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K12 Incorporated (LRN) Q1 2020 Earnings Call Transcript

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K12 Incorporated (NYSE: LRN)
Q1 2020 Earnings Call
Oct 22, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to K12 First Quarter Fiscal 2020 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded.

I would now like to turn the conference over to your host Mike Kraft, Head of Investor Relations. Thank you, you may begin.

Mike Kraft -- Senior Vice President, Corporate Communications

Thank you and good afternoon. Welcome to K12's first quarter's earnings call for fiscal 2020.

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. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. They 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. These reports include, without limitation, cautionary statements made in K12's 2019 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 US or GAAP, we will discuss certain information that is considered non-GAAP financial information. A reconciliation of this non-GAAP financial information to the most closely comparable GAAP information was included in our earnings release and is also posted on our website. This call is open to the public and is being webcast. The call will be available for replay for 30 days.

With me on today's call is Nate Davis, Chief Executive Officer and Chairman of the Board, and James Rhyu, Chief Financial Officer and President, Product and Technology. Following our prepared remarks, we will answer any questions you may have.

I'd like to now turn the call over to Nate. Nate?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Thank you, Mike. Good afternoon and thanks for joining us on the call. Today, I want to provide you with some detail on our fiscal year 2020 count date enrollment as well as our guidance for the full year. I like to start by thanking the entire K12 team for such a great year. Outside of having a large school in Georgia decide to go to self-management, which as we previously announced dampened our enrollment growth. This team is driving excellent progress on so many fronts.

Specifically on enrollment, our Managed Public School business grew to 122.3 thousand students. This is an increase of 3.5 thousand students or 2.9% year-over-year. Importantly, this marks the fourth year in a row that we've seen enrollment growth in our Managed Public School business. Without the impact of the GCA Board decision, our enrollment growth would have been even stronger, in fact, enrollments would have increased 14.7 thousand students instead of 3.5 thousand, and this would be up from the 11.1 thousand in the prior year. This is an increase of more than 32% year-over-year. It's also the highest absolute enrollment growth we posted in the last seven years.

Importantly, enrollment growth was not concentrated in one school nor in one state. We saw growth in more than 80% of the states in which we operate in fiscal '20. It's also worth noting that nearly 50% of the schools posted enrollment growth of more than 10% and our new programs in Alabama, Florida, Texas, Missouri and Ohio also helped, as they comprised a little more than one-third of our enrollment growth. These results underscore the enrollment growth we posted over the last few years were not a temporary phenomenon, rather they are a clear indication that the market demand for online and blended learning options continues to be robust.

Now, a number of factors have contributed to our enrollment growth. First, the number of families reregistered for another year, excluding GCA, increased 16% year-over-year. Our continued focus on improving user experience resulted in stronger student engagement, motivation and retention. We'll continue to improve in this area and maintain a culture of students first in everything we do. Also customer satisfaction continues to rise. Some of you may know, the net promoter score is a global standard of customer satisfaction and loyalty that measures the likelihood of customers to recommend the company. K12's most recent score has risen for the third year in a row to 70% for families rating K12 powered schools.

Second, lead volume hit another high point. This season, we saw an increase in lead volume of 8% to over 385,000 leads. Marketing team used a mix of online and offline marketing to drive interest in K12 powered programs, and our national on-air advertising has long been very effective for us, giving our national footprint. However, every year, we focused more and more of our marketing spend on digital online strategies. Results show that our continued focus on digital marketing generated 2.5 million unique visitors to K12 website this year compared to 1.5 million in the prior year.

Third, interest from parents and students in Career Readiness continues to grow. Enrollment in our Destination Career Academies increased to 13.5 thousand students. This means that more than 10% of students in managed schools are in a Career Readiness program. This represents an increase of 6.4 thousand students, a growth of 90% year-over-year. We estimate that the Career Readiness business will deliver about $90 million in revenues during fiscal year 2020. Overall, we remain confident that we can achieve revenues in the Career Readiness business of over $200 million over the next two to three years. To achieve this goal, we will continue to work with a number of school partners on new programs that will open in fiscal year '21 and beyond. We started the school year with 20 Career Readiness program and are targeted to add four to five new programs over the next year, bringing the total to 24 to 25 schools at the start of next school year.

As we've noted in previous calls and previous communications, over the next two to three years, we plan on expanding our coverage across all of the states in which we operate. At the same time, we will also look to expand our part-time programs. Those programs allow students to attend their local brick and mortar schools, while also enrolling part-time in Destinations Career Academy courses. Our target is to add two to five states that provide this kind of part-time program. We will market it to both directly to consumers and direct to school districts and drive enrollment. And while this initiative is in its early stages, I believe that it has the potential to drive significant growth for Career Readiness over the long term.

Let's talk about Tallo. Tallo is our career connection partner and they're also making great strides. Tallo ended the quarter with 580,000 users on the platform, an increase of nearly 55% year-over-year. While continuing to grow their population of student users and partners, this year, Tallo is also expanding into state workforce initiatives. For example, Tallo just partnered with Ivy Tech Community College, the nation's largest accredited statewide community college system. High school and college students will discover and have access to a multitude of tech and manufacturing-related opportunities available at Indiana. Ivy Tech along with Indiana companies like Michelin, Country Mark, Endress+Hauser and Duke Energy will showcase their opportunities connect with talent on the Tallo platform and view analytics about talent using the Tallo platform.

In addition, Tallo has also started a partnership with [Indecipherable] Incorporated in Delaware. This partnership will create a statewide ecosystem pulling together high schools, colleges, companies and government agencies. [Indecipherable] is one of the country's first non-profit STEM organizations with a mission to prepare and motivate students particularly young growth and those from underserved community to enter college and complete a degree in STEM.

As you can see there are very -- some of the very exciting things happening in Tallo this year. In addition to partnering with companies through Tallo, we're working with more than 100 partners across the nation to offer various workplace experiences for Destination and Career academy students. These range from job shadowing experiences to mentorships to internships, and this is just the beginning. There is a genuine excitement when we talk to companies about Career Ready. I expect a number of partnership opportunities to continue to expand throughout the year, as we educate more companies about what K12 is doing in the Career Readiness space.

It's important to note that our expansion in Career Readiness will not stop with full-time and part-time public schools. We've already launched a private school focused on Career Readiness, which serves students across the nation in a Parent Pay Model. Our vision over time includes possible expansion even into adult learning, corporate training perhaps even in the international market. The key takeaway is that building out a blended experiential Career Readiness program largely for high school students right now is just the first step.

So in summary, enrollments grew on par with our expectations and other than the impact of school moving to self-management, these enrollments grew faster than any year in the past seven years. Importantly, both K12 powered General Education Academies and Career Readiness programs contributed to our growth. One thing is clear, our base business is strong and it's getting stronger.

Taking all this into account, our revenue guidance for the year is $1.02 billion to $1.035 billion. This is an increase of up to 1.9% year-over-year and if the enrollment growth trend continue along the lines of fiscal '19 and fiscal '20 where we grew more than 11,000 and 14,000 respectively, without the effect of GCA, our future revenue growth should be strong and to-date. On the base of a very strong core business, we're also starting to see the benefit of entering the Career Readiness market, a market that is helping students at all levels prepare for jobs in the future.

Now turning to operating income. We expect adjusted operating income in the range of $68 million to $72 million. This is an increase of up to 16% year-over-year. As I said last quarter, our multi-year internal plan calls for us to deliver low double-digit growth in adjusted operating income for the next few years. I believe market demand for online and blended option combined with efficient expense management continue to make this internal plan clearly achievable.

Regarding capital expenditures. We expect to invest in the range of $45 million to $49 million. This year, we will continue to spend on innovation, primarily to grow our Career Readiness capability and strengthen our support for teachers in our core business. Our investment in Career Readiness will include expanding the number of project-based learning courses, deepening the content for existing pathways and expanding into new career pathways.

In closing, I want to be clear that our number one goal continues to be helping students grow in every way. Especially of course in their academic endeavors. That means investing in teachers and school leaders, making their learning experience more personal and engaging, building a robust Career Readiness business and leveraging the latest innovations in technology. We believe that our focus on academics and innovation in addition to driving an efficient business model, will produce consistent growth in revenue and in earnings for our shareholders.

So thank you for your time today. And now I'll hand the call over to James to review our first quarter results as well as provide some additional detail on our guidance. James?

James Rhyu -- Chief Financial Officer and President, Product and Technology

Thank you, Nate, and good afternoon. First a recap of our reported results. Revenue for the quarter was $257.1 million, an increase of $5.8 million or 2.3% from the prior year. Our loss from operations was $19.4 million compared to $13.8 million in the prior year, and our adjusted operating loss was $13.9 million compared to $9.7 million. Capital expenditures for the quarter were $16.9 million versus $17.7 million last year.

Revenues from Managed Public School programs increased to $227.5 million or 3.2% higher than a year ago. The increase was largely a result of the 2.9% increase in student enrollments. As Nate mentioned, we're encouraged with the enrollment growth and broad-based demand we saw across the schools in the states. Over 80% of the states in which we operate saw enrollment growth, and we believe that this growth reflects the ongoing macro trends of greater acceptance of online education as well as demand for our Career Readiness education offerings.

Revenue per enrollment for the quarter was largely flat. We continue to see a positive overall funding environment in fiscal '20. However, for the full year, our revenue per enrollment will be somewhat pressured by school mix. As we previously highlighted when states open, we see revenue per enrollment that is often below average. Over time, we work with the schools we support and the states to increase per pupil funding. This year, we are indexing a little bit more in newer states such as Texas, Florida, Missouri and Alabama where funding is below average. And given our mix in the current climate, we believe per pupil funding levels to be flat plus or minus a couple of 100 basis points for the full year.

In our institutional business, revenue declined 7% on a year-over-year basis. Non-Managed Public School program revenues declined 16.1% as a result of enrollments declining 34.5% and revenue per enrollment was up significantly in the first quarter, given the mix. Our revenue decline is largely due to K12 terminating its relationship with certain programs, specifically we saw several schools close, we'll have challenging operational issues due to poor compliance or general mismanagement by school operators, and unfortunately, [Indecipherable] was a provider of some of these companies. Once, we became aware of these situations, we terminated the relationships.

Institutional software and service revenues were up 2.3% for the quarter. In total, we expect institutional revenue will be down about 15% to 18% for the full year. Private pay revenues were $8.7 million, up 4.7%. We still believe in the long-term outlook for this business and have a number of initiatives in progress to drive growth, however, these activities are early in their development and should not have an impact on current year revenues. As such, we would expect current year revenues to be largely flat to prior year.

Gross margins for the quarter were 34.1%, down 250 basis points from the first quarter of last year. Margins for the quarter were pressured by some early investments in schools to get them off to a strong start for the year. Some of these on-boarding costs were one-off and we expect full year gross margins to be about flat to the prior year plus or minus 100 basis points.

On the expense side, as we outlined last quarter, for fiscal '20, we combined selling, administrative and other expenses with product development expenses. This means we're only reporting a total selling, general and administrative number going forward. And for the quarter, these expenses grew by $1.1 million to $107.2 million. As we grow, we believe we will continue to have leverage in this line item. We will do this by driving automation and other operational efficiencies and it will not detract from our investments in growth areas like Career Readiness.

For the full year, we expect, selling, general and administrative expenses to be basically flattish to last year. I also want to remind you that as with prior years, we expect a sharp sequential decline in spending in the second quarter, resulting from the seasonal decline in advertising.

Our EBITDA loss for the quarter was $2.2 million, adjusted EBITDA was $3.3 million both measures declined over last year largely as a result of the lower gross profit for the quarter. Stock-based compensation increased $1.5 million from last year, we granted some performance-based stock compensation that will drive some higher costs this year and also introduced some potential variability in future years. We currently estimate stock-based compensation of between $24 million and $26 million for the year.

Our loss from operations for the quarter was $19.4 million and our adjusted operating loss was $13.9 million, and as with previous years, this loss was primarily the result of seasonal marketing enrollment expenses, which are higher in the first quarter.

Profitability in the first half of the year will be lower than last year, and we will make it up in the second half of the year. As our guidance for adjusted operating income demonstrates, we still believe we will grow profitability by up to 16% year-over-year.

Couple of other items to note is that we ended the quarter with cash, cash equivalents and restricted cash of $167.4 million. This was a decline of $117.2 million compared to the fourth quarter. However, on a year-over-year basis, our cash balance increased by $22.4 million. The first quarter decline is in line with our normal seasonal trends and we'll expect to grow our cash balance throughout the year.

Capex, which includes curriculum and software development and infrastructure was $16.9 million, it's a decrease of $0.8 million compared to last year and for the year, we expect capex of between $45 million to $49 million.

Our effective tax rate for the quarter was a 47.5% benefit compared to a 37.9% benefit in the year ago quarter, and for the full year, we expect the tax rate of between 28% and 30%. This is in line with the expectations we outlined in last quarter's call.

To summarize our guidance for fiscal 2020, we're looking for revenue in the range of $1.20 billion to $1.35 billion. Capex of $45 million to $49 million, a tax rate of 28% to 30% and adjusted operating income in the range of $68 million to $72 million. And for the second quarter, we look for revenue in the range of $255 million to $260 million, capital expenditures of $9 million to $11 million and adjusted operating income in the range of $35 million to $37 million.

In closing, I want to reiterate that our full year guidance is in line with the expectations we laid out last quarter. We're all excited about this underlying growth in our core business and the initial successes we are seeing in our Career Readiness business.

Thank you, and now we'll move to Q&A. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Alex Paris with Barrington Research. Please proceed with your question.

Chris Howe -- Barrington Research -- Analyst

This is Chris Howe sitting in for Alex Paris. Good afternoon and congrats on the quarter. I had many questions here for you, but I'll just start off with a few and then I'll hop back in the queue. Can you talk about the cost structure in the quarter more specifically, the early investments in schools that you mentioned to [Indecipherable] them with on-boarding. Is that just more of a timing for expenses or how should we look at those investments and the return that you're seeing thus far?

James Rhyu -- Chief Financial Officer and President, Product and Technology

Yeah, I think -- so we test various things every year. This year, we invested a little bit more in the first quarter on a sort of a one-off basis, it's not really a shift in timing, but it's more on a one-off basis. On on-boarding students, we find that the better students on-board onto our programs, the better they retain and obviously there's a long-term financial benefit to them retaining, there's also a long-term academic benefit and outcomes benefits to them retaining longer. So we invested in some programs to essentially help kid get on-boarded better easier, help them with their set up, etc. So really incremental in some respects, not a shift we would not expect to see that shift out of other quarters.

Chris Howe -- Barrington Research -- Analyst

Got it, got it. Okay. And then Nate mentioned the lead volume that was strong in the quarter reaching the high point. How should we think about these leads coming in as you look at growth in 2020 about the current capacity or your ability to handle inflection?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Hi, Chris. This is, Nate. Yeah, I did mention that the leads have made up to 385,000 leads this year, and that's up from previous years. We have not seen a deterioration in our conversion rate from leads to applications that's when a student applies or into a student actually entering a school. So the way to think about it, obviously is that the top of funnel, the more leads we have and keeping the conversion rate the same, the more enrollments we have. So from a capacity point of view, it does cost us a little bit more enrollments entering processing students if we get more leads, but on a profitability basis the return on that investment is strong and not only return on investment but the incremental cost is not nearly as much as the incremental students. Now some of that happens because you open up new schools and some of that happens because of the Destinations Career Academy, but we are seeing greater lead as we market these academies and marketing schools.

Chris Howe -- Barrington Research -- Analyst

Okay, that's helpful. And my last question is on Career Readiness, you mentioned your expectations of $9 million in revenues in 2020 and then $200 million over the next two to three years. As we look at this outlook and consider your part-time programs versus your full time programs, how should we consider the mix as we move two to three years out in regard -- and in regard to revenue and margins for part-time versus full-time?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Well, I think for now the best thing to do is to treat all of the growth that we're talking about is coming from the full-time program. The part-time programs are brand new, they're nascent, they're small at this point in time. We're in two to five states and it's only a few hundred students, we started it in Wisconsin and we were going on to few other states. I think from a volume point of view, you should think of all of the enrollment is coming from the full-time. We will report out next year at this time and say how will the part-time programs are doing. That's the way I have to think about it.

Chris Howe -- Barrington Research -- Analyst

Okay. And just a bookkeeping, you mentioned the adjacencies the adult learning corporate training and international. That's additional upside none of that's factored into the next two to three years for Career Readiness. Is that correct?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Yes. That's correct. All of those are upside and opportunities we see in the market.

Chris Howe -- Barrington Research -- Analyst

Thank you, Nate.

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Take care, Chris.

Operator

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

Corey Greendale -- First Analysis -- Analyst

Hey, good afternoon and congratulations on the strong fall intake. I also have few questions. Do you -- is your sense that the good results are -- how much of that is because of just the market getting more sort of comfortable with online program. So how much of it is market growth versus how much is you taking share from other providers?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, actually, I think that there're a couple of ways I look at that. Hi, Corey, how are you doing? Number one, I think it's really more to do with our growth in Career Readiness. And that was sort of the top factor, the more we talk about it, the more people are interested in online program, even if they first have an initial interest in Career Readiness schools they may find that the general education school is good form. So I think it's more market growth because of the talk about Career Readiness than it is taking share from others. I actually can't see yet what others are reporting. So taking share from others. I really can't see that at this point. But if I look over the last couple of years, it's not been share from others that's driving our growth, it's really been increase in the market.

Corey Greendale -- First Analysis -- Analyst

Yeah, I was thinking since you shared the data on leads which is helpful, are you looking at like conversion rates or anything like that, if you're seeing. I guess you can't really disaggregate whether that's due to market growth or taking share, but anyway it -- I think you answered my question. So I appreciate that. Second question I had is, on the non-Managed -- I just want to make sure with some of the things, it sounds like it was entirely due to the folks operating those schools, but is there any -- is that done and no issue or could there be some like, is there any contentiousness around termination of those contracts or is there any possibility someone could come back and say, hey, it was if you like that, it was part of the problem?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

I can't see that -- without going into the detail, because we don't comment on open litigation. But I can tell you that at least one or two of those parties are under investigation by the state authorities. So it doesn't appear to have anything do with us, we were just a curriculum provider, but all the other things they did, how they ran their finances and how they market the students, how they accounted for things was all on them. So I don't -- it has nothing to do with us. We just provide a curriculum. So we don't see in any way that this has any impact on us or any coming back at us in any way. So no, I don't see that.

Corey Greendale -- First Analysis -- Analyst

And should we assume that Q1 year-over-year trend in that segment continues for the entire year?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, I mean, pretty much, you're going to see that flow through the rest of the year because the enrollment that we don't get essentially from them in the beginning of the year. We're not going to make up through the rest of the year.

Corey Greendale -- First Analysis -- Analyst

Okay. James, I had a question for you. The -- I know that there is seasonality in the cash flow and this is consistent with that. But it looked like the cash flow was down pretty meaningfully year-over-year and some of that looks like it's deferred revenue. So could you just -- is something going on with that? Was there some timing issue was getting paid by any states or anything?

James Rhyu -- Chief Financial Officer and President, Product and Technology

There was a little bit of timing issue in Q4 actually, Q4 bleeding into Q1. But nothing structurally unusual. It was just a little bit of unfortunate timing, that's all.

Corey Greendale -- First Analysis -- Analyst

Could you -- would you expect that free cash flow or let's say capital from the op for the full year should grow in line with operating income?

James Rhyu -- Chief Financial Officer and President, Product and Technology

Yeah, that's right.

Corey Greendale -- First Analysis -- Analyst

Okay, all right. And then, Nate strategic question, it sounds like so many things are going on at Tallo. You -- I don't think you control that, I think you are working closely with them. Is there any -- do you have them locked up at all or like theoretically could they -- others have started of tackling this market, could they sell to someone else or what's the protection against someone else taking advantage or leveraging what they're accomplishing?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Two things, number one, we have Board seat and a very tight relationship with them. And number two, we have a path that deals with what happens if they need further investment and they're obviously involved with us first. So given our sort of right of first refusals and path to control, we're not worried at all about somebody else gets it because we have first look.

James Rhyu -- Chief Financial Officer and President, Product and Technology

And for the other thing, I would say, is that we are -- I'd say in many respects encouraging as many people to get on the platform as possible, so we don't really view -- competitors we want their kids on as well. We think it's good for everybody.

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, I'm sorry if I misinterpreted that. Tallo is very much obviously, the number of students of 500 some thousand students, we're not the majority of their customers. It's really an open market for Tallo. So we want more people to leverage them. I thought you will talk about our financial leverage.

Corey Greendale -- First Analysis -- Analyst

No, that is what I meant. So those are both helpful. And then the last question I had is and then I'll follow up is some of the other things you're talking about Nate with the Career Readiness it sounds like some of that is potentially other -- corporate training obviously is a different source of revenue, but I just want to verify is some of this -- is it only enrolling students that are of an age that they are eligible for all the revenue first is coming from the state or are you getting into other revenue sources today. And secondly, meaning like workforce revenue or something like that. And secondly, how are you thinking about deployment of capital, as some of those other things are clearly adjacent. But I would think that it would take a different go-to-market than what you're doing today and how are you thinking about kind of the gating about deployment of capital?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Yeah. So first of all, all of the funding today is coming from the traditional state funding sources that come to all our NPS schools. We're not tapping on funds from, let's say, from consumer directly, we're not tapping in those funding sources. Those are all opportunities for us. As a matter of fact, the part-time schools, we definitely, as I mentioned before, it's a very small market for us, it started in a couple of states. We want to go to five states, but it's still very small, so you should think right now, 100% of that revenue is coming from the traditional state sources that we use for our NPS schools.

Now in terms of the opportunity and how will we deploy capital around that. The first step in doing that is in the part-time program. We are developing in different go-to-market because that's not the same team that develops a new NPS school. We have to go out and work with school districts and work with the funding sources that the school district have, for example, some of them have an innovation funding, some of them have Career Readiness funding, it might even be Perkins funding that go to the school. We can be a provider of the content and by the way, that is the institutional business that will be making that sale.

So we plan to go to market with a whole new approach, because it's not traditional NPS schools. We see -- if we see that working, I intend to take a look at what we can provide at college level and what we can provide at adult learning level. But those are not businesses, I'm in today, but what we want to do is build these pathways and build the content and then be able to go to corporation, pick a name of the corporation it has a number of workers that are not college-educated and say you need those workers to have a better education. We can provide that content so expertise in programming, expertise in manufacturing, expertise in agriculture business courses. Those are all courses that we can provide to their general employee base, not the ones that are college degree, and not the ones that are generally have best degree to be more the ones that are not advanced educated.

Corey Greendale -- First Analysis -- Analyst

Good. And if I could just one more comment, which is, it's not easy to identify kind of a new market opportunity and grow that to $90 million in revenue and the idea made sense on paper, but the fact that it's playing out as you said is very impressive. So I'd just add congratulations to you and the whole team on kind of laying that out and executing on it.

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Thank you. It's interesting story. We had some consultants in one time and they told us. I don't know how you're going to get this done, we really don't see the path. It's obviously working a lot better than they thought it would. So sometimes it just requires vision and focus and I'm really proud of the team to do that. Thank you.

Operator

Our next question comes from the line of Stephen Sheldon with William Blair. Please proceed with your question.

Stephen Sheldon -- William Blair -- Analyst

Hi guys. Thanks for taking my questions. I guess can you talk some about the enrollments that you have now in Career Readiness and specifically are a lot of the, I think you said 13.5 thousand enrollments in these programs students that have previously been on your platform in some way or the vast majority of the students essentially new to you? I guess I'm wondering are you attracting a much different student profile to Career Readiness than you are in most of your existing other online schools?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

I'll give -- James, you may have a different point of view, but I'll give you my point of view. First of all, hi, Steven. I believe that the majority of the students that are coming into the program right now look very much like the student that come into the NPS program and we're still -- there's still room for us to get what I call a market expansion, all right. So students that would never have considered on online school, we still think there's a lot of room to get more of those -- many, many, many more of those students multiple, multiple factor. Right now, the students that are coming in -- for the most part students that are sort of, hey, I was interested in online in the first place, but now with this career ready thing, they're really getting over the hump, it allows me to take the courses I want to -- in from what I'm passionate about in life, it gives me some confidence that adds to my initial interest. The student who said I was never going to consider an online school for, I'd never have considered that now career ready causing me to consider it. I still think there's a lot of room to get a lot more of those students. So that's -- we're early in that phase.

James Rhyu -- Chief Financial Officer and President, Product and Technology

Yeah, and I just would add that we do see a fair number of sort of the internal transfer meaning kids who are signing up for the normal programs and are transferring over into the career programs. We see that as a good thing because we think that the career programs are more applicable for them. They're better suited to them. So but I just want to reiterate what Nate said like I think the one thing that we didn't do great this year was expand the market for new incremental students. We did a better job of getting the Career Readiness folks into the career schools. But I think that our go-to-market for Career Readiness has -- we're in a first better of the first inning, we've got a lot of upside opportunity on that and we'll continue to push that to drive greater growth in the future.

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

And I'll only add one thing to that Stephen because it's a pet peeve of mine inside the company. We are going to be looking at our marketing approach and making sure that we're reaching out to new sources and new channels to be able to reach students that would never had considered online before. Now it's not that we didn't get any of them this year, we did get some and we can tell the ones that are brand new to the market. But we also there are some channels that we haven't tapped yet and we used some outside resources to come up with some of those channels. We think we can get better at it next year.

Stephen Sheldon -- William Blair -- Analyst

Got it. That's helpful. I guess in Georgia. Can you maybe talk about any progress you have potentially made on getting another school open there. I think you talked last quarter about hoping to have one opened by the fall. So I guess where are you now and what's the outlook there?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

We still likely we'll see a school open up this coming fall. It's more likely the fall after. The Board -- we've been working with one board, we may be working with another soon. So we may actually be -- we're at the support of more than one school. We've got some positive signals that the things we're talking about doing especially in the Career Readiness area and especially in the blended school area. When I say blended school, I mean, having more face to face contact with students, some innovative models that we've been look at all of those things are reasons why the Commission would approve a new school and we're working with a couple of boards on that. So I don't think you'll see a new school in Georgia in school year 2021, you'll more likely see it the next year, but we are working with boards and the board -- more than one has been excited about working with us.

Stephen Sheldon -- William Blair -- Analyst

Okay, got it. And then just lastly on the 2020 guidance, it assumes roughly 13% growth at the midpoint for adjusted operating income, but as you noted, you're going to be down in the first half and you gave some helpful expense commentary, but just wanted to ask what factors we should think about that's going to drive strong year-over-year growth in the second half. I know you have an easier comparison in the fiscal fourth quarter, but just I guess any color there?

James Rhyu -- Chief Financial Officer and President, Product and Technology

Yeah. As I mentioned in my comments, I think we'll continue to drive the leverage in SG&A, but we also -- we were -- our gross margins were a little bit down year-over-year. I think they'll normalize closer to flat year-over-year throughout the year. We continue to look for opportunities to drive automation and efficiencies through our program that's going to affect both line items. So I think you get some benefit across the board, throughout the rest of the year.

Stephen Sheldon -- William Blair -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of Greg Pendy with Sidoti. Please proceed with your question.

Greg Pendy -- Sidoti & Company -- Analyst

Hey guys. Thanks for taking my question. Just real quick on the non-Managed Public School, just kind of understanding, now I guess with the contracts you've walked away from yet a bump, I guess in this quarter specifically on the revenue per enrollment. Is that something that's going to be sustainable throughout the year, I guess with the mix maybe being more favorable from the contracts you walked away from or is that just a one-time thing?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, I think what you'll see is last year in fiscal '19 in Q1, the non-Managed revenue per enrollment was actually unusually low, which helped the comp year-over-year. But so you're going to see the comp year-over-year decline dramatically. So you're going to be closer to, I'd say, flattish for the rest of the year, year-over-year.

Greg Pendy -- Sidoti & Company -- Analyst

Okay, got it.

James Rhyu -- Chief Financial Officer and President, Product and Technology

More dramatic in Q1, but it's because of the low first quarter of last year.

Greg Pendy -- Sidoti & Company -- Analyst

Okay. So that was more of an anomaly this quarter where you had unusually high?

James Rhyu -- Chief Financial Officer and President, Product and Technology

Yeah.

Greg Pendy -- Sidoti & Company -- Analyst

Okay, all right. That's all I got. Thanks.

Operator

Our next question comes from the line of Henry Chien with BMO Capital Markets. Please proceed with your question.

Henry Chien -- BMO Capital Markets -- Analyst

Hi guys. Just sort of follow-on question related to the positive enrollment growth. Maybe it's related to career as the career technical stuff, but I was wondering like what is sort of like the sticking point of going to online versus say like, I don't know, if there is like ground or community kind of resources where have you kind of seen like the most trending?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Hi, Henry. Hey, you're asking the question of what causes the student to come to our program versus going through a ground-based programs?

Henry Chien -- BMO Capital Markets -- Analyst

Exactly. Yeah, I'm just trying to get sort of an update, as you think about sort of new growth right now.

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Well, the first thing is reach. If you are in a traditional high school, you only have so many students. So you can only justify so many courses and so many teachers to teach you Career Readiness course. We can look across the state and just five students, 10 students there, three students there and next thing we've rolled up a large number across the state, which justifies us providing more courses. So it's geographic reach and therefore higher number of Career pathway than an individual school might offer. I think many of the brick and mortar schools offer great program, but we only have a couple of thousand students in this school or sometimes even less, they can only offer so many program they can't offer IT and healthcare and automotive and on down the line because we have such reach across the state and we're looking at larger numbers students across entire geography. We have the advantage offering more programs, that's really the advantage of this program that most people didn't see when we first came out that we have a scale of advantage most people can't reach.

Henry Chien -- BMO Capital Markets -- Analyst

Got it, OK. And it sounds like it's like a decent chunk of that would be like hybrid partnering with more brick and mortar schools as well?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Well not today. That's the future market opportunity that we were talking about. That's -- but today, it's all about full-time students in one of our Destinations Academy schools, that's where all of the revenue is coming from today. What I was mentioning, we're going to start that process. We've actually done it a little bit in Wisconsin but it's really tiny and we want to do more of it across the state, Wisconsin was pretty excited about it, one other state was pretty excited, so we'll be getting to see people want to work with. Because if we walk into a school district that offers, let's say, they offer five IT courses, but they don't offer data analytics, they don't offer Python programing. We can offer that where they can't. So we can augment what they're providing. That's the new market opportunity for us that we've got to work on.

Henry Chien -- BMO Capital Markets -- Analyst

Got it, OK. Great. And switching gears on the political front. Warren's has been sort of out campaigning against charter schools. Just wondering -- your thoughts on I guess maybe not Elizabeth Warren, but the potential impact of the upcoming election and whether those kind of changes are feasible or not?

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, I have some expertise in a number of areas. Politics is not one of them. So I won't comment on this one, but I will say, we have -- number one thing that everybody has to remember is most of the educational funding in this country comes from local and state funds not from federal funds. Federal funds contribute for special education disability, but they don't really contribute to the general education front. As a matter of fact, most -- the federal level also contributes Perkins funding and things like that. But mostly state level. So it's not really up to the federal government, it's something local government. Now the federal government could try to ban for example for profit charter schools. We don't serve for profit charter schools. We serve non not-for-profit charter schools. All of our boards are 501C3 boards that are all not for profit. We are provided to them, but they're all not for profit.

The other schools that we provide -- this is another thing that's not a well-known fact. A little over 30% of our schools, our district programs. I don't think the federal government is going to ban districts from providing online programs. Districts are your traditional school in your neighborhood, but they want to have an online program, we run it for them. So we're not a for-profit charter operator, we are service provider to not-for-profits, there is a big distinction. So not to say that the federal government can do something to harm our business, but it is today. We're not the immediate target of for-profit charters, because we're not a charter ourself. So we're an operator.

Henry Chien -- BMO Capital Markets -- Analyst

Got it, OK. That makes sense. Thanks so much.

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

You're welcome, Henry.

Operator

[Operator Instructions] There seems to be no further questions at this time, I would like to turn the floor back over to management for any closing remarks.

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

Thank you, Devin. I noticed today, we had a more engaging set of questions that I really appreciate everybody being involved. Chris, Corey, Steven and Henry everybody. It's nice to have an engagement with you. We are very proud of the results for this year. I thank you guys for spending time and ladies spending time on the call today. So I have no other comments and thank you for your time.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Mike Kraft -- Senior Vice President, Corporate Communications

Nathaniel A. Davis -- Chief Executive Officer and Chairman of the Board of Directors

James Rhyu -- Chief Financial Officer and President, Product and Technology

Chris Howe -- Barrington Research -- Analyst

Corey Greendale -- First Analysis -- Analyst

Stephen Sheldon -- William Blair -- Analyst

Greg Pendy -- Sidoti & Company -- Analyst

Henry Chien -- BMO Capital Markets -- Analyst

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