Amid Georgia Controversy, Online Schooling Company K12 Sees Career Prep Interest

Despite the likely loss of a contract with Georgia’s largest public school and a worse-than-expected operating loss, online schooling and education management provider K12 reported some growth areas during its latest quarterly earnings.

K12 reported on Tuesday that it saw revenue for the quarter ended Sept. 30 rise 2.3 percent year over year to $257.1 million, beating Wall Street expectations. The lost Georgia Cyber Academy contract could cost K12 about 11,000 students.

But the Herndon, Va.-based company still saw a 2.9 percent increase in enrollment—or 3,500 students—over the same period last year at “managed” schools, ones where K12 provides administrative support as well as academic and technological services.

The company’s adjusted EBITDA decreased 62.7 percent year over year to $3.3 million, worse than Wall Street predicted. The company reported an operating loss of $13.9 million, also worse than expected.

The stock traded at $20.06 Thursday after the market closed, a 19 percent drop from Tuesday after market close.

Managed schools

Founded in 2000, K12 currently serves 122,300 students through its managed schools business, which saw its fourth consecutive year of enrollment growth. Managed schools represent 88 percent of K12’s revenue.

“Management noted that the enrollment growth was broad based with more than 80% of the states in which it operates showing growth, reflecting greater acceptance of online education and demand for its career readiness offerings,” according to a report from Barrington Research.

According to filings with the U.S. Securities and Exchange Commission, K12 took managed school Georgia Cyber Academy to arbitration in May and accused the academy of breaching contract by engaging other educational products and service providers for the 2019-2020 school year.

The academy, in turn, has accused K12 of breaching contract, fraud, breach of the duty of good faith and fair dealing and negligent misrepresentation. An arbitrator is appointed to the case and proceedings are ongoing. K12 reports that the outcome won’t have a material impact on its operations.

In July, K12 President Kevin Chavous posted a message on Georgia Cyber’s Facebook page accusing the school of misspending public dollars and turning struggling students away.

The school has performed poorly, with a zero percent on the academic section of State Charter Schools Commission’s scoring system for the 2017-2018 school year. K12 doesn’t expect to provide the academy with services during the current school year, according to a report from investment bank BMO Capital Markets.

The Atlanta Journal Constitution reported that Georgia Cyber paid K12 $54 million—more than half the school’s federal and state dollars—in fiscal year 2019 alone. K12 sought another $13.3 million to continue services before the current school year.

Career readiness

K12’s growth areas show attempts to diversify the business might be succeeding. Take for instance Destinations Career Academies—its online, tuition-free college and career prep high school—which reported 90 percent enrollment growth year over year to 13,500 students. That represented 11 percent of K12’s total student enrollment.

The company expects $90 million in revenue from its career readiness programs this fiscal year and $200 million in revenue over the next two or three years.

K12 started the school year with 20 career readiness programs and expects to add four or five new ones over the next year. Its goal is to serve more than eight million high school students in 17 states.

“Our vision over time includes possible expansion even into adult learning, corporate training, perhaps even in the international market,” K12 Chairman and CEO Nate Davis said on the company’s earnings call Tuesday, according to a transcript. “The key takeaway is that building out a blended experiential career readiness program largely for high school students right now is just the first step.”

K12 has partnered with Tallo, a company whose platform connects students with colleges and work experiences. Tallo ended the quarter with 580,000 users on its platform, a 55 percent increase year over year, Davis told investors. K12 has invested $11.7 million into Tallo, according to SEC documents.

K12 also has 100 partners nationwide to provide mentorships, internships and other workplace experiences for Destinations students.

Schools with these career readiness programs saw especially strong enrollment growth, according to a report from Jeff Silber, managing director and senior analyst at BMO Capital Markets. Those schools posted 10-plus percent enrollment growth year over year.

“These programs are likely a key driver for the next phase of enrollment growth, which could potentially include hybrid programs,” Silber said.

Davis told analysts the company is experimenting with part-time Destinations programs. Wisconsin is one of a handful of states to host these part-time programs, which service a few hundred students in total. “While this initiative is in its early stages, I believe that it has the potential to drive significant growth for career readiness over the long-term,” he said.

Non-managed schools

Though a much smaller portion of K12’s business, the company’s non-managed public schools business—where K12 provides curriculum and technology but no administrative oversight—saw enrollment drop 34.5 percent, sending that segment’s revenue down 16.1 percent.

The decrease came from ending relationships with several schools that closed or faced challenging operational issues due to poor compliance or mismanagement by school operators.

“We don’t comment on open litigation. But I can tell you that at least one or two of those parties are under investigation by the state authorities,” Davis said. “So it doesn’t appear to have anything to do with us. We were just a curriculum provider, but all the other things they did—how they ran their finances and how they market the students, how they accounted for things—was all on them.”

Davis did not specify the schools.