It would be hard to find a company that increases its revenue by 29% year over year and have the market think it a disappointment. But LRN certainly seems to have fit that profile with its Q2 report.
The quarter was obviously negatively impacted by the $8M million reduction applied to the top line due to expected state funding decreases. The adjustment came so late in the quarter that they had no means of reducing expenses accordingly. Thus the shortfall in revenue fell directly to EBIDTA, which would have been closer to $30 million instead of $21.8M.
Short term traders will gnash their teeth and wring their hands but K12's story is still intact. There is so much noise in their reported numbers that it is hard to sort them all out. The acquisitions, the explosive growth in both the US and overseas and the ramp-up in costs to meet demand all make it difficult to gauge the underlying business. However, this is a company that was doing only $56M in revenue per quarter just 4 years ago and now is doing 3 times that. EBIDTA has grown from $25M in 2008 to an expected $90M this year. Yet the shares have not outperformed the averages over the past few years.
Right now LRN sells for about 11 times EBIDTA and is growing by 30% a year. Something is wrong with this picture.
I expect this to change going forward. As they finish integrating the acquisitions and as the domestic business matures they should start to see their margins begin to grow again. The top line growth will continue to be spectacular as online learning moves into the mainstream. The China business will be brought onboard this year which should help growth.
The market right now is looking backwards instead of forwards and is mispricing this company in my opinion. Their challenge is in managing the growth, not in finding it.