K12 Inc.’s Revenues Rise, Expansion Planned for Next Year

Associate Editor

K12 Inc., the largest for-profit provider of precollegiate online education, posted nearly 8 percent revenue growth in the third quarter, and is expecting to expand in the states it already operates in, said Nate Davis, K12 Inc.’s  chairman and CEO, in a recent conference call announcing the company’s third-quarter results.

The CEO of the Herndon, Va.-based company reported that the 8 percent jump in total revenues year-over-year amounted to $235 million for this quarter, and operating income increased 41 percent to $27.4 million for the quarter. 

The third-quarter report received far less attention than the conference call in October 2013, when Davis announced that K12 enrolled 11,000 fewer students than it had anticipated for the 2013-14 school year.

This call had more news that the company is doing better financially, a fact that Trace Urdan, a senior analyst for Wells Fargo Securities in San Francisco, highlighted in his own “Equity Research” report about the company’s stock, indicating that K12 is “on track for a strong fall,” and predicting that the stock will outperform the market.

“Enrollment, revenue-per-student and expense management in the company’s core managed school business was strong,” Urdan wrote, while noting the competitive market facing the online education industry. Using K12’s strategy of a shared technology platform is also a good sign for growth, he indicated.

Davis talked about K12’s prospects in various states, saying growth will occur in new states but not “at the pace we’ve seen in previous years,” referring to his company’s ongoing discussions with Illinois, New Jersey, and North Carolina. He said that he anticipated no imminent announcements of K12 schools opening in those states.

A new K12-managed Insight School is tentatively scheduled to open in Michigan this fall, with a focus on at-risk students from across the state. The first-year capacity of the school is 2,500 students. Within three years, the school could accommodate up to 10,000 students, Davis said.

Pennsylvania recently rejected a number of cyber-charters, including an application from Insight PA, a school that would have been managed by K12, on grounds that the board was not familiar enough with the oversight of a school, and that K12 would ultimately control the operation.

Career technical education is an area K12 has in its sights for growth. One example is the Iowa Virtual Academies, which recently announced that it is collaborating with the Northeast Iowa Community College in the Association of Business and Industry to provide an advanced manufacturing program for high school students. The three-year blended program will incorporate online instruction and on-site workshops, involving local businesses to ensure that the skills taught match the needs of employers.

“Creating a direct path to either a job or a technical college program right after graduation is just one of the many ways we will look to create pathways that are relevant to students and attract them to K12-managed public schools,” Davis said in the call.

In January, K12 had announced plans for Ron Packard, its founder and departing CEO, to launch a joint venture with an investor group led by Safanad Limited, a global principal investment house based in New York and Dubai. That deal is off, with Davis saying it was too complex. Several international properties owned by K12 would have been part of the transaction.

“In general, investors would much prefer to see them sell the assets and shut down the projects outright, terminating the associated losses,” Urdan wrote in an email response to a question about the move. “While there may be some opportunity cost associated with not expanding internationally today, most investors believe K12’s dominant position in the U.S. market will allow for this at a later date and that at present it represents a distraction.”

My colleague, Sean Cavanagh, recently reported on an investor group’s lawsuit against K12 and Packard. The federal lawsuit accuses the company of misleading investors by putting forward overly positive public statements during much of last year, only later to reveal that it had missed key operational and financial targets. It also claimed that Packard sold 43 percent of his personally held common stock for $6.4 million in that period, before the company revealed disappointing results. K12 denied misleading investors, and Packard, through a company spokesman, said he has been forthright in his transactions.

We also covered the decision by the National Collegiate Athletic Association (NCAA) to reject coursework completed by athletes in 24 K12 schools when students from those schools are applying to Division I or Division II colleges or universities, effective in 2014-15.

In the conference call, Tim Murray, president and COO of K12, said the company is “working very, very hard with the NCAA” to help them shape policies that would ensure eligibility for schools operating in an online model. Many of the students served in this capacity are enrolled in individual sports like swimming and gymnastics, and attending online school frees up hours for their training.

More information about the K12 third quarter results are available here.

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