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.
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.
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.Read the Full Research Report on CPLA
More From Zacks.com
- Investment & Company Information
- Capella Education Company