Capella Education Company
(
CPLA
), the provider of online education, recently delivered
first-quarter 2012 earnings of 82 cents a share that compared to 90
cents earned in the prior-year quarter. The decline was due to fall
in students' enrollment. However, the first quarter earnings
surpassed the Zacks Consensus Estimate of 78 cents.
Behind the Headline
Total active enrollment dropped 5.9% to 37,553 during the
quarter. New enrollment tumbled 4.9%, reflecting tough market
conditions.
The quarterly revenues of $109.4 million fell 1.8% from $111.4
million in the year-ago quarter. However, the revenues exceeded the
Zacks Consensus Estimate of $105.0 million.
Operating income, adjusted for charges related to workforce
reduction, came down to $17.9 million from $22.4 million a year
ago, whereas operating margin contracted 380 basis points to
16.4%.
Instructional cost of services increased to $46.8 million in the
first quarter 2012 from $42.5 million a year ago, primarily due to
enhanced investments like cohort retention initiatives, increased
technology, depreciation and amortization. General and
administrative expenses also increased to $11.8 million from $9.2
million reported last year, spurred by higher Resource Development
Internationa (
RDI
) expenses and higher bad debt.
Other Financial Details
Capella ended the quarter with cash and cash equivalents of
$82.9 million compared with roughly $62.0 million of cash at the
end of the previous quarter. The company's shareholders' equity
stood at $161.5 million in the first quarter 2012 compared with
$162.6 million in the previous quarter.
Cash flow from operations for the first quarter of 2012 went
down 15.3% to $19.9 million from $23.5 million in the year-ago
quarter.
During the quarter under review, the company repurchased 319,000
shares, aggregating $12.9 million for each share. Capella indicated
that it has $46.7 million at its disposal under its share
repurchase authorization.
Guidance
Management expects a 1% - 2% year-on-year decline in revenues
for the second quarter of 2012.
For second quarter 2012, Capella expects operating margin in the
range of 13% to 14%.
Enrollment Falls, Forecasts Softer Declines
We observe that Capella is witnessing a drop in enrollment.
After falling 4.5% in fourth quarter 2011, total active enrollment
dropped 5.9% in the first quarter of 2012. However, Capella now
projects total enrollment to decline between 6% and 7% in the
second quarter of 2012.
The potential risk looming over the education sector is the
regulation proposed by the Department of Education. The regulation
adversely impacts students' enrollments and the company's profits.
The Department of Education proposed that an educational program
could only qualify for Title IV funds, if it helps in achieving
employment, which includes the criteria of loan repayment rate and
debt-to-income ratios.
The institutions are under the scanner due to the rise in the
default rate of student loans, and are now being asked to submit
information relating to recruitment procedures and use of student's
grant.
Our Take
We are encouraged by the company's initiatives to improve
students' enrollment; its diversification strategy as evident from
the acquisitions of Sophia, a social teaching and learning platform
and Resource Development International, an online provider of UK
University qualifications by distance learning; and introduction of
new products offerings and new program accreditations. However, we
are concerned by the consistent fall in enrollments and uncertainty
looming over the education market.
Currently, we have a long-term Neutral rating on the stock.
However, Capella, which competes with
Apollo Group Inc.
(
APOL
) and
Strayer Education Inc.
(
STRA
), holds a Zacks #4 Rank that translates into a short-term Sell
rating.
APOLLO GROUP (
APOL
): Free Stock Analysis Report
CAPELLA EDUCATN (
CPLA
): Free Stock Analysis Report
STRAYER EDUC (
STRA
): Free Stock Analysis Report
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