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K12 Inc. (NYSE:LRN)

K12 Inc

October 17, 2012 08:30 AM ET

Executives

Ron Packard - Founder and CEO

Harry Hawks - CFO

Tim Murray - President and COO

Christina Parker – VP, Investor Relations

Analysts

Suzi Stein – Morgan Stanley

Jeff Meuler – Baird & Co

Kelly Metzler - Bank of America

Kelly Flynn - Credit Suisse

Jeff Silber - BMO Capital Markets

Trace Urdan - Wells Fargo Securities

Operator

Ladies and gentlemen, thank you for your patience. Your K12 Guidance Call for Fiscal year 2013 will begin shortly. Again, thank you for your patience and please continue to stand by.

Good day Ladies and gentlemen and welcome to the K12 Guidance call for Fiscal year 2013. My name is Ann and I will be your coordinator for today’s call. As a reminder this conference is being recorded for replay purposes. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call Christy Parker, Vice President of Investor Relations, please proceed.

Christina Parker

Thank you and good morning everyone. Before we begin, the company would like to remind you that statements made during this conference call that are not historical facts may be considered forward-looking statements, made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. In addition, this conference call contains time-sensitive information that reflects management's best analysis only as of the date of this live call.

K12 does not undertake any obligation to publicly update or revise any forward-looking statements. For further information concerning issues that could materially affect financial performance related to forward-looking statements, please refer to K12's Form 10-K and 10-Q filings with the SEC. These filings can be found on the investor relations sections of our website, www.k12.com.

In addition to disclosing 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 and most closely comparable GAAP information was included in our press release and is posted on our website.

This call is open to the public and is being webcast simultaneously on our website. The call will be available for replay there for 60 days.

With me on today's call is Ron Packard, founder and Chief Executive Officer, Harry Hawks, our Chief Financial Officer and Tim Murray, President and Chief Operating Officer. Following our prepared remarks we will answer any questions you may have. With that, I will now turn the call over to Ron.

Ron Packard

Good morning. Welcome to K12’s fiscal year 2013 outlook call. Before we begin, first and foremost I would like to welcome students in all 33 of our States, including the new schools we opened this year in Florida, Iowa, New Mexico and New Jersey.

During the first quarter of this fiscal year, enrollment in our managed public schools grew by 40% over last year. As you may recall, last year we had nearly 7000 children who were unfunded, which is more students than many school districts have in their entire district. This year we are managing business slightly differently and we have made conscious decisions to decrease the number of unfunded enrollments in our schools, which had impacted our enrollment growth but is expected to favorably impact revenue per enrollment.

We are also pleased to report that several new public charter schools contacted with K12 for curriculum technology and managed services, we recently approved. The South Carolina Cyber Academy received permission to open for the fall of 2013. In Florida, 3 new countywide public charter schools were authorized. The Florida Virtual Academy is Palm Beach County, Florida Virtual Academy is Broward County and the Florida Virtual Academy is Pinellas County.

Before I speak about our 2013 guidance, let me again address the ongoing topic of K12 policies and practices regarding teacher certification and respond to questions from our last earnings call that I promised to address.

First, our policy has always been to meet or exceed all applicable state requirements in our managed public schools, only in rare circumstances over our history where non certified teachers used and only in states where legally permitted. The schools we serve are regularly audited for compliance, in most cases far more frequently than traditional public schools.

We take compliance very seriously and always have. As asked on our last call, we have confirmed that Pennsylvania permits up to 25% of teachers in the chartered school to be non-state certified and in Ohio, the charter schools may engage non-certificated person to teach up to 12 hours per week. However, even in those states, schools managed by K12 only use certified teachers certified in that state.

In fact, across our managed public schools, there are more than 4000 teachers and I can report now that fewer than 10 out of those 4000 teachers are not currently certified in the state where they are teaching. In these rare circumstances, where the teachers not state certified, it is permitted by state law in all cases and there are unique justifications for the hiring decision, such as instances when the teacher is already in the process of working towards their certification in that state. This usually occurs in specialized subjects and in these rare cases the teachers are required to work towards their certification. Again, it’s important to know that in all cases, these hiring decisions are in compliance with all applicable regulations and these amounts to less than 0.25% of all teachers teaching in K12 managed public schools.

Since this certification issue was raised, we are also currently conducting review of the certification of the teachers who provide services for institutional business customers, particularly those who are employed by KC distance learning and teach the events of curriculum. These businesses were recently acquired and are currently in the final stages of integration into K12 operation and into K12 culture.

In our institutional business, public school districts had purchased online courses or programs in K12 can also opt for a teacher who often teaches multiple courses in numerous states, which many districts permit. For those of you unfamiliar with certification procedures, a teacher must go through certification process in each individual state for each subject. We understand the complexities associated with providing teachers teaching services across deadlines and we are working closely with schools and school districts to ensure the policies required by our district customers are being followed.

Turning now to the outlook for fiscal year 2013, we anticipate the revenues will be between $840 million and $870 million. And EDITDA will be between $107 million to $115 million. The midpoint of these ranges is consistent with fiscal year 2013 estimates as posted on First Call yesterday afternoon, which reported on a consensus basis revenue of $854.6 million, an EBITDA of $112.1 million.

As we told you on our last call, we remain comfortable with consensus estimates for fiscal year as posted on First Call. Last month, we also told you that Q1 for fiscal year 2013 was too heavily waited and we are frustrated that the consensus does not currently reflect what we believe to be the be the appropriate waiting across quarters. We continue to focus on improving margins and are steadfast in our commitment to improving academic outcomes for our more than 100,000 students.

Now I will turn the call over to our CFO, Harry Hawks.

Harry Hawks

Thank you Rob. Good morning to everyone on our guidance call and listening in to our webcast. I am pleased to provide our outlook for fiscal 2013. As many of you have recommended we’re providing a range for the various financial metrics included in the press release. Generally, the midpoint of the range is consistent with First Call consensus. The variability on either side of the midpoint in reasonable in our review. For example, the revenue range equals approximately a 1.7%, plus or minus variance from the midpoint.

Furthermore, this range recognizes the market risk we experienced in fiscal 2012 and the political uncertainties we believe are inherit in certain states this election cycle, particularly as it relates to key ballot initiatives. We’re forecasting the following for fiscal 2013. Revenue of $840 million to $870 million, EBITDA $107 million to $115 million, operating income of $45 million to $50 million. Depreciation and amortization expense of $60 million to $65 million. Capital expenditures including capitalized curriculum, capitalized software development and PPNE of approximately $55 million to $60 million. Capitalized leases for student computers of approximately $20 million to $25 million and an income tax rate of approximately 42% to 44%.

As Ron mentioned, I will also reference our quarterly waiting comment from our Q4 call of the full year consensus is at the midpoint of our guidance range. We repeat, our earlier comment that consensus allocation between quarters waits Q1 too high at the expense of Q4 and to a lesser extent Q2. The various range cascades down through certain other metrics as appropriate. Although, it’s important to recognize that the impact on EBITDA and operating income is not formulaic or necessarily linear as other factors can come into play from volume, to rate to mix and others.

Ron made a note of our enrollment growth rates for our managed public schools which are a lower rate versus the prior year. I am going to add a little color to that. Enrollment growth in 2012 benefited from the effects of our acquisitions, greater number of enrollments from new states, larger contribution from increased caps. If we isolate and then compare same school organic growth, we added roughly 10,500 students this year versus 9,500 students last year. Growth rates of approximately 14% and 15% respectively. As we look forward we’re focused on the quality of our enrollment growth, where we have significantly fewer unfunded students.

Accordingly, we expect to reverse the trend of recent years, where enrollment growth exceeded revenue growth due to various factors ranging from funding reductions to student mix, to single count sates and the light. Our management team made deliberate efforts to improve revenue capture where students we teach reducing the number of students we have not in the past and paid for working with our school district partners to develop equitable methodologies for student counts and striving for an overall improvement and our compliance efforts. Therefore, we expect revenue growth to exceed enrollment growth this year essentially reversing the trend of recent years, which by the way is unusual in a long term historical context.

In addition we’re expecting a continued evolution of the seasonal pattern of our business as the business mix changes and the business model itself evolves. For example, we see an emerging trend of a greater proportion of material free courses which will reduce Q1 shipments on a relative basis and revenue related with that, but well, on the longer term improves our operating margin. In addition the still evolving profile of course enrollments and license sales in our institutional business results in Q2 and Q4, being larger quarters for those categories of revenues.

As many of you are aware some time ago, we launched an effort to reorganize our business units along three lines, as we refer to it, the three pillars of K12. Our 10-K portfolio describes what we have done. This strategic initiative to better align resources, maximize managerial effectiveness, better serve our students, leverage the intellectual and technical assets common to all and capture operating synergies is still ongoing. Consistent with this effort we’ve only recently started providing revenue by pillar which by itself also represents a change in our internal reporting as well.

In an effort to help you have a better sense of progress among these lines of business, we are providing some historical context in the press release. Regarding selected operational metrics, we’ve also included some historical enrollment data for two of the three pillars being managed public schools and international private pay.

Historical data was reclassified to conform with the three pillars presentation into update for net immaterial but net positive adjustment.

Operator, we would now be pleased to take any questions.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Suzi Stein with Morgan Stanley, please proceed.

Suzi Stein – Morgan Stanley

Hi, if we try to normalize for the 7000 unfunded students, with that imply that enrollments are actually up 22% and not 14%. And what can you do to get rid of the unfunded students and the numbers.

Ron Packard

It’s not quite that, because we will have some unfunded students here, so if we take those students out, the growth rate would be about 18%, because we’re not going to have zero. There will still be some. K12 has a hard time saying no to kids who want to come to us, but it will be less number, so we’d make about 18% growth rate.

Suzi Stein – Morgan Stanley

Okay and then what are you assuming in the guidance in terms of any changes in state funding, like how should we think about revenue per student.

Ron Packard

With regard to an apple-to-apple basis, we have the state funding levels which again here, there is like, when you actually realize there’s like 12 variables to get into that, but on the apple-to-apple kind of price per student basis we have to model it down the neighborhood by 1%.

Suzi Stein – Morgan Stanley

Okay and then on the last call, you talked about taking costs out of the system, where do you think you can get operating leverage in the next 12 months?

Ron Packard

In addition to the operating leverage and we know we’re based on the dimension of the ERP cost will not go down to zero, will be about half of what they were last year. And we’re also seeing the start up losses will be about half of what they were last year, so we’re getting some leverage there but also, as our scale gets increased we become better in purchases of material, better purchases of computers and we’re also able to get higher leverage out of the management infrastructure cost that exists in the large number of schools. Most of our employees are outside of the headquarters, you have managed organizations for every state and you get some leverage as the overhead cost in each of the schools. And then generally our SG&A, here we get leverage out of most of the non, to finance all those functions, so we’re getting it across the board, in addition to those, the special ones I talked about.

Suzi Stein – Morgan Stanley

Okay great, thank you.

Ron Packard

Thank you Suzi.

Operator

And our next question comes from the line of Jeff Meuler with Baird, please proceed.

Jeff Meuler – Baird & Co

Thank you, just want to ask a follow up on the same school organic growth metric that you gave for 14 and what percent last year, a 14% this year and a 15% last year, could you just clarify again what adjustments you have made to get to that number and how the unfunded students play into that?

Ron Packard

I think, go ahead Harry.

Harry Hawks

Certainly, the last year our enrollment growth benefited from a number of things, a fairly large contribution from new states, a fairly substantial amount of cap increases and of course, acquisitions. If we strip away of those things and look at just organic growth on a same school basis without the new states and without the cap increases, it’s roughly 14% compared to 15%, so reasonably comparable. But that’s with the higher percentage of last year of unfunded kids, lower percentage this year of unfunded kids.

Ron Packard

So just to make it really clear, when you look a year-over-year, there are three big factors that make a difference in all of us. One with last year, we had the acquisition of Inside, which added to the involvement growth last, two, is the unfunded students which will be, which were a lot more last year than the previous year and will a lot less this year. And third, we’ll always have some this institute in our enrollment growth, because we ended up with new states, caps coming off and that will always either fuse it up or down and we expect this year was low because the new states were smaller school and we didn’t have large large cap increases that we would expect. For example the 14-year to be a large contributor with the caps coming, getting increased in Michigan for example already known, we would expect to 2014 year to have a much higher enrollment growth because of that cap coming undone and we also think one or two larger states that may come on will be large state posses small so, the new state and capital balance around year-to-year, this year was a lot less than last, we expect next year to be a lot more.

Jeff Meuler – Baird & Co

Okay, this 14 to 15% growth rate, its organic growth in uncap states plus you do not adjust for the unfunded students?

Harry Hawks

In that number, tats correct.

Jeff Meuler – Baird & Co

And then how should we expect the unfunded students to kind of ramp or decline over, as a zero unfold relative to last year. You gave us what the current cap is, does it widen or narrow as the year goes along.

Ron Packard

It’s hard to say, we expect it would stay similar throughout the year.

Jeff Meuler – Baird & Co

And then, just on the operating leverage question, maybe I’m getting a little bit nitpicky here on the EBITDA margins, but it looks like the EBITDA margin, implied IBITDA margin from the guidance but the midpoint maybe implies a little bit of a decline in EBITDA margin and a little bit of expansion at the high end. Just wondering if you could address that relative to the commentary about the expected leverage?

Harry Hawks

Certainly. Well first half, on the range we’ve got a fairly modest difference at the low end of the range compared to the implied EBITDA margin for ’12, and obviously at the higher end of the range improvements in the EBITDA margin. But once again, we are looking at all the factors that Ron already articulated in terms of where the operating leverage comes from. In addition, I think it’s also fair to say that we are – because we have got a credibly hyper focus this year on CapEx, but let me peel that back a little bit.

Underneath what drives CapEx is investment things like curriculum, products, platform etcetera. Those kind of investments are highly scalable. For example, some of the technology and product would support, not just 100,000 students but 1 million students. And so, the cost associated with those investments and the operating cost that go with it are very, very scalable, plus those are the kinds of investments that are common in bridge across the three pillars of K12. So, the leverage comes in a variety of ways, both in terms of organic growth within an individual pillar, but also leverages the operating capabilities across the three pillars or lines of business in K12.

Jeff Meuler – Baird & Co

Okay. And then final one from me. When you said that the guidance recognizes market risk experienced in 2012 in political uncertainties, does that mean that you have baked in some potential midyear funding reductions or changes in terms of how states do count days or things like that, that negatively affected that you already baked at the end of the guidance?

Ron Packard

Let’s just say we are creatures of history. So, we try to allow for potential adverse events in the line with what we see historically. You have to do that otherwise, you know, but (inaudible). We don’t know – we tend to when the events on the horizon that are positive, we very rarely model them in and we try to model in things that could work adversely. That’s generally our philosophy.

Jeff Meuler – Baird & Co

Understood. Just want to make sure we are all on the same page. Thanks guys.

Ron Packard

Thank you.

Operator

And our next question comes from the line of Kelly Metzler [ph] with Bank of America. Please proceed.

Kelly Metzler - Bank of America

Hi, this is Kelly Metzler for Sara Gubins. I was wondering if you got improvement in profitability in the Kaplan Virtual assets in the first quarter? And also, how does the margin of this business compare relative to the rest of the company?

Ron Packard

So, the Kaplan Virtual assets, which were the Kaplan Private Schools and Insight, the Kaplan Private Schools are very difficult because they basically merged into our three schools last year. They don’t exist as a standalone entity. The Insight assets are now positive contributors and they have been integrated into our operations. So, those schools which are seeing very good growth are now positive contributors. They are obviously not at the scale where the efficiencies have to be the same kind of positive contribution of our schools we have had for many years, but they are now positive contributors. So, we feel great about that. We took an asset that has historically been losing, you know, $10 million plus a year for as long as they went back. And now, we have turned them where they are positive contributors within what 30 months. So, we feel pretty good about that and we think that as we continually put more of our processes, procedures and scale that those businesses will be even better contributors.

Kelly Metzler - Bank of America

Thanks. And the follow-up, international and private pay student enrollment for the course enrollments were about flat year-over-year in the first quarter. Is there anything going on there and could you talk about the long-term growth drivers of that business, and if you expect it to be up year-over-year in fiscal year ’13?

Ron Packard

Certainly. By the way, just to be clear, we are very excited about that segment of our business. There is a lot of growth potential there long term. So, don’t want to imply anything other than our significant competence and excitement about that line of business. One of the things that is evident here in the information that we have shared with you is we had a substantial amount of, say credit recovery type courses that we were able to sell, if you will, through private school platform last year that’s not been realized just this year.

So, that gives us a little bit of a distortion in terms of a one quarter versus one quarter comparative analysis. So, we are working on a variety of things that will once again accelerate the growth opportunities there.

Harry Hawks

I would like to add, our K12 International Academy, which is our vehicle that we created – the enrollment there, up 21% for last year.

Ron Packard

Yes. I should have been more specific. The credit recovery comment actually was very specific to our Keystone private school versus international academy, which is up quite nicely.

Kelly Metzler - Bank of America

Thank you.

Operator

And our next question comes from the line of Kelly Flynn with Credit Suisse. Please proceed.

Kelly Flynn - Credit Suisse

Thanks. I have a couple of different questions. First of all, just back to the kind of political commentary, I think you specifically mentioned some ballot initiatives. What are you talking about basically on that?

Ron Packard

There is election coming up, Kelly.

Kelly Flynn - Credit Suisse

Right, I know. But what are the specific – thanks to that – what are the specific initiatives? It sounds like you have your eye on the cup ball.

Ron Packard

I am just – there is a bunch of events that I rather not comment on specific states with regard to politics, but there are four or five things that are happening at various states that we think will affect our outlook. And one the obvious ones which I will just give you one, but there are about five of them. For example, there is a ballot issue on California that will affect school funding in California. And the fast as you end up, my guess is that you will have – less reductions in California, maybe of an increase. So, that’s just one example, but there are four or five other things like that. And after we get the post-mortem, we may comment a little more specific, but I tend never to comment on political events.

Kelly Flynn - Credit Suisse

Okay. Great. And then, just regarding, I think your color on the consensus estimates by quarter. I think you said basically, you think maybe Q1 was 5. Can you give us a little more help there? I mean, what specifically are you trying to say there, and maybe a little more help on where we should be for Q1?

Ron Packard

Yes. And by the way, we are certainly happy to have a follow-up offline to go into more detail with you, of course, but one of the things that we referenced in the prepared remarks is we are doing things deliberately to, if you will, evolve our business model. Let me give you an example. We referenced in the comments an increase in materials-free curriculum. Q1 in terms of the seasonality of our business is the largest single quarter throughout the year where we have shipments of materials as would be obvious. And associated materials revenue is more significant in that quarter versus other quarters.

Now, the good news is it’s a relatively low margin piece of business that we do. And so, we are delighted by the way to grow the materials-free curriculum, that’s a good thing. Longer term and throughout the year, it will actually contribute to margin improvement. However, it shifts revenue out of the quarter and to subsequent quarters. So, that’s a little bit of the color there. In terms of impact, it’s probably single-digit percentages and single-digit millions of dollars, but we can try to work with you to give a deeper understanding of that offline.

Kelly Flynn - Credit Suisse

Okay. Can you give us a sense of how much of the EBIT you think will fall in Q1 or how much will be in Q1 as a percentage of the year?

Ron Packard

Why don’t we take it offline because we are not actually giving Q1 guidance, and I want to be a little careful not to accidentally walk into that. However, we do want to be responsive and helpful. So, we will visit with you offline.

Kelly Flynn - Credit Suisse

Okay. And then, just another one on – this is sort of related what Jeff was asking, but on the 18% enrollment growth ex the impact of the unfunded students, that’s nice growth, but obviously it’s lower than what you saw last year. Can you make some more qualitative comments there, Ron? I mean, is this reflective of any kind of headwinds related to Florida head buying their New York Times, and how should we think about that 18% relative to what you think the long-term growth potential is of the managed school business?

Ron Packard

Sure. It’s a good question. So, couple of things. Remember, it’s not just beyond funded, it’s also, last year, it happened to have the acquisitions and expenses. So, I think it’s not clear, obviously it’s always hard when you are a high growth company to figure out what the large numbers is, but we don’t necessarily believe. A lot of times we have seen where a lot of them just a publicity to attention and the awareness that’s created even by false negative publicity actually helps enrollment, because what parents (inaudible) good product, and we didn’t see changes in withdrawal rate because of publicity. We didn’t see changes in the rates, which customers sign up. So, we haven’t seen a large change. So, we are not sure whether that publicity actually helps or hurts with regard to student growth rate. But the same state’s growth is not that different year-over-year.

So, I think that’s a good indicator that we are not seeing the headwinds that you described and the difference in growth has more to do with the acquisitions beyond budget states and the cap expansion differential. So, we feel pretty good about how the market responds to us. We think this growth rate is pretty good. Obviously, you know me, I am never satisfied, 60% on that satisfied. So, we just think we do a great thing for kids who want to sort as many kids possible.

So, I think it would be hard to comment. It’s clear, we will put it this way. The difference isn’t obvious, right. We are not seeing a significant change when you could obviously say it’s due to this or that.

Kelly Flynn - Credit Suisse

Okay. Got it. And then, just the last one, can you go back to the unfunded students? I think I understand high level, but what exactly is going on with the students, sort of they are not funded? Are you saying you are providing a service to them and you are getting paid nothing? If that’s the case, why would you actually enroll them at all?

Ron Packard

Kelly, what I was saying was (inaudible). So, last year, we talked about because there are lots of kids that come to us after dates in which the states will not fund those children, we have the option of taking those students or not taking those students. In some cases, we don’t even – and so, we historically have made those decisions differently in different years, and so, last year, we had just about 7,000 students that we were completely serving with teachers, with curriculum, with materials and computers that we got zero for it. We only received zero dollars for them. Now, why do we do that, because we like to help children, right. We make those decisions based on that matter and we always have helped kind of the error on the side of the child – saying please educate my child, and we can within reason and we do it.

This year, that number will be probably half, down half from that. And we still going to take kids because of that count situation in certain cases to help them. And that’s why it happens and a lot of ways and some ways it’s philanthropic effort in a lot of ways and that we have been willing to take so many kids. And now, we are just drawing a line a little differently. And we could take that line up or down depending on the year, but that’s what happens, and it’s just case what’s called through, we want to help kids. I mean, it just so ingrained all the way through the organization about helping as many kids, doing the right thing for kids. And so, that’s where it came from, and we are just going to be a little more judicious. That’s why I almost chuckled when I read in papers about accusations that somehow K12 was getting paid for kids who were on survey, and (inaudible) but we found out we have 7,000 kids that we are not getting paid for. So, these were ridiculous things that were put in newspaper articles that were almost comical. I mean, K12 has behaved exactly the opposite way even against our own financial detriment. So that is for that issue, and there is going to be less of (inaudible).

Kelly Flynn - Credit Suisse

Great, thanks a lot. Appreciate it.

Operator

And our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed.

Jeff Silber - BMO Capital Markets

Thanks. Just wanted to clarify a couple of things. In your comments, you talked about revenues growing faster than enrollment growth. But I think when somebody asked a question about revenue per student, you expected that to be down this year. Can you just equate those two statements?

Ron Packard

Yes. You got to separate revenue per student and pricing. So, the answer we try to give is that, if the same page you x per child, which is the basic funding rate, which the next year, next year that we are paying you 0.99x. But the actual revenue realized per student depends on, if you cut the number of unfunded students, your denominator changes and you have removed all the excuse of denominator and that changed the top line at all. What the attendance rates are of those students matter. The mix shift among the various states matter, the mix between high school and K8 matter. So, the revenue per student can absolutely be off, while the actual apples for apples pricing you are receiving across the portfolio of states is actually down.

Jeff Silber - BMO Capital Markets

Okay. Got it. Thanks for that clarification. Also, just wanted to double check, the way that you are defining enrollments in course enrollments in the international and private pay business, you called it cumulative. Can you explain what that is and why you didn’t give us an average student enrollment number like you did in the managed public school segment?

Harry Hawks

Certainly. Well, first off, the business model is different there. So, the reference to cumulative, if you look first quarter through fourth quarter, you see the numbers build throughout the year. So, that is a cumulative count as our student counts actually do go up. And so, what we have done there is just to give you the raw data that we have a mix of full-time and part-time. And so, we give the student count of the kids that we have served on a cumulative basis throughout the year. So, Q1 will be smaller, Q4 will be bigger, and then, the actual course enrollments which is more directly tied to the revenue generation as a general statement is the way to look at that. The funding and the business model and the pricing is just different in the private model versus the public model. So, that’s why it’s presented that way. Is that responsive to your question?

Jeff Silber - BMO Capital Markets

Yes, but again, if you can just give it a little more color why it’s built so dramatically throughout the year?

Harry Hawks

Because kids enroll throughout the year. And there’s special things such as credit recovery where kids come in at a variety of times throughout the year. So, it’s a different business model and once again, coming back to the comment about, there’s a fairly significant number of part-time kids there who come in at various times throughout the year to take one or two courses, and that’s what they came for.

Ron Packard

And if we just see with the private schools, kids will come in throughout the year, particularly in things like credit recovery because you don’t really just so you need them when you start to fall. So, it comes on at a much larger rate later on, but it’s just a different business model, different than the iAcademy for example. So, it’s just, it’s behaved differently, but for the public schools, the average enrollment is a better number.

Jeff Silber - BMO Capital Markets

And going back to the segment, you still expect that kind of buildup throughout the year, but we are just starting from a much lower base in the first quarter because of what you mentioned in the credit recovery side.

Harry Hawks

Yes, that’s correct. In the first quarter, it suffers from the law of averages. As Ron said, we are seeing very, very nice growth in our higher revenue per unit iAcademy school, where we are seeing lower growth in the credit recovery lower priced business delivered through the Keystone school, but we expect that to build to plan over the course of the year.

Jeff Silber - BMO Capital Markets

Okay. Great. All right, thank you so much.

Ron Packard

Thank you.

Operator

(Operator Instructions) And our next question comes from the line of Trace Urdan with Wells Fargo Securities. Please proceed.

Trace Urdan - Wells Fargo Securities

Ron, thank you for those comments about the teacher hiring practices. I am just wondering if you can say anything about what the status of the Florida investigation is and when we might anticipate it being resolved formally?

Ron Packard

I can’t predict when the government investigations would come out. Basically what I say is we have cooperated fully with the IG investigation. The statement I made in the last call about the certification issue, and in fact, we hired an external investigator to investigate. Nothing has changed. We have had further discussions in incorporation with the investigation and we respect the investigation, we expect the Florida IG and we will await the outcome. We are hoping it’s sooner rather than later.

Trace Urdan - Wells Fargo Securities

I am sorry. Did you just say there’s been further back and forth?

Ron Packard

When there is investigation, you are constantly cooperating with that investigation, you are asked – they talk to people who worked in the Florida school. So all I can say is there are conversations that I can’t comment on. I don’t have a comment on this, but we are still very comfortable with our statements about the last and the results of the external investigation. Nothing has changed on K12. Viewpoint, we are actually quite happy that we have received several countywide charges in Florida since that. These accusations we have managed to continue to move through forward, and we think the investigation will come out and show – as we talk (inaudible).

Trace Urdan - Wells Fargo Securities

Got it, all right. Thank you.

Operator

Ladies and gentlemen, with no further questions, this concludes today’s question-and-answer session. I would now like to turn the call back over to Mr. Ron Packard for closing remarks.

Ron Packard

All right. Thank you everybody for joining us on the call. Just a couple of future events. We will have in early November, our first quarter earnings call. We will be at JPMorgan’s conference in New York on November 14th, and in the first week of December, we will be at the UBS Conference in New York. We look forward to seeing many of you there and thanks for your support.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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