K12, Inc. attracts Wall Street criticism, compared to subprime mortgages

I wrote yesterday about the renewed attempts to open a virtual charter school in North Carolina run by K12, Inc., an online education company that’s faced fierce criticism for the quality of public education it delivers (Click here to read.)

A reader alerted me to a September presentation New York hedge fund manager  Whitney Tilson made at an investment conference where he  gave a harsh recap of K12’s business model, saying that the company pulls in students not well-suited for online learning in its pursuit of increased revenue from public coffers.

K12,Inc. (NYSE:LRN) earned $848 million in revenue for the 2013 fiscal year, 86 percent of it from its business running virtual public schools in 33 different states., according to its 2013 annual report.

Tilson doesn’t hold back much in his criticism.

“K12 reminds me of the subprime mortgage lenders and for-profit colleges when they were flying high – and the ending will be similar I believe,” Tilson wrote in an email to Business Insider, who posted his entire slide presentation here.

Tilson, also an outspoken education reform proponent who previously served on the National Alliance of Public Charter Schools board, “shorted”  K12’s stock in the presentation, meaning he predicts that the company’s value will go down.

He made his decision because of what Tilson describes as K12’s aggressive pursuit of students unsuitedto the home-based online schooling that led to poor academic results. He also expressed concern about numerous regulatory issues and accusations of wrongdoing K12 has faced that Tilson wrote, “I’m convinced the problems are endemic.”

K12, for its part, has defended its low test and graduation rates in many states, pointing out the schools they run tend to attract large numbers of at-risk students.

He highlights the Tennessee Virtual Academy, which opened in 2011 and is “the worst of any school in the state,” according to Tilson.

The school had test scores in its first year of operation that put it in the bottom 11 percent of Tennessee schools, according to 2011-12 school data.

“I think it’s safe to say there’s almost no learning at all going on at TVA,” Tilson writes on a slide showing the school’s low test scores.

TVA

Slide from Tilson’s presentation on TVA. Source: Business Insider

To read Tilson’s slideshow, which is chock-full of charts, data and interviews from named and unnamed former K12 employees, click here.

K12, Inc. gets turned down for virtual school by appeals court

A state appeals court found that a proposed online charter school to be run by a Wall Street-traded education company K12, Inc. did not have an automatic right to have its application considered.

The court’s decision puts a halt to any plans to open the virtual charter school, with no applications currently pending with the N.C. Department of Public Instruction.

In an order issued today in the case, N.C. Board of Education v. North Carolina Learns, the three-judge appeals court panel backed the prior rulings made by former Wake Superior Court Judge Abraham Jones that the State Board of Education (SBOE) acted properly when, in 2012, it didn’t act on an application submitted by the online school.

“NCVA [North Carolina Virtual Academy] argues that the SBOE was required to act before the 15 March deadline and thus lost its ability to act by failing to meet the deadline,” N.C Appeals Court Judge Wanda Bryant wrote in the opinion. “We disagree.

“[I]t is clear that the SBOE had no duty to review or otherwise further act on NCVA’s virtual charter school application,” she wrote.

To read the entire appeals court opinion, click here.

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K12, Inc. misses enrollment expectations, stock takes a nosedive

BMO Capital downgraded K12, Inc.’s stock (NYSE: LRN) yesterday, on account of slowing enrollments. Shares of the stock tumbled on the news, down 25 percent at the start of trading this morning and down 35 percent as this story was posted 40 minutes after the market opened.

K12, Inc. is a Virginia-based for-profit company that runs online schools in 32 states and attributes nearly 85 percent of its income to public dollars.

The company has been trying to break into the North Carolina market by opening a virtual charter school, but their bid thus far has been unsuccessful.

K12 has run into numerous problems recently, with school districts dropping their partnerships with the company, news of teachers lacking certification, and instances of very low graduation rates.

Just last week, news surfaced of a K12 school outsourcing the grading of student essays to workers in Bangalore, India.

In a press release, K12 explained the slowed enrollment growth:

We believe the increase in Managed Public School enrollments fell short of internal expectations due to several factors, which include, among others:

–The Companys inability to convert the increased volume of student applications into enrollments at a level achieved during previous years due to performance in its enrollment centers and, to a lesser extent;

–The delayed start of the open enrollment period for certain schools.

Managed Public School first quarter enrollments were 5.7 percent over enrollment numbers this time last year, short of expectations.

Revenue is projected to come in between $905 million and $925 million, below the anticipated target of $988.5 million.

Court hearing next week on K12, Inc., for-profit school looking to open in NC

Remember when the for-profit K12, Inc. wanted to open up a virtual school in North Carolina, paid with public education dollars?

Well, they still want to.

There will be a hearing at 1 p.m. Wednesday in the N.C. Court of Appeals in Raleigh about the company’s 2012 attempt to open up an online school in North Carolina. The application was sidelined by the N.C. State Board of Education (click here, here and here for background on K12, Inc. in North Carolina).

For those unfamiliar with K12, Inc., the fairly controversial company has a profitable system of running online-based charter schools across the nation,  but has been subject to accusations of putting profits over quality in how it runs the public schools. On the flip side, the company and its supporters of their brand of online education say that the criticism is unfair, and the schools work well for many students struggling in traditional schools.

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Colorado online school distances itself from K12, Inc.

The Colorado Virtual Academy (COVA) recently broke off its future school management relationship with K12, Inc., a for-profit company that runs virtual public schools around the nation.

Online schools allow students to take their full course load from home computers, and K12 has been a national leader, with close to 85 percent of its revenues coming from public education dollars.

The Colorado charter school’s board of directors decided recently to part ways with the company’s hands-on school management for the 2014-15 school year, according to this article from a Colorado public radio station, KUNC. The school will still use K12-developed coursework and K12 will continue to run the school in 2013-14, according to KUNC.

From KUNC:

Brian Bissell, head of the COVA board, confirmed the change Tuesday. It will go into effect during the 2014-2015 school year. COVA has struggled with poor academic performance in recent years amid questions about K12 Inc.’s management of school resources—including teacher understaffing.

Bissell, who is a K12 Inc. shareholder and has three children enrolled in COVA, says that the school could still use K12’s curriculum but says school leaders have decided that new management is the best option.

“It became clear that at certain points in COVA history the interests of COVA—that is our students and their families, their teachers and Colorado’s taxpayers—these have not always been aligned with K12’s interests,” he said.

The Colorado school has been criticized for its low graduation rates (22 percent in 2011-12, according to state education statistics) and a discovery by state auditors that the school had overcharged $800,000 for 120 students who never attended, weren’t Colorado residents or whose enrollments couldn’t be verified, according to this in-depth 2011 New York Times article.

K12 spokesman Jeff Kwitowski said COVA is continuing to use K12, Inc. to manage the online school in 2013-14, and took issue with the idea that COVA was backing off from its use of the company.

From an email Kwitowski sent N.C. Policy Watch after this post’s initial publication:

We presented a self-management option to COVA Board so they could assume full management and operational control of the school next year, but they declined.  They wanted K12 to manage the school next year and use K12’s curriculum. Furthermore, they wanted the new agreement to state that if they received a new charter, a relationship with K12 would continue.  They voted to ratify the agreement.  In short, they didn’t “dump” K12, they stayed with K12.

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