Earnings Call Transcript - LRN Q2 2020

Operator, Operator

Greetings. Welcome to the K12 Second Quarter Fiscal 2020 Earnings Conference Call. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mike Kraft. Thank you. You may begin.

Mike Kraft, Host

Thank you, and good afternoon. Welcome to K12's Second Quarter Earnings Call for fiscal year 2020. Before we begin, I'd 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 operational 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 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 Nate Davis, Chief Executive Officer and Chairman of the Board; and James Rhyu, Chief Financial Officer and President, Product and Technology. Additionally, we are joined by Dr. Shaun McAlmont, President of Career Readiness Education; and Harsh Patel, Chief Executive Officer of Galvanize, who will be available to answer questions following our prepared remarks. I would like now to turn the call over to Nate. Nate?

Nathaniel Davis, CEO

Thank you, Mike. Good afternoon, everyone, and thanks for joining our quarterly call. I'd like to devote most of my time to providing details about the announcement we made earlier today, K12's acquisition of tech pioneer Galvanize. I'd like to welcome Harsh Patel, CEO of Galvanize, to our team, and also welcome him to the call today. Harsh is calling in remotely, and he will participate in our Q&A session, as Mike noted. Let's get going with a brief summary of this quarter's financial results. As you saw in today's press release, revenue was $257.6 million in the second quarter of fiscal year 2020, an increase of 1.1% year-over-year. Tied to our revenue growth, adjusted operating income for the quarter was $36.5 million, and capital expenditures for the quarter were $9.3 million. Note that our revenue, adjusted operating income, and capital expenditures for the second quarter of fiscal '20 met or beat the guidance we provided last quarter. These numbers underscore the ongoing strength of our core business. It's also worth noting that excluding the impact of our acquisition, our business is on pace to achieve the full year revenue and adjusted operating income guidance we originally provided. Now let me turn to a discussion of the Galvanize acquisition and our Career Readiness strategy going forward. As most of you have heard me mention before, our Career Readiness initiative allows us to support and prepare students of every age and background for an increasingly competitive job market. According to the U.S. Bureau of Labor Statistics, job growth is expected to create more than 1 million new jobs per year through 2028. At the top of the list for in-demand jobs, now and in the future, are software engineers and data scientists. However, despite the growing demand for these roles, they are some of the most challenging positions to fill. K12's acquisition of Galvanize puts us in a unique position to make a difference in this area. Galvanize is one of the country's top providers of workforce training in software engineering and data science. Like K12, Galvanize provides high-quality, affordable, online, and facilities-based learning programs. Through its full and part-time boot camps, Galvanize helps students gain the most relevant and in-demand skills in these fields. Galvanize offers the software engineering boot camp under its industry-recognized brand name Hack Reactor. Hack Reactor is rated in the top 5 boot camps on sites like Course Report and Investopedia. One of the synergies of this acquisition is that our Destinations academies now have even more ability to provide high schoolers with entry-level software engineering courses. We'll do this by tapping into Galvanize's expertise in tech training and adapting their curriculum for high schools. This also gives us the opportunity to license this content and training to public school districts, colleges, universities, and other institutions. For both our schools and public schools, we could help high school graduates with early aspirations of this career option. Now you might ask, how effective is the Galvanize training? Nearly 85% of Galvanize's web development and data science students are gainfully employed within 6 months of graduation. And I'll bet many other forms of post-high school education would love to make that claim. Additionally, graduates earn on average annual base salaries of $90,000 or more. Graduates in New York and San Francisco achieve even higher salaries. Galvanize's graduates have been hired by more than 2,000 companies, which includes 50% of the Fortune 500. For instance, Amazon, Facebook, Google, and Apple have all used Galvanize to train their technical teams or to help them find skilled workers. The alumni base is now more than 8,000 professionals and growing. We conservatively estimate that the adult learning market we are targeting with this acquisition is more than $50 billion annually. It's estimated that corporations are investing $1 trillion globally in digital transformation, which, in turn, drives demand for software engineers and data scientists. Galvanize is among many young and growing enterprises, which will contribute to this growth, and K12 is now part of this market. K12's revenue growth this year will be accelerated by Galvanize and well into the next year. In fact, in the next fiscal year, after the effect of purchase accounting, the revenue growth should accelerate. Over the next year, I expect Galvanize's growth to accelerate for the following reasons: first, Galvanize will now have the funds to expand its direct-to-consumer education business. This includes adding students to existing facilities, while also opening up new markets across the nation. Together, K12 and Galvanize will also increase the use of hybrid and fully online training models. Here, Galvanize will be able to leverage K12's deep expertise in teaching students in blended and online environments; second, we believe the use of income share agreements, or ISAs, will help drive demand. Income share agreements make training programs more accessible since students can defer the tuition cost until after they secure jobs. This is a win-win for both Galvanize and participating students; third, Galvanize will work with new and existing enterprise clients to reskill and upskill their workforce, a market that has huge potential, both domestically and abroad. In fact, the World Economic Forum has concluded that given the wave of new technologies and trends disrupting business models, the vast majority of skills required to perform most jobs will have shifted significantly over the next 5 years, and the skills most needed are data analytics and software development. It's worth noting that in the U.S., 54% of companies think that some form of reskilling of their workforce will be needed by 2022. This tech-oriented corporate training requirement is a perfect fit for Galvanize's expertise; and fourth, we plan to expand Galvanize's existing efforts related to IT staffing requirements. Corporations will spend more than $39 billion in outsourced IT staffing support by 2024. Galvanize is positioned to provide companies with candidates that have customized credentials tailored to each company's unique needs. Many graduates won't have to find jobs because they can immediately fill a company's needs as outsourced IT staff. In summary, here's what we gained from this acquisition: Galvanize's management team, brand recognition, an alumni network, campuses, and, of course, industry-leading software engineering and data science programs. All of these advantages will allow K12 to accelerate its entry into the important and growing market for software engineers and data scientists. Importantly, this acquisition also aligns nicely with our existing strategy of being the industry leader in career education for learners at all stages of life. Our goal is to continue to build a strong and profitable Career Readiness business, reaching nearly $300 million in revenue over the next couple of years. We're already nearly $100 million in our Destinations Career Academies alone this fiscal year and growing, and we're just getting started. Excluding the effects of purchase accounting, Galvanize will add more than $50 million to that revenue stream this calendar year. Importantly, Galvanize's business units will be EBITDA positive excluding purchase accounting in fiscal year '21. I'll remind you that in James' comments, he will discuss how purchase accounting will affect revenue and costs. Both organically and inorganically, we will continue to look for opportunities to further expand our technology-enabled Career Readiness business, especially in the areas of healthcare and information technology. As you know, K12 has a very small amount of debt and a balance sheet full of cash. Investors have often asked how we will use cash to drive shareholder value. The Galvanize transaction was funded completely with cash from our balance sheet. We're putting our cash to work as we said we would. However, we do believe that this isn't the only smart properly funded acquisition to be done. To fund other acquisitions, should the opportunity arise, we just closed the line of credit with a bank that will give us up to $300 million in additional financing. This funding, in addition to our strong balance sheet and cash flow, gives us the flexibility to continue to grow. This line of financing will only be used if needed, since our core business continues to demonstrate strong cash flow from operations. In closing, Career Readiness and skills-based learning that prepare students for our rapidly changing workforce is increasingly important in our country and around the world. Career Readiness is critical for our economy, for employers, and for the diverse student body that we serve. Our acquisition of Galvanize is consistent with our goals to help students prepare for their futures, while also driving long-term growth and profitability for shareholders. We intend to continue leveraging expertise in tech-enabled education to build a strong Career Readiness business, a market in which we are rapidly becoming a national leader. I want to remind everyone that K12's mission remains the same. We help students reach their full potential through inspired teaching and personalized learning. But remember, full potential can mean the workforce, college, military career, or other pursuits; students and learners come in all ages and from all locations. Our flexible tech-enabled platform allows us to be a leader in this field. Thank you for your time today. Now I'll hand the call over to James. He will elaborate on second quarter financial results as well as provide some additional details on the Galvanize transaction.

James Rhyu, CFO

Thank you, Nate. Good afternoon, everyone. Let me quickly summarize our reported results. Revenue for the quarter was $257.6 million, reflecting a 1.1% increase from last year. Adjusted operating income was $36.5 million, down 2.4%, and capital expenditures were $9.3 million, a decrease of $0.3 million. As Nate noted, these results met or exceeded our expectations set in last quarter's guidance. Our core business remains strong and positions us for growth moving into next year. Excluding the Galvanize acquisition, we are on track to remain within our projected guidance ranges. I will discuss Galvanize further in a moment. Now, regarding our quarterly results, revenue from Managed Public School Programs rose by $6.8 million, or 3%, to $229.6 million, driven by increases in both enrollment and revenue per enrollment. Enrollment increased by 1% year-over-year, while revenue per enrollment grew by 2%. For the full year, we anticipate revenue per enrollment to remain roughly flat compared to last year. Institutional revenues fell by 16.2%, primarily because several large general education customers we supplied have either gone out of business or are experiencing significant declines. For the full year, we expect the Institutional Business to decline by approximately 15% to 18%. Private Pay revenues were $8.6 million, remaining relatively flat compared to last year. I want to emphasize that for the remainder of the year, we will incorporate Galvanize's results into the Private Pay segment. We will revisit our external reporting for fiscal '21 and offer more insight into any potential changes in the fourth quarter. Gross margins were at 35%, slightly up from our first quarter margins. When accounting for Galvanize and purchase accounting, we expect gross margins to be around 33% plus or minus 100 basis points for the year. Selling, general, and administrative expenses totaled $59.8 million, a slight decrease of $1.5 million from last year. The Galvanize acquisition will exert some pressure on SG&A costs in the latter part of the year, particularly due to purchase accounting impacts. However, we still anticipate costs to remain relatively stable compared to last year, with minor fluctuations. EBITDA for the quarter stood at $47.5 million, and adjusted EBITDA was $53.7 million. Operating income was $30.3 million, and adjusted operating income was $36.5 million. We concluded the quarter with cash, cash equivalents, and restricted cash amounting to $213.1 million, which is an increase of $45.7 million from the first quarter. As Nate pointed out, we financed the Galvanize acquisition using cash on hand, so we expect a significant drop in our cash balance next quarter. In addition to acquiring Galvanize, we have secured a credit facility that provides up to $300 million in financing. We believe this facility, combined with our robust balance sheet and ability to generate free cash flow, gives us the financial flexibility needed to sustain our operations while pursuing further acquisitions in the Career Readiness space. Capitalized costs were $9.3 million, nearly unchanged from last year, and our effective tax rate for the quarter was 33.5%. We still project our full-year tax rate to be in the 28% to 30% range indicated last quarter. We also expect to benefit from multi-year cash tax relief due to the Galvanize deal, as their net operating loss carryforwards will help mitigate some of the cash taxes we would otherwise incur. Our guidance for the remainder of the year implies a decrease of about $20 million in adjusted operating income, due to the effects of purchase accounting and Galvanize's negative EBITDA. It is important to remember that while we will recognize the revenue for the rest of this fiscal year, that revenue will also be impacted by purchase accounting, which is why the effect on our guidance appears somewhat muted. Additionally, as Nate mentioned, we anticipate that the underlying Galvanize business will generate more than $50 million in revenue this calendar year, and we fully expect it to grow into the next fiscal year and exit positively contributing to our adjusted operating income. For the full year, we are now estimating revenue to be between $1.033 billion and $1.040 billion, with capital expenditures of $45 million to $49 million, a tax rate of 28% to 30%, and adjusted operating income in the range of $48 million to $52 million. For our upcoming third quarter, we expect revenue to be between $252 million and $255 million, capital expenditures of $8 million to $10 million, and adjusted operating income to be between $18 million and $20 million. Before I hand the call over to the operator for questions, I want to reiterate Nate's belief that the Galvanize acquisition will accelerate our strategy in the growing Career Readiness and lifelong learning market. I see this as an initial step toward creating significant shareholder value through our Career business, and we will continue to explore opportunities in this field. Thank you. Now, I will turn it over to the operator.

Operator, Operator

Our first question comes from Corey Greendale with First Analysis.

Corey Greendale, Analyst

Congratulations on the acquisition. I've got a couple of questions about Galvanize. First of all, how would you describe Galvanize's differentiation versus other boot camp providers in the market?

Nathaniel Davis, CEO

Well, Corey, this is Nate. Thank you for attending today. I want to start by sharing what drew me to Galvanize. First and foremost, I sought a company with a student-centered culture, which I believe they embody. Their focus is clearly on student outcomes. I also wanted a company that is large enough to have demonstrated scalability; it’s essential that we avoid being tied to a small company that cannot grow. Additionally, I wanted evidence of growth and a strong management team, both of which I see in this organization. I have confidence they will be able to set themselves apart. Furthermore, I was looking for a company recognized for its high quality; evaluations of many boot camp providers showed that Galvanize received top ratings for the quality of their education. Harsh, I’ve shared my perspective, and I would love for you to explain how you differentiate yourself in the market.

Harsh Patel, CEO of Galvanize

Thanks, Nate. One of the biggest ways that we differentiate ourselves is the size of the alumni base. I'll give you a quick example. When I look at our alumni networks, the biggest and most frequent message I see is, 'Hey, my company is hiring for software engineers or data scientists. Who is interested?' I mention that as a differentiator because not very many places can have a well-engaged, large, 8,000-plus alumni network, and that helps with your careers. Network effects are something that helps differentiate Galvanize and Hack Reactor because of the size. We've been around since 2012, one of the earliest in this space, and therefore, our alumni size is just larger than most other places. The other thing is when you look at rating sites, one of the differentiators is that Galvanize and Hack Reactor show up amongst the top 5, often top 2 as places to go to learn software engineering and data science. Therefore, from a prospective student perspective, that immediately differentiates us from the tens, if not hundreds, of other competitors or players in this space.

Nathaniel Davis, CEO

I think the only thing that we didn't cover was a high placement rate?

Harsh Patel, CEO of Galvanize

That's right. Galvanize and Hack Reactor both have historically been known to have some of the highest placement rates out of all of the coding boot camps in the space. We continue to keep that as our #1 focus. Earlier in the call, the majority of our graduates, 85% or more, are placed within 6 months. Average starting salaries across the entire nation are $90,000 plus and over 6 figures in the big markets like New York and San Francisco. The alumni base has a lot to do with that, as well as the reputation in the marketplace as being high quality, generating junior to mostly mid-level engineers when they come out.

Corey Greendale, Analyst

Good, very helpful. And then my follow-up, and I'll get back in the queue. Nate, you mentioned a number of potential synergies from the acquisition. I was interested in, specifically, if you could say a little bit more about what Galvanize's primary method of customer acquisition is and whether you see any synergy on that front like marketing the programs to graduates of the existing kind of managed public schools or anything along those lines?

Nathaniel Davis, CEO

Yes. I'll talk a little bit about this; Harsh, you can elaborate if I miss anything. First of all, there are 2 segments of the marketplace for Galvanize. One is the consumer business, and in the consumer business, they use a number of techniques you would have imagined. There's a lot of social contact and recommendation. They do a little bit of web advertising and search engine optimization and marketing. So most of the acquisition for consumers is coming from either social recommendations or coming from the internet. They do very little on-air advertising. As a matter of fact, they don't do any that I know of. So that's the most of how they get their customers. I don't want to minimize the reference and referrals because that business is pretty significant, based on the fact that there are 8,000 alumni who recommend others who need to go through the same process they've been through. But in the enterprise business, it is a face-to-face sale. Very, very different. There is a face-to-face workforce that's growing and called directly on corporations to have corporations give them information about the specific needs they have, and then they go and train in their boot camps, specifically for what those corporations need. But that's a face-to-face sale, much different than the consumer business. Harsh, anything else you want to add?

Harsh Patel, CEO of Galvanize

No. I think you nailed it there. The majority of them come from referrals, word-of-mouth from our alumni, that strong alumni network and the rest of it through digital advertising and digital acquisition online.

Corey Greendale, Analyst

Good insight. Do you foresee marketing directly to people who are in or graduating from the managed schools or anything along those lines?

Nathaniel Davis, CEO

Yes, we do. But I want to be clear that this is a pretty intense program. It's 12 weeks, but most of the people who apply the first time, they'll get in the first time. They have to take a few entry-level courses before they really qualify to go to the immersive intense program. So we intend to market to our students, but we also intend to help our students get some of those basic courses done first, so they can roll into the program that Galvanize runs on a qualified basis. But yes, I think there's a synergy there that we can help many of our students who aren't going to go to college, or don't want to go to college, who are looking for their careers. I think we can help them with exploration courses and then we can help them with getting into Galvanize as well.

Operator, Operator

Our next question comes from the line of Alex Paris with Barrington Research.

Christopher Howe, Analyst

This is Chris Howe sitting in for Alex. Just congrats on the acquisition and the partnership with Galvanize. Some questions in regard to that. You mentioned the potential for re-skilling and up-skilling the workforce. Can you provide some more color on what you're seeing as far as the lifetime revenue of the student and the potential for them to go to Galvanize for initial training, enter the workforce? And then after 3 years, as software changes, for them to reroute for additional training, is that an opportunity currently? Or how do you see that evolving?

Nathaniel Davis, CEO

Harsh, I think you're best prepared to answer that.

Harsh Patel, CEO of Galvanize

Yes, absolutely. I actually think that's one of the biggest opportunities for Galvanize long-term. Right now, the entire 8,000-plus and growing by over 1,000 every year base of alumni has not yet been offered contained education programs or second-time-around programs to re-skill from a consumer perspective. What is happening today is when those students enter into jobs, their managers may say, 'Hey, where did you learn this modern stuff?' and they'll reference Galvanize and Hack Reactor, and then that starts the conversation with that company or that enterprise for us to come in and re-skill their existing engineering talent. So from a consumer perspective, that lifetime value is huge, and we have not yet begun to extract that for second-time or third-time consumer-based courses. But then, the bigger, I think, lifetime value is when the enterprise engages through our consumer graduates, which could actually double or triple that lifetime value over time.

Corey Greendale, Analyst

That's great. And my last question or series of questions. You mentioned some comments in the Q&A about the go-to-market proposition and the difference in value that you bring. Being a top 5 boot camp, what are you seeing as far as student mix and geographic trends? Are you seeing an increasing percentage of your students, I wouldn't call it transferring or moving to your more elite boot camp from other competitors?

Nathaniel Davis, CEO

Harsh?

Harsh Patel, CEO of Galvanize

Yes. I'll be frank, I wish I could answer that with specific data off the top of my head, but I'll tell you more example-based. We do get students who either graduated or went through some other program halfway through or quarter of the way through and decided to change and come to Galvanize for data science or Hack Reactor for software engineering. That does happen. To be honest, I don't have the data to tell you whether it's increasing or at what rate. But as consolidation happens in this space, I expect it to continue to increase, especially because we continue to be focused on quality as our top-most metric.

Corey Greendale, Analyst

Yes, that's good. All very helpful. And this is a lot of interesting things in front of me, but I'll hop back in the queue, and thank you for the color, and look forward to the combination.

Operator, Operator

Our next question comes from the line of Jeff Silber with BMO Capital Markets.

Jeffrey Silber, Analyst

I also wanted to follow up on Galvanize. You had mentioned in the prepared remarks about the use of income share agreements. And I know that's one of the things that Galvanize prides itself on. Is it possible to tell us roughly what percentage of students use that and how that's been impacted in the market?

Nathaniel Davis, CEO

I don't know if everybody else understands what these income share agreements are. So Harsh, you can answer that. But first, I want to mention to everyone that the reason we think it increases the market is Galvanize actually just started using income share agreements. It's not something that's driven growth in the past, which is why we believe it's a growth accelerator. Galvanize just found an arrangement to have their ISAs funded. We think our cost of capital is lower than theirs, so we will probably renegotiate and develop a new set of ISAs that are even lower cost for us. With that, I'm going to let Harsh answer, but I wanted to make sure everybody knew how we look at that as an accelerator, not as something they've been doing a long time.

Harsh Patel, CEO of Galvanize

Yes, I'll double down on that. We just started broadcasting and publicizing ISAs more broadly, I want to say just a few months ago. Our initial data for our most upcoming cohort is going to be about 20% of the cohort using ISAs to fund their education. Like Nate said, we just started doing this. So we actually believe that it opens up an entire set of the market that wasn't open to us before. It's going to be additive to our enrollment, which is really exciting.

Jeffrey Silber, Analyst

Okay. I apologize, I must have seen something online or somewhere that made me think Galvanize had been doing this for a longer period. Thank you for the clarification. Did you have something to add?

Nathaniel Davis, CEO

No, no. Go ahead.

Jeffrey Silber, Analyst

Okay. Great. Going back to the combination of both companies, and forgive me, I came on late. Can you just repeat what you said about the path to profitability for this company? And you can give us a little bit more color on how you're going to get there?

James Rhyu, CFO

Yes, Jeff. So it's James. We expect that we're going to exit our fiscal '21 with a profitable Galvanize subsidiary. We're already seeing the early signs of growth in this calendar year, we see that growth continuing. The underlying business growth is expected to continue through this calendar year into next year, which will drive that profitability exiting our next fiscal year. However, as you know, the impact of purchase accounting will sort of mute that, particularly in the first 6 or 12 months. Our financials will reflect something different; but again, as some of that washes through and on the adjusted EBITDA, exiting next year will be positive for our fiscal next year.

Nathaniel Davis, CEO

Yes. This is Nate speaking. This is going to be a little confusing because we haven't disclosed all the details around purchase accounting, but I would say this: the EBITDA, not adjusted operating income yet, but EBITDA will be positive for the full year of our fiscal year '21. The comments that James is making about the exit when you fall down to full operating income or EBIT, you're going to see some impact of obviously purchase accounting that shows up in amortization of goodwill and things like that, which will cause it not to be exiting in the year. But if you just look at the EBITDA, it's positive for the full year of our FY '21. So it's going to contribute to our EBITDA.

Jeffrey Silber, Analyst

And is it possible to give us some kind of framework about the purchase accounting impact, both from a revenue perspective and an EBIT perspective?

James Rhyu, CFO

Yes, I believe it's currently too early in the acquisition process to provide guidance. There are certain procedures we need to complete, but we will offer updated guidance in the next few quarters. Since the acquisition has just taken place, it's premature to offer any specific forecasts at this time, but we intend to do so before the end of next year.

Nathaniel Davis, CEO

Last thing I will mention on that. From an operational perspective, I think it's important to understand that in the first 6 months that Galvanize is part of K12, we intend to remove the shackles, so to speak, from certain areas. They were working hard as a company that didn't have a lot of funding and they were tight on things like opening up new sites; they were tight on their marketing expenses. So we have said we don't mind spending a little bit more money to open new sites, to do a little more marketing to students, and to do a little bit more development. There is an opportunity we have in the military market, which we didn't talk a lot about; they will work with military bases to retrain soldiers as well. All of these things will require some money and investment in the first 6 months. That's why we said it will be EBITDA-positive in fiscal '21, but for the next 6 months, we're going to let them spend a little bit of money to get some of these revenue opportunities going.

Jeffrey Silber, Analyst

Does that help, Jeff? Yes, it does.

Operator, Operator

Our next question comes from Stephen Sheldon from William Blair.

Stephen Sheldon, Analyst

For Galvanize's stand-alone financial performance, can you provide some detail on how quickly it's been growing in the past few years, the mix of online versus classroom-based revenue and maybe just some detail on the stand-alone margin profile right now?

Nathaniel Davis, CEO

So Harsh, I think you should start with the mix question of online versus classroom?

Harsh Patel, CEO of Galvanize

Sure. Galvanize offers two online programs: a full-time option that lasts about three months and a part-time option that lasts around nine months. The revenue from both programs varies depending on the enrollment cycle, but generally, it's about 20% from online offerings and 80% from on-campus programs.

Stephen Sheldon, Analyst

And Harsh, how do you think that changes in the coming years?

Harsh Patel, CEO of Galvanize

I think the online enrollment continues to increase. What we're finding is that a lot of students are loving the synchronous online offering. It really feels like you're developing really strong student relationships, which goes counter to typical assumptions about online education. We're expecting that mix to grow while the overall pie will also grow. Our most incoming cohort is going to be one of the largest ever for our online offering. So my expectation is that mix will grow, while the overall pie also grows.

James Rhyu, CFO

To your other question, I believe the current mix of business as it's constructed today, and again, excluding the impact of any purchase accounting, has gross margins that are better than the current K12 gross margin by 10% to 20%. With the mix that Harsh is outlining changing over time, we obviously think that that gross margin profile will improve over time, but it's currently better than K12.

Nathaniel Davis, CEO

In terms of growth, your other question was what does the growth look like in the past. The growth in the businesses, the 2 segments have different growth profiles. The fastest-growing segment of the Galvanize businesses has been the enterprise business. It was the smaller of the 2, but it's definitely growing at a much higher rate than the consumer business, which is also growing. However, the enterprise business has been growing the fastest. We don't disclose revenue growth rates of individual business units. I can tell you that the enterprise business will grow faster than the core business at K12, which is growing faster than the consumer business at Galvanize. It's the fastest-growing opportunity we see in the segment.

James Rhyu, CFO

One thing I want to add to the growth question is that, as Nate mentioned earlier, the Galvanize team faced some limitations on their growth investments. In contrast, we will not have those restrictions. We fully expect the Galvanize business to grow at a rate that surpasses our expectations for the overall K12 business, projecting growth well into the double digits for many years ahead.

Stephen Sheldon, Analyst

Got it. That's very helpful. In your core business, how has NPS student retention trended so far in fiscal '20 compared to your expectations, both in Career Readiness and the regular NPS program?

Nathaniel Davis, CEO

This is Nate speaking. Without going into the gory detail, we tried something this year. We talked a little bit about it on the call for the previous quarter. We changed the way we were marketing and the way we did enrollment. We put a little more money into some things early on in the year. The market was not expecting it. It was part of our plan; the market probably didn't anticipate it. What it did was it shifted the characteristics of our withdrawal and retention metrics. We expected and have seen greater withdrawals in the first half of the year. But it's sort of a washing out that happens. We expect through the rest of the year, retention will be slightly better than last year. We expected to see more withdrawals early in the year and fewer withdrawals as the year goes on based on the way we marketed to students and the programs we put in place. In terms of retention and how it's going, it's going largely flat with the previous year but just with a different characteristic. We have seen, by the way, in the last 3 months, a tick up in retention, which is exactly what we expected based upon the way we put our new marketing program in place.

Operator, Operator

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

Gregory Pendy, Analyst

Just one, I guess, trying to get a grasp on the 85% placement rate. I assume as you try and embed some of the program into CTE, is that still going to be based on sort of endpoints, sort of exam-type outcomes? Or are you going to be able to use placement rates as well on that? My understanding was, under CTE, you were looking for things like Python certification as outcomes. I'm just trying to understand because it seems like this is a much more intense program that already is going into the placement rate and sort of salary outcome?

Nathaniel Davis, CEO

Yes. If I got the question right, the answer will be, we don't expect the average person coming out of one of our programs at the high school level GCA programs to be able to be immediately qualified to move into a Galvanize program. The Galvanize program, you are right, is a more intense program at a higher level. However, the key here for us is to be able to take the Galvanize content and some of their entry-level courses because remember, I mentioned, when you apply to Galvanize, if you don't get in, they have recommended a number of entry-level courses you can take to strengthen your skills enough to enroll in one of the immersive programs. We're going to take that content and make sure it's available at the high school level. Once it's available at the high school level, that makes more of our students qualified. Sometimes, that may mean after they graduate high school; sometimes, they'll be able to do it, depending on their performance, while they're in high school. We think there is a step of learning that needs to happen between your average high schooler and before you get into one of these programs. By the way, there's a lifestyle change that happens there as well. It's not just your intellectual intensity; it's also your life capacity because it's very immersive and very intense. You have to really be dedicated, much more dedicated than most high school students. So that's a gap that we will have to bridge, which we see as an opportunity because it means we could take a number of high school students and enroll them in more of the lower-end courses, which means we can grow the revenue in the lower-end courses.

Harsh Patel, CEO of Galvanize

I do. Nailed it.

Operator, Operator

There seems to be no further questions in the queue, and I'd like to turn the floor back over to you for any closing remarks.

Nathaniel Davis, CEO

This is Nate speaking. As always, I really appreciate those who attended the call. I appreciate the questions. It's obvious that you were well engaged in what we were talking about, and I look forward to talking to you more about this. This is a very exciting time for K12, and I hope we will demonstrate to you that we can grow this business and grow our overall business. I think James also wants to make a closing comment. If I can, James?

James Rhyu, CFO

Yes. I think due to the Galvanize transaction, we had a significantly larger number of listeners today compared to usual. I want to remind anyone on the call that if you have any follow-up questions, please reach out to Mike Kraft. His contact information is included in the press release we issued earlier today. Mike will be available to address any questions or follow-ups after this call.

Nathaniel Davis, CEO

Devin, back to you.

Operator, Operator

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.