As the nation's largest provider of online grade school
education programs,K12 (
) has faced a number of head winds the past few years, from legal
challenges to negative headlines.
So much so that Executive Chairman Nate Davis opened the May 3
third-quarter conference call addressing how the for-profit
educator has met these challenges as it racked up the 15th
straight quarter of double-digit sales growth and a hefty profit
"As industry leader, K12 often takes the brunt of assaults for
online education as our integrity and our effectiveness are
sometimes questioned," he said on the call. "This is to be
expected, but I am very proud of our employees and all we
accomplished even in the face of these challenges."
K12 provides public school systems with the curriculum,
software systems and educational services to deliver an
individualized online education to students in kindergarten
through 12th grade. Most of the schools it manages are virtual
charter schools, which are public schools that are run by
nonprofit charter boards that hire K12 to manage the schools.
They're funded largely by state and local taxes and, as a
result, are under a lot of scrutiny. Like its peers in the
for-profit online education space, K12 faces a lot of legislative
and market hurdles. But it's making progress on those fronts.
The quarter, said Davis on the call, highlighted examples of
the "real truth" about K12 and what it stands for. For instance,
in March, K12 announced that after reviewing more than 1 million
pages of discovery, the lead plaintiff in a class-action lawsuit
against the company, voluntarily and permanently dismissed the
claims it made about the academic performance and educational
quality of K12-managed schools. Davis called the dismissal "a
very powerful vindication of the company."
K12 has also been winning on the financial front. In the third
quarter, profit rose 72% to 31 cents a share. It followed an 118%
increase in profit the prior quarter. Third-quarter sales
increased 22% to $218 million. Managed public schools revenue
rose 26% to $39.4 million, primarily as a result of organic
growth in existing states and funding increases in certain
states. K12 also got a boost from a 12.2% rise in average student
enrollments, improved funding rates and capture in certain
states, and a decrease in the number of unfunded enrollments.
The growth comes amid the increasing acceptance of online
education as a viable alternative to face-to-face learning, says
First Analysis analyst Corey Greendale.
"In general, more states are becoming comfortable with virtual
education," Davis told IBD. "And more parents are advocating
K12 offers individualized virtual learning via a mix of
venues. In full-time online schools, most students take their
courses from home. In K12's "blended schools," students learn in
school buildings or learning centers. But they still use online
courses, and have some face-to-face classroom instruction with
One of the benefits of online schools is that students can
access their courses 24/7 and from any remote locations through
technology, says spokesman Jeff Kwitowski. In a growing number of
cases, K12-managed online schools offer more blended learning
opportunities, he says. This way, students can drop into learning
centers, community centers or school-owned facilities for
remediation, face- to-face instruction, or access their lessons
in a computer lab.
The ability to customize learning to individual students'
needs is one of the strong suits of virtual education and a big
draw for parents and students. The scheduling is flexible, says
Davis, and teachers are online with students monitoring their
progress. As a result, students are able to work at their own
K12's growth has been driven largely by the growing acceptance
of online learning as an alternative to brick-and-mortar schools
for students, who aren't being served well by the traditional
system, adds Greendale. "Students may not be well-served by the
traditional system because they were bullied in school or because
face-to-face teacher-led instruction tends to focus on the median
student and may not meet the needs of students, who are either
behind or accelerated," he said.
Or life circumstances, such as health or economic issues, may
get in the way of a student's ability to attend school on a
normal schedule, he adds.
"Meanwhile, K12's stock has significantly outperformed in 2013
as the company has begun to translate its top-line growth into
better margin performance and free cash flow, and as some
investors have become more comfortable with the political
environment," said Greendale.
Analysts surveyed by Thomson Reuters expect full-year earnings
to rise 53% to 69 cents a share. They see a 38% increase in
Davis says the first piece of his growth strategy is focused
on providing the best educational products and individualized
"The more and better we do, the more people use this form of
education and that accelerates the growth," he said.
One of the things that has helped K12 is it's gotten more
efficient in managing the schools and in turn, improving student
"We spend more of our money on keeping the students we have by
giving them a better education experience," Davis said.
"If they stay with us longer, we spend less on recruiting new
The K12 program is offered through K12 partner public schools
in more than two-thirds of the states and the District of
Columbia, and through private schools serving students in all 50
states and 85 countries.
Half of the states where K12 manages public schools are
capped, meaning there are limits on the number of students who
are able to enroll in school.
"This is a tremendous market opportunity, and we anticipate as
the caps are expanded or completely eliminated, we have the
potential in the next three to five years to help at least 50%
more students than we currently serve today," Davis said on the
Some of the head winds are abating. On average, the political
climate is getting better because of an acknowledgment that the
traditional system doesn't serve all students well, says
He says new states approving online charters and existing
states raising enrollment caps at online schools have been
meaningful drivers of K12's growth. And the Obama
administration's policies have encouraged states to pass laws
that make it easier to open charter schools.
"But the political climate is very much 'two steps forward,
one step back' rather than inexorable smooth sailing," he adds.
"You'll see plenty of negative headlines about states denying or
delaying approval of an online charter because of questions over
the student outcomes at virtual schools. Whenever public funding
for education goes to a for-profit entity serving students in a
manner that's outside the mainstream of the education
establishment, it's fair to assume policymakers will raise
But that doesn't mean K12 won't continue to grow, he says.
"It's just that the company has to be vigilant in ensuring
that it's doing the right thing for students as well as for
shareholders," said Greendale.