K12's (NYSE: LRN) recent fiscal fourth-quarter earnings report beat consensus estimates for earnings and revenue, driven by strength in its managed public school business and the acquisition of coding boot camp Galvanize.
The provider of online and blended education solutions, curriculum, and programs sees continued strength in enrollments, leading to potential double-digit growth in revenue and adjusted earnings in the coming year. Here's why the company is well positioned in the current environment.
The shift toward increased remote learning benefits revenue
Given COVID-19 concerns, some schools in the U.S. are opting to begin their school years online. This will likely increase demand for K12's online learning services. One high school in Indiana decided to move to online learning after being open for a few days. A school in Mississippi had its students in quarantine after multiple students tested positive for COVID-19.
According to research group Axios, 71% of 219 U.S. parents polled saw some risk to health from children returning to school in fall 2020.
K12 CEO Nathaniel Davis commented on the latest earnings call: "As for school districts, more and more of them now plan to use online learning as an alternative to in-person classes. One such school district is Miami-Dade County Public Schools, a district we've had a relationship for more than a decade."
Strength in enrollments is projected to lead to double-digit revenue growth
In the earnings release, Davis also provided an estimate of K12's revenue in fiscal 2021, saying, "We are therefore positioned to deliver double-digit growth in both revenue and adjusted operating income in the coming year." The company anticipates increased student enrollments, which it is addressing by hiring more staff and expanding its learning platform.
K12's managed public schools program, which accounted for about 87% of its revenue in the fourth quarter, is seeing momentum. Its technical platform is being used by Miami-Dade school district, one of the largest in Florida with 270,000 students. K12 solutions allow educators in the district to customize the online curriculum provided by the company, and K12 sees its flexible learning solutions appealing to other large school districts that may also seek customized offerings.
During the fourth quarter, K12's lead volumes in enrollment applications increased over 50% year over year. The company is hiring 1,300 additional teachers and education staff to meet the increased demand.
The Galvanize acquisition is a growth driver
While K12 is confident it will retain a good portion of its business post-pandemic, its Jan. 2020 acquisition of Galvanize will contribute to revenue growth when people again feel comfortable with in-person learning. The acquisition "positions K12 as a premier provider of career readiness education services and a leader in skills training, technology staffing and developing talent and capabilities for Fortune 500 companies," according to the company..
Galvanize has eight campuses where students can learn technical skills like data science and software engineering. It also provides online bootcamps. Davis said of the business on the earnings call, "[O]nce COVID subsides [...] Galvanize gets back to even higher growth because not only will they have online and remote, it will now have the brick-and-mortar students back in."
Overall, K12 can thrive in the current environment, thanks to the increasing popularity of online education. Given the number of school districts that need support with remote learning as closures and quarantines remain commonplace, K12's business has plenty of room to expand. Furthermore, the education solutions company has strong in-person offerings in place that can contribute to growth once the pandemic subsides. The stock is already up 80% year to date, easily outperforming the broad market.
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