K12 Inc. is on a remedial course of action after learning hard lessons about managing student enrollment and addressing public criticism about the academic performance of its students.
The Herndon, Va.-based company鈥攖he largest for-profit provider of precollegiate online learning and one of the few publicly traded companies in the K-12 marketplace鈥攕howed an inability to enroll as many students as anticipated for the 2013-14 school year. That sent its stock into a nose dive earlier this month鈥攁 38 percent drop that also came three weeks after a prominent hedge fund manager, Whitney R. Tilson, took a position that the company was overvalued.
Company management responded to both developments in different ways.
During an Oct. 10 call with stock analysts, K12 Executive Chairman Nate Davis took full responsibility for management issues that left 11,000 fewer students signed up than the company had the potential to enroll. Behind the scenes, founder and CEO Ronald Packard met with Mr. Tilson about the public lashing represented by the Kase Capital managing partner鈥檚 presentation at a conference in New York last month.
October represents an annual rite of passage for K12 Inc., when the year鈥檚 overall financial performance can largely be anticipated based on how many students are on its rolls.
This year, 128,000 students are currently enrolled in K12 programs, an increase of 5.7 percent compared with last year at the same time. But Mr. Davis said enrollments were well below company expectations.
Management Challenges
Officials of K12 forecast that their revenues would increase by between 3 percent and 4 percent for the first quarter of fiscal 2014, which is lower than the company鈥檚 full-year growth, and that K12 would incur operating losses during that period of $8 million to $10 million.
The value of the virtual education company鈥檚 stock rose steadily for almost a year before taking a nose dive this month. Some analysts predict continued problems for the country鈥檚 largest for-profit provider of K-12 virtual education while others paint a more positive outlook for the company鈥檚 future growth.
SOURCE: NASDAQ
The day after K12鈥檚 announcement, the company鈥檚 stock price plummeted from more than $29 a share to about $19. At the end of last week, it was valued at $18.60.
Mr. Davis attributed his company鈥檚 shortfall to these issues: insufficient staffing to handle a 25 percent increase in the number of applications between July and September; the fact that the company did not prepare adequately for new compliance requirements, such as face-to-face meetings before enrollment in one state; management鈥檚 failure to swiftly adjust staffing in enrollment centers when some school openings were delayed; and a school with 1,500 applicants that did not open at all.
Upgrading school-by-school planning tools to match media and advertising with enrollment periods will be one way the company adjusts, said Mr. Davis.
Mr. Tilson has been one of the company鈥檚 chief critics. A founding member of Teach For America who is now an investor and an advocate on education issues, he acknowledges that, by law, the company cannot turn students away, but he contends that learning online is inappropriate for unmotivated students, particularly ones who lack parental guidance and oversight at home.
鈥淲hen K12 was small, it was mostly serving kids like mine, with at least one鈥攊f not both鈥攃ollege-educated parents working in the home with children,鈥� Mr. Tilson said. 鈥淚n those cases, it really works.鈥�
But after speaking with Mr. Packard and Mr. Davis, Mr. Tilson has changed his opinion of K12鈥檚 intentions, if not its prospects.
鈥淧rior to meeting Ron, I thought this company was knowingly targeting students who were certain to fail, but didn鈥檛 care because that was the way to profitability and growth,鈥� Mr. Tilson said in an interview last week. Talking to K12鈥檚 top leaders convinced him it is not 鈥渁n evil company.鈥�
Sector 鈥楻un Amok鈥�
Mr. Tilson鈥檚 critique of K12 for investors focused on the scrutiny the company has faced on several fronts. One of his arguments is that K12鈥檚 academic results have been lackluster by too many measures.
鈥淟ike subprime lending and for-profit colleges, the business makes sense on a small scale鈥攂ut, fueled by lax regulation and easy government money, the sector has run amok,鈥� he wrote in the presentation he gave.
For his part, Mr. Davis believes that Mr. Tilson鈥檚 extensive presentation had one motivation: 鈥淗e鈥檚 clearly focused on driving the price of the stock down. I think he鈥檚 gone overboard,鈥� the K12 leader said.
Frank A. Bonsal III, a general partner in New Markets Venture Partners, a Fulton, Md.-based early- and growth-stage venture capital firm that invests in education, said large public companies experience growing pains, and he doesn鈥檛 鈥減ut a lot of stock in the shock and awe of reports like that.鈥�
A former educator who is now an entrepreneur and venture investor, Mr. Bonsal said he would be more concerned if he saw a compilation of negative reports from K12鈥檚 customer base. 鈥淭hat鈥檚 worth downgrading a stock,鈥� he said.
Unlike some other stock analysts at the time of K12鈥檚 announcement about its financial outlook, Trace Urdan, a managing director and a senior analyst at Wells Fargo Securities in San Francisco, upgraded his company鈥檚 rating of K12鈥檚 shares after the announcement. He said the prospects for the stock鈥檚 growth look promising since K12 Inc. hasn鈥檛 reached the enrollment cap in some states.
鈥淭hey have another 12 percent of growth without any new cap increase and any new approvals,鈥� Mr. Urdan said.
The company has been growing steadily for years, but such growth can cause complications. K12 has faced increasing scrutiny about the academic performance of the students in its programs.
In 2012, the company was sued by a group of investors who claimed they were misled by K12鈥檚 business practices and academic performance. Earlier this year, the company announced it had reached a tentative settlement of that class-action securities lawsuit.
In a recent court development, Florida Virtual School, a state agency based in Orlando that provides online courses to Florida鈥檚 school districts as well as to students in other states, had its trademark-infringement suit against K12 revived, after a federal appeals court reversed a lower court鈥檚 dismissal of the suit.
Florida Virtual School鈥檚 suit alleges that K12 adopted the name Florida Virtual Academy for its services in the state, used the acronym FLVA, and paid for a sponsored listing on a Web address that was similar to Florida Virtual School鈥檚 site to divert traffic to its business.
K12 fought the suit, asserting in a court document that the Florida Department of Education was aware of K12鈥檚 use of trademarks such as Florida Virtual Academy, and 鈥渋n fact, expressly approved such use.鈥� The company also uses 鈥渧irtual academy鈥� in other states, it pointed out.
About the issue, Mr. Davis said: 鈥淚鈥檓 not concerned. We never violated anything.鈥�
Tom Vander Ark, a board member for the International Association for K-12 Online Learning, or iNACOL, said the association has discovered that online education providers receive many enrollments late, after the first day of school.
鈥淲hen you look at the performance of those kids, they do significantly worse than returning kids,鈥� said Mr. Vander Ark, who writes an opinion blog for 澳门跑狗论坛鈥榮 website.
He said iNACOL has identified 鈥渢he need for better measures and better enrollment policies so families and kids get better advice when they enroll and better measures of academic growth in these schools.鈥�
As K12 Inc. makes adjustments for the challenges of enrollment, company officials said it will also be looking at how to improve student performance.
Finding new ways to engage students from the outset will be a focus. Mr. Davis said the company has just started to roll out an engagement test, giving students a chance to sample the curriculum and the experience of online learning, with the hope that it will show them鈥攁nd their parents鈥攚hat taking an online program entails before they begin.
Yet he conceded that monitoring ongoing engagement is a challenge and a frustration.
鈥淔or those students who are not engaged, it is difficult to get them out of the program,鈥� Mr. Davis said. 鈥淚n one state, we have to go find the student, and take them to the brick-and-mortar school. Until you go through all those steps, you can鈥檛 鈥榰nenroll鈥� them.鈥�
Plans for Expansion
Mr. Tilson challenged K12 to find a way to determine quickly whether students are not engaged and are simply logging on the minimum number of times required, without actively participating in the program. He maintains that those who are 鈥済aming鈥� the program should be identified and eliminated from it.
He said taking that step would help the company improve test scores, and give those students an opportunity to find a school environment better suited to them.
Mr. Davis said his company will continue to work on expanding its future product offerings, such as making its curriculum more mobile and more individualized so that schools can purchase parts of it. 鈥淲e鈥檒l be selling to districts more and more, and to consumers,鈥� he said.
As for the October setbacks, Mr. Davis summed up his company鈥檚 resolve in the conference call: 鈥淲e understand that we didn鈥檛 deliver. This is on us. We鈥檝e got to demonstrate that we can do better so we can get credibility back in the marketplace. We鈥檒l be working hard to get that done.鈥�
