highly unique partner because they are certainly one of the leaders and the fastest growing online both secondary institution in the country they are known for very high quality program. And what one of things that makes them highly unique is that they are both project based and competency based.

So that's very different then just about every other graduate education program in the country.

The other thing that makes it unique is that they are building it alongside us, so we are going to be working together with - we’re starting with anthropological study where they will be observing our teachers, teaching in their natural habitats in their houses we are also going to have a lab up in Southern New Hampshire for little bit to study exactly what great - what the characteristic of great online features look like.

And the program is also unique and that it will be interweaved with K12 training program that we have in place for all teachers. So we are building the program collaboratively in three pieces, the first module will be a series of training modules that roughly all 5000 or so of our teachers will go through as part of their core training program.

The second piece stacked on top will be a micro-credential so student will effectively get a badge for completing it which K12 will administer.

And the third component will be the opportunity for teacher to finish their graduate education with Southern New Hampshire and they will have the ability to take that second piece the micro-credential and roll it in for credit into a master's of education programs. So it’s a very integrated program with our own internal training system.

We will provide it as I said I need to highly subsidized or potentially even free basis for our teachers because we believe with assuredness that the better we train our teachers in a customized program to teach in an online teaching environment which you know it's really hard to be a great teacher, it’s even harder be a great teacher online and we’re building a customized program to teach that.

But the bet is and the bet is that these better trained teachers will be more engaged teachers, create better engagement with students and ultimately better retention and financial results of the byproduct of doing the right things for kids.

So we see nothing like this in the marketplace, we think - there is a revolution needed in graduate Master's of education programs and we have - we think the only really terrific partner in the country to go build that with..

And then just following up in your comments on Big Universe going into Spanish bilingual. Is that an area of interest moving forward, is this just the beginning.

Should the growth in Fuel Ed be expected organically or is there a pipeline of opportunities that you see on the horizon?.

Well it’s a terrific little product and program that has been getting absolutely fantastic results and if not rocket science if we give kids great buffs really engaging full color literature that high interest level to get to pick you want to go read five books in a row on butterflies you can do that.

That students will engage in reading and we can measure their reading practice more carefully. We know that at least better outcomes of all types not just in reading but another subject areas. Now Big Universe is a fairly modest in terms of scale right now that get a very small but loyal customer base in K-12 school.

But the opportunity for Big Universe for us is really two-fold on one hand we will take that platform and fully integrate it with our core managed public school platform, so that reading practice will be taken to the particularly for elementary kid to much to a newer and much more engaging level.

And secondly we will distribute that product through Fuel Education to mostly public and even private school systems across the United States. So that’s the plans we have. We think it has significant potential as a standalone product, and really important purpose for us in our core managed public school program..

[Operator Instructions] Our next question comes from Corey Greendale from First Analysis. Please proceed with your question..

So few questions on the managed enrollment, so given that you resolved, the retention issue last year that the comps get easier.

So anyway you can give us a sense like - I am assuming that means year-over-year growth could improve as the year is gone, do you think you get up the kind of mid single digit growth by end of the year what are your thoughts are there?.

I think part of the best - Corey maybe the best comp if you will to look at is you might remember in fiscal 2016 we had a really good retention year it sort of provided a fully different arch of quarter-to-quarter-to-quarter enrollment throughout the year than we had seen in years prior to that and all things been equal we think we could do something similar this year, get back to those retention levels maybe a little bit better.

So while doesn’t get to quite to the mid single digit but it certainly gets you some improvement throughout the year..

And then on the nonmanaged enrollment, can you just elaborate a little bit on - I think you mentioned one school didn’t renew and another had some issues can you say anymore about those two schools?.

Well we typically don’t disclose who particularly lost their clients but we did have one significant charter school operator that decided to move in a different direction. And as we said we had one of our larger nonmanaged partners who declined a little bit on a year-over-year basis then in aggregate you know was obviously pretty significant.

But you haven't quite asked the question this way, on top of it we did have self execution problem as you know because we’ve shared on the prior call Shawn Ryan is in place he is kind of new General Manager of Fuel Education and he has been in the process of strengthening his team. So we feel optimistic about the future.

We know the market is there and we have the responsibility for executing better particularly from a sales perspective on forward basis..

The one that didn’t renew did they go to a competitor or they were doing themselves?.

I am not particularly certain but I don't believe it was to the loss of a competitor they - our program that uses multiple products and I think I just dropped off for whatever reason I'm not quite sure..

So if you look at the enrollment pattern and nonmanaged enrollment pattern in fiscal 2017.

The enrollment up sequentially as the year went I’m telling it’s pretty unusual is there any reason to think could have initially affected this high watermark for the year?.

Yes, I think - I’ll sort of again fiscal 2016 prior a little bit barometer of how the enrollment trend might look this year. I don't think we’re going to get the type of - like you said last year was a little bit unusual, there was a couple where particular situation that happened last year which I don’t think are going to recur this year.

So '16 is higher more likely type of the trajectory..

And then James actually had a question for about the Q2 guidance.

So if you look at the quarter you just reported revenue was basically flat year-over-year right operating loss, the adjusted operating lot got better so less of a loss this year than last year? The guidance is more or less flat revenue in Q2 but that’s good - the guidance on the adjusted operating income relative to last year so what accounts for the year-over-year weak kind of basically November was better in Q1?.

Yes and some of it is just some of its timing there was accounting things happened during the course of the quarter. There really wasn’t anything too structural in that. We did do - we have some higher seasonality in cost.

And so we were a little bit tighter this quarter that we’re really more efficient because I think we just - we actually I think our results are pretty good but we did it with a little bit less. So I think we were little more efficient but nothing really of note other that, so I think out of the ordinary fuel..

And as Jim said this can imply in the guidance just to be clear if the managed enrollment can get better the year-over-year comp may better year as the year goes on it sounds like the private they can get better that both topline and bottom-line results should get better year-over-year in the back half-year of the year relative to the first half?.

Right..

Our next question comes from [Mark Schapiro] with [indiscernible]. Please proceed with your question..

Just a quick question on the managed school business. You talked about some of the new states and your ability to kind of accelerate growth to managed schools over time.

Maybe you can just touch on case like Florida where you got significant expansion opportunity and how that may layer in growth over the next couple of years?.

I mean Florida is very exciting state for us. We have been operating with both Fuel Ed programs and some charter programs that were within district borders. What happened in Florida that was very exciting this year is the state got opened up for - open enrollment state wide.

So we've been able to use our existing vehicle to improve enrollment in the state in year already and suffice it to say we've had nice growth in Florida this year and we’re working hard to build more capacity in there in years to come and we don't have any reason to believe it can be one of our most significant states over period of time.

The other very significant state that we expanded our work into, we of course have at least - we have a couple nonmanaged partners in the state of Pennsylvania already but we did get charter approval to open insight school in Pennsylvania. So it’s the only fully managed program we now have in the state of Pennsylvania.

We are off to what we think is a pretty good start there and we continue to work carefully and closely with our other partners in the state.

The insight school of Pennsylvania will ultimately be somewhat different than the non-managed partners we have in Pennsylvania and that it will have a CTE flavor to it over time which allows us to really - we think optimize that market and get kids with different types of interest into different program some of them of course being orphaned and some of them being partner program.

So that’s another state - we obviously know there is very high funding level for student in the state of Pennsylvania and we are also excited about the opportunity of it being a very established state I should say in terms of acceptance of virtual education - new opportunity..

As you see momentum growing for kind of the blended solution for students who want more choice.

Do you see the penetration rate of student population changing at all and if the market can today bigger four companies like yours to address that market and maybe it’s been in the past is there more confidence in that market opportunity and maybe there was in the past?.

Yes, we think that blended is an opportunity to try to expand that TAM a bit so there are folks who want some level of socialization. Blended can also play an important role in providing enrichment opportunities so for instances in Nevada we have an incredible school that provides in lego and robotics and other kind of science exposure.

And in fact we had the only I think - two years ago we had the only robotics team in the state to go as a national championship to that school. We also think blended can play a real role in intervention to offer kid to need extra help.

And we have quite a few blended programs setup across the nation right now and it is an area we’ll continue to expand. The opportunity is significant it also comes with a challenge of figuring out how to provide that as economically as possible.

So we continue to work with our partner school to try to speak out what we think are fair and appropriate funding levels for blended programs..

The other opportunity that we really do see to expand the market growth to TAM is the CTE, I mean well it’s a very small for us today, all of our preliminary research and preliminary acquisition modeling indicates that there's a lot of demand across a lot of states we’re just scratching the surface.

And we think that could be a pretty material addition to our growth in the years to come..

I am just going to say, I mean that’s an area where we think the mega and macro trends really line up. Last year - or this year in the 50s state of the state 18 governors sighted CTE as something that's important to them.

We know that business is looking to fill an estimated 5 million to 6 million open middle skilled jobs by the year 2020 and in research that we've done parent research we know that - you know parents want their kids to have marketable skills because that can lead to better job and opportunity.

So the interesting thing about CTE is that you know it’s not the old vocational education that many of us grew up with it, it’s really an opportunity that opens to both kids who need an alternative and students who are still college-bound, but want additional marketable skills and credentialed and certification.

So we think we have an opportunity - we think the market is significant and we have opportunity to help expand it by telling the story..

I was just going to ask Stuart whether this is a business that you grow organically, it basically expand over several years while there are inorganic opportunities that really accelerate the growth in this business?.

Well I think we certainly have both. So organically we have been able already open up seven academies either in combination with or standing alone. I think that quite a few of our existing managed public schools will want to open CTE schools within schools over time. We also have the opportunity to open many new ones.

On the inorganic side we are looking as well - we probably will be more focused in organically on content plays and other tools that can help those types of students whether they’re career counseling opportunities or opportunities to engage with others types of groups that could be helpful to advance the CTE student’s career.

But we are looking at both is the short answer Mark..

And just last question on institutional business, how quickly do you think - how long do you think it will take to turn that business around.

Obviously we've fixed the window this year, do you expect to get back to growth next year in that business?.

We do I think that’s the only acceptable answer for us and we do feel like we have a pretty good understanding of the issues. We've been working hard on sales execution really bifurcating our sales channel strategy.

On inside sales basis we’re selling lot more of our transactional products and the outside team we're training up to sell more and more consultant fashion and really higher level higher ticket complex implementations which we think we're uniquely qualified to do because we’re really one of the only players in the marketplace that offers an instructional component which means the turnkey solution.

So - we have the ability to do it. Our expectation is that we will be back to growth by 2019..

I was just wondering and thinking to myself that with the managed school business seeming to gain momentum and the outlook there improving whether - how long a lease do you have on this business before you decide whether this is something core to take off over the long-term?.

My perspective is this is a business that should be multiple bigger than it is, we have to figure out how to get there but clearly we’re enthused about the continued growth in managed public schools.

And frankly when we just do the mathematical exercise around if we have the ability to improve retention this year to the levels we think we can in managed public school and then continue to execute against moderate growth as we have this selling season with managed public school.

We think we could have some pretty good out years to things come together at the right way. So that's just kind of mathematical opportunity for us..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks..

Once again thank you everyone for joining us this quarter. We greatly appreciate you being here and we look forward to reporting to you in about 90 days or so. Take care now..

This concludes today's conference. You may disconnect your lines at the time. Thank you for your participation..