Capella Education Company’s (CPLA) first quarter 2013 earnings of 70 cents a share surpassed the Zacks Consensus Estimate of 62 cents by 12.9% on the back of better-than-expected new enrollment growth. However, earnings declined 14.6% from the year-ago quarter due to year-over-year decreases in revenues and margins. Better-than-anticipated new enrollment growth, however, could not offset the year-over-year downward drift in earnings.
Revenues and Enrollments in Detail
Quarterly revenues of $105.2 million went past the Zacks Consensus Estimate of $104.0 million by 1.2%. However, revenues slipped 3.8% from the year-ago levels due to total enrollment decline. The top-line decline was however much narrower than management’s expectation of a 4.5% to 5.5% decline. Revenues benefited from positive new enrollment growth.
Total active enrollment dropped 3.1% from the prior-year quarter to 36,405 students, near the lower end of management’s guidance of a drop in the range of 3.0% and 4.0%. New enrollments grew 8.2% year over year, far exceeding management’s expectation of a 5% increase. Enrollments benefited from high-single digit increase in bachelor degree enrollment, better-than-expected performance in Master’s degree enrollment and stabilizing demand for doctoral programs.
Total enrollments declined 5.7% for Ph.D./doctoral degrees and 7.2% for the Master's programs. Total enrollments for the Bachelor’s programs grew 6.2%, resulting in the fourth consecutive quarter of increase. The Other segment jumped 27.9% year over year.
Costs and Margins
Instructional cost of services decreased to $47.0 million in the first quarter of 2013, down 2.9% year over year. However, as a percentage of revenues, instructional cost of services increased primarily due to higher bad debt expense and increased investment in diversification initiatives and cohort retention efforts.
Operating income came down 15.1% to $15.2 million, whereas operating margin contracted 200 basis points to 14.4% due to higher bad debt expenses. However, operating margin exceeded management's expected range of 12.0% to 13.0% on the back of better-than-expected revenue performance and cost control initiatives.
Outlook for 2Q13
For the second quarter of 2013, the company expects new enrollments to remain flat sequentially. Total enrollment is expected to dip 2% to 3% in the quarter. Revenues are expected to decline in the range of 3% to 4% in the second quarter of 2013.
Operating margin is expected in the range of 13% to 14% for both the second quarter 2013 and fiscal 2013.
Overall, we believe that Capella’s brand-driven marketing strategy as well as initiatives to improve learner success rates bode well for the company’s long-term growth. We are optimistic about the company’s steady increase in new enrollments. However, the company is likely to take some time before posting positive enrollment growth.
Capella Education Company currently carries a Zacks Rank #4 (Sell). Interestingly another education company, Apollo Group, Inc. (APOL) surpassed the top- and bottom-line estimates when it reported its results for the second quarter of fiscal 2013 on Mar 25. We believe that Apollo may have beaten the top- and bottom-line estimates on the back of cost savings resulting from its restructuring efforts.
Education stocks such as DeVry Inc. (DV) and Xueda Education Group (XUE) are currently performing well and are worth considering. Xueda Education Group carries a Zacks Rank #1 (Strong Buy), whereas DeVry holds a Zacks Rank #2 (Buy).
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