Originally published to Investing.com – July 25, 2020
By Christiana Sciaudone
K12 (NYSE:LRN) Inc. runs online public schools and, accordingly, business is booming.
“The growth in enrollments that we’re seeing is shocking even to us,” Chief Executive Officer Nathaniel Davis said in a Zoom interview with Investing.com this week.
Covid-19 stay-at-home mandates and school closures have forced parents to seek out alternatives to traditional in-person school, boosting K12’s fortunes. The company gets the lion’s share of its revenue from operating virtual public schools, with the first quarter bringing in $228,335 for the segment out of a total $257,154. Investors are seeing the same opportunity, tripling K12’s share price this year.
“They are in the right place at the right time,” said Jeff Silber, an analyst at BMO Capital Markets who has a buy rating on K12. “This is likely to be the best year in company history.”
K12 is a 20-year-old venture, and operates more than 70 schools in 35 states, with an enrollment of 122,800 as of fall 2019. It also provides the curriculum and services necessary for public and private schools to set up their own customized full-time and part-time online programs, and for supplemental online and blended education. In total, K12 works with 6,000 teachers, of which approximately 2,000 are K12 employees. That will grow this year, with plans to hire as many as 1,300 teachers.
Visits to the website are up 90% from February through now, and applications are up 60%, Davis said. The company is poised to announce a major deal with one of the country’s largest school districts, for which it will provide software and services. Local teachers will remain.
K12 is targeting expansion in big markets like New York and New Jersey, and will continue opening schools in states where it already operates.
“Based on the kinda applications we are seeing, the estimates in the marketplace are modest,” Davis said.
Online school is still a limited market, however, Silber said. While there are more than 50 million students in U.S. public schools, not everyone can adjust well to the virtual environment. In 2017-18, 298,000 students were enrolled in full-time virtual schools, Silber said, citing the most recent information available from the National Education Policy Center. It’s a tiny niche, he said. Even if it doubled, 99% of students would still be enrolled in regular schools.
Pearson’s Connections Academy is K12’s biggest peer, and it also reported strong revenue growth, with applications up 61% in the first half compared to 2019. Pearson said in its half-year results statement on July 24 that it is increasing capacity in existing schools and seeing interest from states that haven’t yet initiated virtual schooling. In the upcoming school year, Connections will have 32 partner schools in 29 states.
While the short-term looks positive, long-term growth will come from K12’s career readiness segment, Davis said. While K-12 education is a market estimated to be worth $11 billion, the potential market for career readiness totals almost $100 billion, according to a K12 presentation.
In January, K12 bought career readiness company Galvanize Inc. for $165 million in a cash deal. The acquisition of Galvanize positions K12 as a provider of career readiness education services, including skills training, technology staffing and developing talent and capabilities for Fortune 500 companies.
Davis recounted a recent management meeting with four big corporations, and their frustration at finding qualified talent.
“Half the jobs they are going to fill don’t require college education, but they do need skills,” Davis said. “The corporations are all telling us ‘I care more about skills than I do about degrees.’”
Companies want employees who can get to work on time, be organized, handle spreadsheets, and perform other tasks. Those things aren’t being taught in college, though some are adapting, Davis said. With the coronavirus sending kids home, families are starting to question the tens of thousands of dollars they are spending on traditional college experiences.
“A liberal arts education may not help you get a job,” Davis said.
Among the strategies in building a successful company is, evidently, finding the right people. While diversity is on everyone’s mind of late, Davis has made it a priority since he took charge in 2013. White men are outnumbered on K12’s management team and the board of directors, which includes African-Americans, Asians and Hispanics.
“I am a person who has benefited from people giving me a chance. I want to give others a chance,” Davis said. Candidates, including for the board of directors, have to be qualified, but Davis keeps an open mind in terms of experience and exact skills. Even if they have never served on a board, they will have something else to contribute. “You have to be committed to it and you open your mind up to the other skills of individuals.”
A recent example of the difference diversity brings to the board came after a look at the mix of students showed a dearth of Latinos. Two Hispanic board members were consulted, and they reached out through their contacts to help the company reach Latino families. As a result, K12 saw a jump in the number of Latino students enrolled.
“It comes from the top,” Davis said. “It’s how you set the tone.”