For-Profit Education Firms Report Record Results

For-Profit Education Firms Report Record Results
February 1, 2001

George A. Clowes

George Clowes is a Heartland senior fellow addressing education policy. He served as founding... (read full bio)

The November 8 announcement of record results from the two most significant
players in the for-profit K-12 schools marketplace was completely overshadowed
by Vice President Al Gore's refusal to concede defeat to Texas Governor George
W. Bush in the early hours of that day, and by the resounding defeat of voucher
initiatives in California and Michigan.

But the first-quarter reports from Edison Schools Inc. and Nobel Learning
Communities Inc. make it clear the two companies have developed successful
working models for the for-profit operation of K-12 schools that provide
alternatives to the accepted norm of government ownership and operation.


Nobel Learning Communities

For Media, Pennsylvania-based Nobel, the largest operator of private schools in the
nation as well as an operator of charter and special education schools, revenues for
the fiscal quarter ended September 30, 2000, increased 20 percent to a record $32.7
million from $27.3 million a year earlier. The quarter's EBITDA (earnings before
interest, taxes, depreciation and amortization), an operating cash flow indicator,
increased 14 percent to a record $2.2 million in a summer quarter, versus $1.9
million in the previous year.

Other financial highlights for Nobel's first quarter included:

  • School operating profit for all schools increased 16 percent to $3.4 million, up
    from $2.9 million in the previous year.
  • Operating profit for schools in operation for at least one year increased 35 percent
    over the previous year.
  • Nobel opened 13 new schools since June and enrolled 1,516 new students in
    those schools.

During the first quarter, Nobel increased the number of schools it owns and/or
manages to 162, consisting of 139 private schools, 19 special education and
specialty schools, and four charter schools. Located in 15 states, the 162 schools
have a combined capacity of over 26,000 students and currently serve nearly

The company provides contracted special education services to an additional 60
charter schools through its strategic partner, Total Education Solutions. Nobel
recently announced a strategic alliance with the South Ocean Development
Corporation, the largest operator of private schools in China. (See sidebar.)

"Our Company has to meet two bottom lines; one for our shareholders who invest
their equity dollars, and one for our parents who invest their tuition dollars," noted
Daryl Dixon, president and COO of Nobel. "We know if we fail either, we fail both.
It is equally important at Nobel to continue reporting positive financial results, as
well as for our students to continue performing above grade level."

Average test scores at Nobel schools for the last school year were significantly
above the national norms for each grade level. Average achievement scores for
Nobel's eighth-grade students in both reading and math were at post-high school


Edison Schools

For New York City-based Edison, the nation's leading private manager of public
schools, revenues for its fiscal quarter ending September 30, 2000 increased 57
percent to $64.8 million, compared to $44.1 million a year earlier. Enrollment
increased to a record 57,000 students in 113 schools, up from 37,500 students in 79
schools last year. Edison's basic and diluted loss per share improved to $0.43 this
quarter from $0.46 for the same period last year.

The company also reported an improvement in gross site margins to 6.6 percent
from 5.2 percent last year, and a reduction in the percentage of total revenues spent
on headquarters and pre-opening costs from 31.4 percent last year to 26.2 percent
for the first quarter.

For the 1999-2000 academic year, Edison students posted achievement gains on
norm- and criterion-referenced exams of 5 percentiles and 7 percentage points

"We're particularly pleased with our ongoing progress toward profitability," said
Chris Whittle, the company's founder and CEO. "This is all the more impressive
when you take into account that our first quarter has only two months of revenue
and it is the period where most of our startup costs are incurred."

Edison Schools opened its first four schools in August 1995 and has grown rapidly
since then, now managing 113 public schools with a total enrollment of
approximately 57,000 students. Through contracts with local school districts and
public charter school boards, Edison assumes educational and operational
responsibility for individual schools in return for per-pupil funding that is generally
comparable to spending in other public schools in the area. The company's
curriculum and school design were developed over the course of three years of
intensive research by a team of leading educators and scholars.

While privatization brings new competition to public schools, it also brings new
competition to private companies. When New York City Schools Chancellor
Harold O. Levy asked for proposals from private sector firms to manage some of
the city's worst-performing schools last year, 14 companies and nonprofit
organizations from around the country responded with proposals, including one
from Edison to convert 45 public schools to charter schools by September 2003.
Another proposal came from a new competitor in the public school management
arena: Advantage Schools Inc., a Boston-based company that hitherto had focused
on charter school management.


Other News

Less successful at developing a viable working model in the for-profit education
business was the TesseracT Group Inc., which on October 6 filed for Chapter 11
bankruptcy protection against its creditors.

The school management company, formerly known as Education Alternatives Inc.,
managed public schools in Hartford, Connecticut, Baltimore, Maryland, and Dade
County, Florida, before centering its attention on operating charter schools, its own
private schools, and preschools. Amid mounting financial losses, TesseracT sold
two of its charter schools to Nobel last June.

George A. Clowes

George Clowes is a Heartland senior fellow addressing education policy. He served as founding... (read full bio)