Capella Education Company
(
CPLA
) reported third quarter 2012 earnings of 39 cents a share,
surpassing the Zacks Consensus Estimate of 28 cents banking on
better-than-anticipated new enrollment growth. However, the third
quarter earnings were down 40.9% from the year-ago quarter due to
year-over-year decline in revenues and margins.
Despite solid results in the second and third quarters,
management maintained a cautious outlook for the last quarter due
to a challenging economic environment, increased competitive and
pricing pressure, and possibility of quarter over quarter
volatility.
Revenue and Enrollments in Detail
Quarterly revenues of $99.3 million moved past the Zacks
Consensus Estimate of $98.0 million. However, revenues slipped
2.9% from the year-ago levels. The top-line decline was much
narrower than management's expectation of a 3.5% to 4.5%
decline. Revenues benefited from the positive new
enrollment growth.
Total active enrollment dropped 2.1% over the prior-year
quarter to 34,989 students, lower than management's guidance of a
drop in the range of 3.5%-4.5% due to new enrollment growth and
solid learner re-registration rates. New enrollment grew 10.5%
year over year despite tough market conditions. However, new
enrollment growth was significantly better than management
expectation to remain flat or grow slightly. Capella's strategic
initiatives, continued innovation efforts and bringing forward
some demand into the quarter drove new enrollment growth.
Also, the new enrollment growth was driven by the Master
degree programs. Total enrollments declined 3.7% for
Ph.D./doctoral degrees, 7.9% for the Master's programs and grew
6.9% for the Bachelor's programs. However, the Other segment
jumped 135.7% year over year.
In order to improve overall enrollment growth and increase
efficiencies, the company is moving away from a direct marketing
aggregator channel to a brand-driven marketing strategy to build
greater awareness and preference for Capella. The company is also
working to build brand awareness for its university through mass
media, social media and strategic relationships with employers.
Further, the company has undertaken several initiatives to
improve student success rates. It is also creating innovative
learning technologies, which will meet the needs of working
adults. We believe that positive new enrollment growth in the
third quarter is a clear indication that these operational
initiatives are paying off.
Costs and Margins
Instructional cost of services increased to $44.4 million in
the third quarter of 2012, up 4.4% year over year primarily due
to the addition of Resource Development International Ltd, the
company's strategic investments and increased impairment and
depreciation charges. Marketing and promotional costs also
increased to $32.9 million, up 2.1% year over year, spurred by
higher advertising expenses.
Adjusted operating income came down 44% to $8.3 million,
whereas operating margin contracted 620 basis points to 8.3%, due
to higher bad debt expenses. However, operating margin was better
than management expectation of a range of 5% to 6% driven by
better revenue, shift of some marketing expenses into the fourth
quarter, and efficiency improvements.
Dull Fourth Quarter Outlook
Management expects a 3.5%-4.5% year-on-year decline in
revenues for the fourth quarter of 2012 as they anticipate a
decline in total enrollment. Total enrollment is expected to
decline between 4.0% and 5.0%, while new enrollments are expected
to remain almost flat in the fourth quarter of 2012.
The total enrollment outlook for the fourth quarter is
somewhat muted as some new starts were brought forward into the
third quarter and due to management expectation of a lower
persistence rate in the quarter. Despite witnessing positive new
enrollment growth in the third quarter, management believes it
will take a number of quarters before total enrollment growth
turns positive.
For the fourth quarter of 2012, Capella expects operating
margin to be in the range of 13.5% to 14.5%. The expected
operating margin is down from 17.2% in the prior-year quarter due
to revenue decline and higher investments in marketing, learner
success strategy and increased bad debts.
Marketing and promotional expenses are expected to remain
similar to prior-year quarter levels. General and administrative
expenses are expected to increase slightly year-over-year
primarily due to diversification-related expenses and increased
bad debt.
Our Recommendation
We currently have a Neutral recommendation on Capella. The
stock carries a Zacks #3 Rank (a short-term 'Hold' rating).
We are encouraged by the solid back-to-back quarterly results
from Capella in the second and third quarters. We believe that
Capella's brand-driven marketing strategy as well as initiatives
to improve learner success rates, despite hurting margins in the
near term, bode well for the company's long-term growth. Further,
continuous innovation and efforts to update courses will boost
enrollments. We believe that Capella is performing better than
many larger peers like
DeVry, Inc.
(
DV
) and
Apollo Group
(
APOL
). However, the muted fourth quarter outlook concerns us. We
would like to remain on the sidelines until we have greater
confidence that the improvement in enrollment growth is
sustainable.
APOLLO GROUP (APOL): Free Stock Analysis
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CAPELLA EDUCATN (CPLA): Free Stock Analysis
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DEVRY INC (DV): Free Stock Analysis Report
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