K12, Inc. Continues Its Massive Transition

By Markets Fool.com

Continue Reading Below

K12 traditionally caters to students and families who work better in smaller, at-home, individualized settings. Photo: K12.

For-profit educator K12 released its quarterly report today, handily beating expectations for both revenue and earnings. Revenue came in at $244 million -- about $6 million ahead of what was forecast -- and earnings came in at $0.45 per share, far ahead of the expected $0.37 per share. Yet the stock itself is up less than 5% as of mid-day.

In order to understand why the reaction was so muted, it's important to grasp where K12 has been, where it's going, and the massive transformation it is undertaking to make its business model more sustainable.

A tale of two approaches
Traditionally, K12's bread and butter was in what are now called "Managed Schools." With such schools, K12 would set up a charter school subsidiary in a local community. The company would handle essentially all of the schooling -- teaching, curriculum, assessment, etc. -- for students whose families chose to use the company's online offerings instead of attending the neighborhood school.

The model itself started running into serious problems back in 2011. Parents, educational officials, and some short-sellers claimed that the company was recruiting students for the program based solely on meeting booming enrollment expectations. This led many to accuse the company of accepting students who were doomed to fail in the at-home environment simply to make an extra buck.

Continue Reading Below

As education officials began to investigate these claims, the company began exploring other ways to provide e-learning solutions to schools. That gave birth to what are now referred to as "Non-Managed Schools." In these schools, K12 principally provides the content and online platform for classroom teachers to use in augmenting their instruction.

Diverging results
As you might expect, growth in enrollment and revenue from managed schools has screeched to a halt, while non-managed programs have been growing by leaps and bounds. Altogether this is a very positive development: focusing on non-managed programs allows K12 to adopt an approach that is both sustainable and will keep the company out of the public's cross-hairs.

The problem: managed programs still bring in much more revenue than non-managed ones.

K12's Two Lines of Business | Create infographics

Overall, for the most recent quarter, managed schools saw enrollment shrink 4.6% year-on-year, while revenue inched up 3.5%. Non-managed schools, on the other hand, experienced a 37.8% bump in revenue on an enrollment surge of 38.1%.

Perhaps more important are the trends for average revenue per student. Managed schools brought in $1,849 per student last quarter, while non-managed schools brought in significantly less: $462 per student. The non-managed figure has also been trending downward, if ever so slightly.

This, combined with revenue estimates for next quarter that came in near the low end of expectations, explains why Wall Street remains cautious with K12, taking a wait-and-see approach to the company's transformation.

The article K12, Inc. Continues Its Massive Transition originally appeared on Fool.com.

Brian Stoffel owns shares of Apple. The Motley Fool recommends Apple and K12. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.