Capella Education Company (CPLA), the provider of online education, recently delivered lower-than-expected fourth-quarter 2010 results as new enrollment declined. Quarterly earnings of $1.09 per share missed the Zacks Consensus Estimate of $1.11, but grew 23.9% from 88 cents posted in the prior-year quarter. The Zacks Consensus Estimate was stable prior to the earnings announcement.
Behind the Headline
Total active enrollment climbed 16.2% to 39,477 from the year-ago quarter. However, new enrollment dropped by 10.7% during the quarter, reflecting sluggish demand for its programs, stiff competition and stringent admissions criteria, which require students to undergo an assessment to get enrolled.
Quarterly revenue of $114.7 million surged 21.3% compared with the prior-year quarter, and remained in line with the Zacks Consensus Estimate. Capella now expects revenue to increase in the range of 8.5% to 9.5% in first-quarter 2011.
Despite a rise of 20.7% in total costs and expenses, operating income for the quarter surged 23.4% to $28.3 million helped by double-digit growth in the top-line, whereas the operating margin expanded 40 basis points to 24.7%. Capella now expects operating margin in the range of 17% to 18% in first-quarter 2011.
Slowing Enrollment Growth
We observe that the growth in enrollments in the quarter under review has decelerated sequentially. After increasing 25.7% in the third quarter of 2010, the rate of growth in enrollment dropped sharply to 16.2% in the fourth quarter. Capella now expects total enrollment to rise in the range of 4.5% to 6.5% in first-quarter 2011, reflecting a slower growth compared with previous quarters.
Following this, a negative sentiment may be palpable among the analysts covering the stock, and we could witness a fall in the Zacks Consensus Estimate in the coming days.
The current potential risk looming over the education sector is the regulation proposed by the Department of Education that is weighing upon 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 gainful 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.
Capella cautioned that new enrollment in first-quarter 2011 is expected to tumble by 35%. Management hinted that other for-profit education institutes facing tougher norms are chasing Capella’s students who are financially sound and have better loan repayment rates. The company generally focuses on working adults.
To counter sluggishness in students’ enrollment, education companies are resorting to restructuring their cost base. Capella said that it would lower its headcount by about 125, which represents approximately 8% of its non-faculty workforce, and for this it would incur a charge of about $2 million in first-quarter 2011. Management hinted that the eliminations will result in cost savings of approximately $12 to $12.5 million per year.
Other Financial Details
Capella ended fiscal 2010 with cash and cash equivalents of $77.4 million, shareholders’ equity of $208.6 million and no debt. Cash flow from operations for fiscal 2010 jumped 28% to $88.4 million.
The company bought back 721,000 shares, aggregating $50 million. During the quarter under review, the company repurchased 242,000 shares, aggregating $13 million. Capella indicated it has $48 million at its disposal under its share repurchase authorization.
Currently, we have a long-term “Neutral” rating on the stock. Moreover, Capella, which competes with Apollo Group Inc. (APOL) and Strayer Education Inc. (STRA), holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation, and correlates with our long-term rating.
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