Friday, September 19, 2014

Why K12, Inc. will struggle.

As I write this, K12 just today watched its stock value plummet over 5% in one day. Over the past three to four weeks, it has lost almost 25% of its value and is now resting in the $16s.

The question today is 'Why are they struggling?' Below are just a few of the primary reasons:

1. They lost their focus.

This began when they went public almost ten years ago and it has led to the crescendo we see happening now. For K12, the promise of revolutionizing the educational industry was replaced with meeting quarterly expectations and annual earnings per share and revenue targets.

They may like to tout "putting students first" but actions unfortunately paint a different picture. Their focus is, and has been for some time, on other areas.

2. The lost their visionary.

Founder Ron Packard severed all ties with K12 on June 30 of this year (except I assume for personal shares of stock). Having worked with Ron for almost 12 years, he had his shortcomings and faults as we all do. However, one area where he excelled was casting the vision of what K12 could be.

By doing this he was able to overcome ongoing issues with partner schools and continue relationships with them. Though he left K12 just a few months ago, his influence was diminished as far back as almost two years ago.

So, it is no coincidence that within the past eighteen months Colorado Virtual Academy broke off management relations with K12, Agora Cyber recently issued an RFP to sever ties with them, and K12-managed schools in California, Ohio, and other states are waiting in line to possibly do the same.

Why? The main reason is without Ron's impact, relationships with K12 have now become more of a business decision centered around school performance, management expenses, and P&L statements.

3. A multi-page report cannot overcome a headline.

Do a quick search for Agora Cyber, TNVA, CAVA@Kern, OHVA, or even K12 and you will see headlines spotlighting poor and even dismal student performance on state tests. You will also see efforts to close down Tennessee Virtual Academy (TNVA) and CAVA@Kern.

K12's response to all of this? Issued a multi-page report in an effort to counter the headlines.

First, in-depth responses tend not to overcome headlines (need proof - just watch the elections this year). Or, remember "if the glove doesn't fit, you must acquit." So, whether or not the evidence K12 presented in the report was accurate or not doesn't matter. Perhaps it is true that the longer students stay with K12 the better they perform (though that argument could be made in many schools) and perhaps it is true that Scantron tests are better measurements of student performances than state tests. None of this matters.

What matters is that the headlines are directing the narrative. And, those headlines are saying that K12 is failing. Until K12 schools can demonstrate strong academic performance on the state tests, it really doesn't matter if the report they issued was fifty pages, or five hundred.

All of this leads to the next question -- 'Will their struggles continue?' I would answer this with a strong YES. In fact, I predict that K12 is headed down a slope that will only get steeper increasing the rate at which they will struggle.

Watch for their stock price to nosedive into the $12-13 range (if not more) if Agora leaves. In addition, it will potentially create a cascade of other K12-managed schools following Agora's lead causing further erosion in value.

Tennessee Virtual Academy (TNVA) is in its last year unless it can demonstrate a level of academic performance that it has not been able to do during its entire existence. The TN Ed Commissioner has said that if they cannot meet the expected performance level he is closing their doors at the end of this academic year. Again, this will create a crescendo effect in other states where K12 is presently.

Finally, current issues in Tennessee, Pennsylvania, and other states could be obstacles in K12's efforts to expand into new states such as North Carolina, or expand enrollment caps in other states where it already operates schools. And I haven't even mentioned slowing growth rates in virtual school enrollments in many states (Ohio at .5%), increased costs, increased competition, unionization efforts of teachers in K12-managed schools, and the exodus of corporate staff.

Is it too late for K12 to change course? First, one would need to ask how strong the desire is to change course, or if there is one from the current leadership team? Or, is there an exit strategy involved that is playing itself out already?

It will be interesting to watch. Unfortunately, it will be the students and families who pay the real price.

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