For Edison Schools, there are promises to keep

In face of declining revenues, company must show investors it can turn a profit this spring

by Paul Socolar

It's crunch time for Edison Schools Inc., the controversial, for-profit company that took over management of 20 of Philadelphia's public schools at the beginning of the school year.

Edison, along with the other outside managers, is awaiting a decision from the School District about what will happen to its contract to manage those schools. District CEO Paul Vallas, who has at times criticized Edison's actions in Philadelphia, has said that he expects fewer schools to be privately managed next year.

Nationally, Edison runs over 100 schools serving roughly 80,000 students, making it the largest company involved in privately managing public schools. Edison claims it can improve student achievement at low-performing public schools and make a profit for its investors while doing so.

Despite mounting financial losses and contract cancellations, company officials are still forecasting continued expansion and even profitability. But in the next few months, Edison will be under tremendous pressure nationally to deliver real evidence of a reversal of fortune. Some have called this Edison's "make-or-break year."

Promise of a profit

The perennially money-losing company has made a specific and well-publicized promise to investors that in the three months from April to June -- the fourth quarter of Edison's fiscal year -- Edison will for the first time ever bring in more money than it spends.

Edison is forecasting positive net income of $11 million in its fourth quarter. In the first two quarters of the year, the company reported losses of $19 million and then $9 million.

A single profitable quarter doesn't mean an end to the company's history of racking up annual losses -- its cumulative deficit now totals well over $300 million. As of now, Edison is making no other specific projections of positive earnings in the future, according to Edison spokesperson Adam Tucker.

But a profitable quarter would be a significant turnaround for the company, Tucker said. "In 10 years, we've never done it," he explains.

Tucker said the company has undergone significant "reengineering" and is now "pointed in the right direction."

In a February conference call with investors, Edison CEO Chris Whittle noted, "The public debate has calmed, and that is a favorable development."

But company officials provided only a sketchy explanation of why they anticipate an abrupt leap to profitability. Edison projects a $21 million improvement in net earnings between the third and fourth quarters, which they say will be driven by the profitability of their summer school programs. Edison plans to serve 44,000 summer school students this year, mostly in Missouri.

Unfortunately for Edison, a severe budget crisis in Missouri has prompted proposals to slash state summer school spending.

No more growth years?

The company has not retreated from its forecasts of continued growth, but revenues are down and Edison will be hard-pressed to avoid its first-ever decline in total student enrollment at its schools in the coming school year.

To date, Edison has lost management contracts covering 16 schools for the 2003-04 school year, while gaining only one new school. While opposition to the company has been loudest in cities like Philadelphia, New York, and San Francisco, Edison has continued to have trouble holding on to school management contracts in smaller communities. Pontiac, MI and Tyler, TX are two of the most recent school districts to cancel contracts with Edison. Both cited high costs and lack of progress in student achievement.

"I think they're in serious trouble, and this year may be their peak in terms of the number of schools they are running," said Nancy Van Meter of the American Federation of Teachers (AFT), who heads that national union's Center on Privatization.

Van Meter said Edison is finding that the labor-intensive job of selling themselves to school districts is increasingly challenging. "The key stakeholders in school districts are saying, 'Wait a minute -- these guys don't have the kind of track record that would make us want to bring them in here to run schools.'"

A study released in February by the AFT reported that Edison is still managing barely half of the schools that it took on in its first four years of operation. Out of those 64 schools, 30 are no longer under Edison management.

Edison officials remain upbeat. "We'll be making more new contract announcements in the spring," Tucker promised. He stood by the company's projection that it will continue to grow and talked about "exiting unprofitable contracts" when he discussed their recent contract cancellations.

Despite declining revenues in the last two quarters, Tucker said that company predictions of growth in revenue and student enrollment at a rate of 10 to 15 percent annually will be realized through expansion at existing sites as well as through acquiring new contracts. The company is also expanding side ventures such as marketing its assessment system.

But after a year of well-publicized troubles, Wall Street continues to regard the company and its promises with a great deal of skepticism. Edison's stock price has been hovering under $1.50 per share, only one-tenth of the price it was trading at a year earlier. In that year alone, total shareholder equity plunged by over $100 million, representing a loss of one-third of the company's "book value," or net worth.

For Edison, a failure to deliver on the two promises of a profitable quarter and continued growth would further undermine investor confidence. Declining confidence in the company has made it difficult for Edison to borrow money for operations and school startup. Last summer, Edison agreed to pay a staggering $4.4 million in fees on top of a 12 percent interest rate to obtain a needed loan of $20 million.

In turn, doubts about the company's viability make it difficult to secure new contracts with school districts.

Edison's latest annual report repeats the company's assertion that its schools significantly outpace similar schools in raising student achievement. But like Edison's past claims of success, this has already been challenged by critics. The recent AFT study of Edison maintains that in 14 out of 20 states where the company operates, Edison schools performed below zaverage compared to public schools.