Capella Education's Q3 Earnings in Line, Outlook Bleak

Shares of Capella Education CompanyCPLA fell 11.6% on Oct 27, as the post-secondary education provider reported weak top-line results in the third quarter of 2015 and provided a disappointing outlook for the fourth quarter. Capella's share price declined 37.7% year-to-date.

Though Capella's third-quarter 2015 earnings of 67 cents per share were in line with the Zacks Consensus Estimate, its revenue performance failed to impress. Meanwhile, earnings improved 8% year over year.

Capella Education Company (CPLA) - Earnings Surprise | FindTheCompany

Revenues and Enrollment in Detail

Capella's quarterly revenues of $103.7 million missed the Zacks Consensus Estimate of $105 million by 1.2%. Revenues inched up a mere 0.6% from the year-ago level, missing the company's expectations of a 1% to 2% increase. In spite of an increase in total enrollment and a tuition hike in Jul 2015, revenues failed to meet expectations due to an unfavorable timing of enrollment and a shift in degree mix.

Total active enrollment of 36,683 was up 4.2% from the prior-year quarter. The enrollment growth rate exceeded the company's expectations of a 3% to 4% increase on the back of better-than-expected growth in new enrollment and improved early cohort persistence. Early cohort persistence improved 3% during the quarter, driven by the company's focus on learner's success.

During the third quarter of 2015, the company reported positive total enrollment growth at all programs except the PhD/Doctoral programs. Bachelor's degree enrollment increased 2.4%, Master's degree enrollment increased 10.9% and enrollment in other programs increased 0.7%. However, PhD/Doctoral enrollment decreased 4.2%.

New enrollment rose 2.3%, surpassing Capella's expectations of flat to slightly down year-over-year rate. The increase was driven by strong enrollment in Master degree programs and FlexPath, partially offset by an expected softness in PhD and bachelor programs.

Costs and Margins

Operating income increased 2.3% year over year to $13.5 million. Operating margin increased 20 basis points (bps) to 13.0%, which was within the expected range of 12.5% to 13.5%. Operating margin was driven by consistent cost control.

Instructional cost and services of $48.2 million in the quarter increased 2.3% year over year.

Fourth-Quarter 2015 Outlook

Revenues are expected to be flat to up 1% year over year. Total enrollment is expected to increase 1.5% to 2.5%. Capella expects new enrollment to decline year over year in the mid-single-digit percentage range. Operating margin is expected in the range of 17% to 18%.

Near Term Outlook

In the near term, Capella expects to operate in "a low to no growth market environment", which will be accompanied by increasing competition. While the company expects challenging environment to make mid single digit new enrollment annual growth difficult, the company believes new enrollment will continue to perform in this range. In the long term, the company expects to outperform the market.

Moreover, the company mentioned a change in degree mix, which reduces the visibility on enrollment trends in the near term. The company is witnessing a shift in its degree mix from PhD to professional doctorates. It also noted a shift from doctoral to master degree enrollments. While this is driving strong enrollment trends for master degree programs, it will also be responsible for hurting revenue per students and operating margins in the near term. In addition, more students are opting for the FlexPath direct assessment programs.

Capella currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks in the education industry are New Oriental Education & Technology Group Inc. EDU , Bridgepoint Education, Inc. BPI and TAL Education Group XRS . While New Oriental Education & Technology Group and TAL Education Group sport a Zacks Rank #1 (Strong Buy), Bridgepoint Education holds a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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