K12 Inc. Beats And Still Goes to the Principal’s Office? Here’s Why

Investors in K12 Inc (NYSE: LRN  ) should have been rejoicing when the company reported earnings yesterday. Instead, the stock fell by as much as 14%.

Consider all the good news:

Revenue ($237 million) and earnings (loss of $0.18 per share) figures both came in ahead of expectations. The company met its updated enrollment goals set in early October. The mid-point of revenue guidance offered by management was above analyst expectations.

If you go back to the earnings preview I published on the company earlier this week, you could be forgiven for being completely baffled by these results.

But one very important piece of information was buried at the end of the company's release that should give all Fools reason to pause.

A business shift that doesn't look good for shareholders
As you know, K12 has been forced to acknowledge that there are other options out there for students who want to learn via on-line schools. CEO Nate Davis, in a recent conference call, had this to say:

We're ... seeing more traditional school districts offering their own full-time online programs, along with supplemental learning options and online summer courses ... these market dynamics have also created a challenge to enrolling students in our traditional managed programs.

But Davis said the company could be nimble on its feet, focusing on growth in non-managed programs to make up for the shortfall. In essence, the difference between managed programs (which has been K12's historical focus) and non-managed programs is that in the latter, local school districts provide instruction and management while relying on K12's technology platform and content.

In managed programs, K12 covered all of these bases.

As I mentioned in my earnings preview: "it's not quite clear how margins will be effected in the long run by a shift toward non-managed programs."

I may have been wrong to say "margins" instead of "revenue", but the news from K12's release is clear: non-managed programs bring in a lot less money. Here's what I mean

Revenue per enrollment
Currently, non-managed students only make up 15% of all students under the K12 banner, but they are the supposed "growth driver" moving forward.

Enrollment Trends | Create Infographics

The problem is that the total amount of revenue K12 gets per student for non-managed programs is much lower -- like a whopping 70% lower!

Revenue per Student: Managed vs. Non-Managed | Create Infographics

Adding insult to injury, revenue trends for the non-managed programs are heading south, and were down 17% from last year.

CEO Davis said that the company still believes it can grow managed programs over the long-term. With K12 still trading for about 29 times earnings, it will need to fulfill that promise.

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