Lower Enrollment Hurts Capella - Analyst Blog
15 February 2012 - 8:30PM
Zacks
Capella Education
Company (CPLA), the provider of online education, recently
delivered fourth-quarter 2011 earnings of 91 cents a share that
dropped 16.5% from $1.09 earned in the prior-year quarter due to
fall in students’ enrollment. On a reported basis, including one
time items, earnings came in at 85 cents, down 22% from the
year-ago quarter. The Zacks Consensus Estimate for the quarter was
91 cents.
Behind the
Headline
Total active enrollment dropped
4.5% to 37,704 during the quarter. Management had earlier guided
enrollment to fall by 4% to 6% in the quarter. New enrollment
tumbled 9.4%, reflecting tough market conditions, changes with
respect to program accreditation, and stringent admissions
criteria.
The quarterly revenue of $110
million came in line with the Zacks Consensus Estimate but fell
4.1% from $114.7 million in the year-ago quarter. The decline in
the top line dovetails with management’s guidance range of 3% to
4.5% fall. Capella now expects revenue to drop by 1% to 2% in the
first quarter of 2012.
Operating income, adjusted for
charges related to workforce reduction, plummeted 28.7% to $20.2
million, whereas operating margin contracted 640 basis points to
18.3%.
Capella now expects operating
margin in the range of 15% to 16% in the first quarter of 2012,
down from 20.2% in the first quarter of 2011, reflecting planned
investments in learner success initiatives, rise in depreciation
charges and expenses related to Resource Development International,
acquired in July 2011.Management’s target is to attain operating
margins between 15% and 17% for 2012.
Enrollment Falls,
Forecasts Softer Declines
We observe that Capella is
witnessing a fall in enrollment. After falling 7.5% in third
quarter of 2011, total active enrollment dropped 4.5% in the fourth
quarter. However, Capella now projects total enrollment to decline
between 5% and 6% in the first quarter of 2012. Management expects
that the rate of decline in total enrollment will decelerate as the
year progresses due to improvement in new enrollment.
The 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 hinted that new enrollment
in the first quarter of 2012 is expected to decline marginally,
following a drop of 9.4% in the fourth quarter and a fall of 36% in
the first quarter of 2011, as it expects re-registration of
existing apprentices to remain robust.
Capella generally focuses on
working adults, and in order to draw students it is also ramping
its marketing and promotional expenditures. To counter sluggishness
in students’ enrollment, education companies are also resorting to
restructuring their cost base. The company lowered its headcount by
about 63 non-faculty workforces, and for this it incurred a charge
of about $1.3 million in the quarter. Management hinted that the
eliminations will result in cost savings of approximately $5.2
million per year.
Other Financial
Details
Capella boasts a healthy balance
sheet with no debt. It ended the quarter with cash and cash
equivalents of $62 million and shareholders’ equity of $162.6
million. Cash flow from operations for fiscal 2011 period was $80.3
million.
During the quarter under review,
the company repurchased 775,000 shares, aggregating $25.2 million.
In fiscal 2011, it bought back 2.5 million shares for a total
amount of $103.4 million. Capella indicated that it has $59.6
million at its disposal under its share repurchase
authorization.
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 #2 Rank that
translates into a short-term ‘Buy’ recommendation, and it well
defines 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.
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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