The Lie Behind K12 Inc: A Glimpse Inside

Posted: March 4, 2016 in Uncategorized
Q2 2013 K12 Inc. Earnings Conference Call
Source: Fair Disclosure Wire
Ever wondered what happens behind closed doors when corporate executives meet to discuss how their company is doing on the world of education reform?

Beyond the media sound-bites and advertisements, what do they really care about?

Please join me in this blog in reviewing the K12 Inc Earnings Conference Call (Feb 5th, 2013).

I am providing only a summary snap shot of what transpired during that call.

The full transcription is available here.

First, a Short Bio. Who is K12 Inc?

Read Sourcewatch. “K12 Inc. was founded by former Goldman Sachs executive Ron Packard and former United States Secretary of Education and right-wing talk show host William Bennett in 1999. Packard was able to start K12 Inc. with $10 million from convicted junk-bond king Michael Milken and $30 million more from other Wall Street investors.”

Services they provide:

K12 Managed Public Schools, International and Private Pay Schools, materials and resources to traditional public schools (i.e. curriculum) via subscription leases. They call this the institutional segment: business products, software and service business selling into school districts nationwide.

 Who was present in this conference call?

Nate Davis, Executive Chairman; Ron Packard, Founder and Chief Executive Officer; Tim Murray, President and Chief Operating Officer; and Harry Hawks, Chief Financial Officer.

Also present (the lords of Wall Street): JEFF MEULER, ANALYST, ROBERT W. BAIRD & COMPANY, INC; SUZI STEIN, ANALYST, MORGAN STANLEY; KELLY FLYNN, ANALYST, CREDIT SUISSE; TRACE URDAN, ANALYST, WELLS FARGO SECURITIES, LLC; PAUL CONDRA, ANALYST, BMO CAPITAL MARKETS; JERRY HERMAN, ANALYST, STIFEL NICOLAUS; KELLY METZLER, ANALYST, BOFA MERRILL LYNCH

Some highlights from their call

  • It’s all about marketing and sales

Nate Davis: “We will continue to sell more products, whether inside the managed services contracts or as a stand-alone implementation, selling by course.”

Soon, even Pre-K children will also be sitting in front of screens.

Meet the new Google Babies.

According to Tim Murray K12 Inc is “piloting a Pre-K program …” He says “We also released a number of applications for mobile platforms with distribution through iTunes, Google Play and the Amazon app store, bringing us to 16 mobile apps in total with over 600,000 downloads to date.”

They also sell teacher preparation!

Tim adds that “Two specific areas of focus on are teacher training and compliance” To that end K12 Inc provides its “own version of certifying teachers in accordance with iNACOL’s standards for quality online teaching.”

Nate Davis says SELL!!! (0ver and over again): “There’s a significant amount of revenue that comes from selling products … we sell our service of managing the school; we also sell the products to the school, the curriculum … remediation tools allow us to sell more products. So some of our product sales will not just be coming from the Institutional line of business, it will also be coming from within the Managed Schools area.”

Not to mention those untapped little pre schoolers! Davis adds, “We think there’s an opportunity there to sell more products in that category as well. Again, that’s brand-new. It has not officially been launched.”

And don’t forget those kids with special needs or learning difficulties/disabilities. They are the cash cow. Nate Davis says, “They may go off-line into a specialized remediation program, and that’s a service that we can sell (as well).”

And math labs. Davis adds, “That’s another program we can take and pour back into the schools … It’s the course-specific, topic-specific, remediation-specific, that we can sell back into the same school that we are in. And that’s where I think the opportunity is.”

Tim Murray: “(New) technologies … allow our customers to self-service themselves as able, which in turn reduces our cost.

  • Individualized education is code for online education

Ron Packard: “(We will) lead the transformation to individualized learning and educational liberty …. what K12 technology is about is driving an individualized education for every child … there’s going to be multiple programs within schools; there already are. But it could also be separate schools with different brand names as well.”

  • The “Experts”

Ron Packard: “We are excited about our new Chief Academic Officer, Margie Jorgensen, who comes to us with an extensive background in assessment and instructional practices … (and) K12 has formed an education advisory committee of outside experts.” (See Committee Composition here)

Dr. Jorgensen’s previous “expert” experience includes:

Founder and CEO of Measure2Learn; Managing director at Battelle for Kids, a non-profit enterprise focusing on several aspects of educational reform; Senior Vice President and before that Vice President, Product Development, Psychometrics and Research for Harcourt Assessment, Inc.; Assistant Vice President for Development, ACT, Inc.; (and) Senior Examiner for the Educational Testing Service.

Also see their Board of Directors

  • Show me the Money:

Tim Murray: “Total enrollments and semester course enrollments in our International and Private Pay Schools grew 10.9% and 1.5%, respectively … Revenue in Institutional sales grew 8.6%. When I look at our operational metrics for this team, I continue to see a growing pipeline, greater sales productivity than last year and a growing backlog.”

Harry Hawks: “Cash from operations for the six months year to date was a positive $32.1 million compared to the same period a year ago as negative $19.5 million and two years ago was $7.1 million … we know that net cash at 12/31 was $9 million higher than cash at 12/31 a year ago, notwithstanding our ongoing investments in curriculum, software and infrastructure.

Ron Packard: “We believe virtual schools are already a significant discount to what taxpayers pay for education and delivering a great value.”

Are we talking about used cars or children????

Nate Davis: “Institutional Business, the business of selling stand-alone products to schools is a higher-margin product … improving the sales of the Institutional Business, because that’s a very profitable products business for us.”

Not all services and products are equal. K12 is looking for “a shift in some cases toward higher-priced products that we are selling as opposed to lower-priced products” according to Tim Murray.

  • The Result?

Trace Urdan: “You guys are making disproportionate profits.”

  • How can they get away with this?

Nate Davis: “We start by looking at what we think the market opportunity is

Tim Murray “We have significant traction in reengineering policies and processes, creating a identified enterprise systems architecture and focusing on our unit cost improvements in our business.”

AND THAT’S HOW YOU SELL OUT OUR CHILDREN AND OUR DEMOCRACY TO WALL STREET

Tommy: Now you can’t hear me,
your ears are truly sealed.
You can’t speak either,
your mouth is filled.
You can’t see nothing,
and pinball completes the scene.
Here comes Uncle Ernie to guide you to
Your very own machine.

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