K12, Inc Behavior Scares Off Investors

Managing Director of investment house T2 Partners Whitney Tilson recently took a position recommending investors short K-12, Inc. Tilson in fact said that K-12 was his largest short position. And he made his reasons clear:

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“In short, online schools are only educationally appropriate for a very small number of students, which means that K12 and its peers need to be highly selective in recruiting students, warning parents away whose kids are unlikely to succeed at an online school, especially at-risk youth.

“So what does K12 do? Exactly the opposite. Since going public in late 2007, numerous former employees have told me that K12 has adopted a growth-at-any cost mentality in order to support its richly priced stock.”

Tilson goes on to write that K12 recruits kids it knows won’t demand much. He quotes Columbia University professor Luis Huerta:

“K12’s phone banks have figured out a way to target dropouts and special ed kids. They will sign up anyone – as long as that warm body signs in periodically, K12 can draw enrollment money from the district.

“It isn’t for some noble reason – it’s because these kids demand the least amount of education. These aren’t kids and parents who will be knocking on K12’s doors saying, ‘Hey, you need to do more for my kid.’”

He reports that K12 spends “far less on teacher and administrator salaries than regular schools” and as a result “many teachers report excessive class sizes and feeling harried, overworked and unsupported.”

The piece describes “horrific education outcomes” which K12 hides by advertising its own test results and refusing any independent external evaluation, and its “sky-high student dropout rate:”

“Another aspect of K12’s horrific educational outcomes is the sky-high student dropout rate, which exceeds 50% annually at some schools. K12 has never released this data – it is nowhere to be found in its 132-page Academic Report, and in a conference call on November 16, 2011, CEO Ron Packard, while admitting that “[w]e track churn immensely,” said that “we haven’t chosen to” disclose churn rates to investors. Instead, the company only acknowledges that “online schools experience relatively high departure rates,” but says that it has “maintained consistent retention rates over the past five years.” However, on that same conference call, Packer did reveal that “about 60% of the kids who start with us in September are with us a year later” – meaning a 40% churn rate!”

Finally, Tilson explains how K12 continues to expand with such an awful record:

“There are many answers, but the most important is money and politics. One person I spoke with told me that in many states, “the Republican legislatures are bought and paid for” by K12.”

Nevertheless, K12 is facing a backlash in some states:

“K12 is also facing scrutiny in Florida and Georgia, where investigations revealed K12 employees covering up the illegal use of uncertified teachers, and class sizes of up to 275 students. And in Colorado, K12 is scrambling to launch a new school after getting hit with a double whammy: the board of the Colorado Virtual Academy has fired K12, and the district that hosted the school has said it won’t renew COVA’s authorization. Local media reported that ‘the school’s 22 percent graduation rate, high student turnover and questions about COVA’s management company, K12 Inc., originally led district staff to recommend denying the virtual school’s multiyear charter application.’”

“Lastly, K12 was denied online schools recently in New Jersey, North Carolina and Maine, which means that K12 is not opening schools in any new states in the next year.”

Tilson concludes:

“K12 is pursuing a growth-at-any-cost strategy that is harming countless students, likely violating numerous state and federal laws and regulations, and wasting hundreds of millions of dollars of taxpayer money every year.

“What the company is doing is becoming increasingly well-known so states – and possibly the IRS – are waking up and thus the company faces increased regulatory risks. The likely result is that K12 will not only miss its growth projections (analysts project that K12’s revenues and profits will grow 16% and 32%, respectively, in the next year), but will actually have to shrink substantially in order to properly serve students (and states/taxpayers).”

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3 Responses to K12, Inc Behavior Scares Off Investors

  1. Sue Redifer says:

    This is so a reason that these “special” schools should not be funded with public money. If a parent pays out of pocket perhaps the students will do better and public education will have more dollars to do the job it was designed to do.

    • CTaylor says:

      Sue: You say there’s no reason cyber schools shouldn’t get public money (other than all the reasons described by this site) and then you say parents should pay out of pocket. The reality is that K-12 gets the money from the government that the schools would have received. A big problem but nothing compared to the damage these corporations are doing to the kids unfortunate enough to left with one of their ‘diplomas.’

  2. MaxMom says:

    I don’t understand how these schools can draw public enrollment funds if they ‘refuse any independent external evaluation’. I thought much of our public school funding was based exactly on test scores? It sure seems that my daughters public school is constantly testing them and sending home letters re: ‘the dire consequences of funding’ should kids even stay home sick and miss the test day…

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