CPLA Capella Education Company (MM)

Second quarter 2017 financial performance within expectations

Capella Education Company (NASDAQ: CPLA), a leading educational services company, today announced financial results for the three and six months ended June 30, 2017.

“Our financial performance in the second quarter of 2017 was within expectations,” said Kevin Gilligan, chairman and chief executive officer. “New enrollment performance was softer than expected, and we have taken actions directed at restoring new enrollment growth in the second half of 2017. We believe that our strategy of delivering the most direct path between learning and employment positions us to create a differentiated value proposition for learners and employers and to create shareholder value.”

Selected Financial Data for the Three Months Ended June 30, 2017

Revenues were $109.6 million in the second quarter of 2017, up 2.7 percent compared to $106.7 million in the second quarter of 2016. Operating income was $15.4 million, compared to $18.1 million for the same period in 2016. The operating margin was 14.0 percent, compared to 16.9 percent for the second quarter 2016. Diluted net income per common share from continuing operations was $0.90, compared to $0.93 for the same period in 2016.

Operating and Segment Highlights

• The “Post-Secondary” segment is comprised of Capella University and Sophia Learning; the “Job-Ready Skills” segment consists of Capella Learning Solutions, Hackbright Academy and DevMountain.
• For the Post-Secondary segment, second quarter 2017 revenues were $107.0 million, up 1.1 percent compared to $105.8 million in the same period a year ago. The operating margin was 16.6 percent, compared to 20.4 percent. Results are primarily attributable to Capella University.
• Capella University total active enrollment decreased 1.7 percent to 37,588 learners, new enrollment decreased by 9.6 percent compared to second quarter 2016, and early cohort persistence improved by approximately 3 percent.
• Revenues for the Job-Ready Skills segment were $2.6 million in the second quarter of 2017 compared to $0.9 million in the same period of 2016. The operating loss was $2.4 million in the second quarter 2017, compared to a loss of $3.5 million in the second quarter of 2016.

Balance Sheet and Cash Flow

At June 30, 2017, Capella Education Company had cash and marketable securities of $179.5 million, compared to $162.3 million at Dec. 31, 2016, and no debt as of these dates.

Cash provided by operating activities from continuing operations for the six months ended June 30, 2017 was $35.3 million compared to $42.8 million in the same period a year ago.

Dividend

A quarterly cash dividend of $0.41 per outstanding share of common stock was declared during the second quarter of 2017. The dividend was paid on July 14, 2017.

Outlook

For the third quarter ending Sept. 30, 2017, consolidated revenues for Capella Education Company are expected to be up 2.0 to 3.0 percent compared to third quarter 2016. Consolidated operating margin is anticipated to be approximately 11.5 to 12.5 percent of total revenue. Capella University’s third quarter 2017 new enrollment growth is expected to be about flat year-over-year and total enrollment is expected to decline about one percent year-over-year.

For fiscal year 2017, we expect consolidated revenues for Capella Education Company to grow about 3.0 percent and consolidated operating margins to be about 15 percent.

“While we achieved our financial goals for the first half of 2017, Capella University’s second quarter enrollment performance has put pressure on our annual performance goals,” said Steve Polacek, senior vice president and chief financial officer. “We remain committed to making investments necessary to achieve our long-term growth potential.”

Forward-Looking Statements

Certain information in this news release does not relate to historical financial information, including statements relating to future prospects and expectations regarding our growth, revenues, enrollment, and operating performance, and should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company cautions investors not to place undue reliance on any such forward-looking statements, which are based on information available at the time those statements are made or management's good faith belief as of that time with regard to future events, and should not be read as a guarantee of future performance or results. Such statements are subject to risks and uncertainties which could cause the company's actual results to differ materially from historical results and from results presently anticipated or projected. The company undertakes no obligation to update its forward-looking statements.

Among these risks and uncertainties are any failure to materially comply with the extensive regulatory framework applicable to us, including compliance with Title IV of the Higher Education Act and the regulations thereunder; complying with U.S. Department of Education rules, including those regarding incentive compensation, gainful employment, return of Title IV funds, borrower defenses to repayment, financial responsibility standards, state authorization, certifications and program requirements; maintaining our business in accordance with regional and specialized accreditation standards and state regulatory and program approval requirements; adapting to changes in the administration, funding and availability for Title IV programs; successfully defending litigation and other claims; any governmental action or review of our business, marketing, or financial aid practices, including by any state attorneys general, the federal Consumer Financial Protection Bureau, the Federal Trade Commission, the Minnesota Office of Higher Education or other state or federal regulatory bodies; successfully growing our FlexPath programs; maintaining and expanding existing commercial relationships with employers and developing new employer and business partner relationships; improving our conversion rate and effectively optimizing our marketing strategy and spend; successfully managing our learner success, doctoral enrollment and degree completion efforts; keeping up with advances in technology important to the online learner experience; effectively managing data security risks; successfully integrating acquisitions; successfully growing Capella Learning Solutions’ new business lines; and managing risks associated with the overall competitive environment and general economic conditions.

Other factors that could cause the company’s results to differ materially from those contained in its forward-looking statements include those described in the “Risk Factors” section of our most recent Annual Report on Form 10-K on file with the Securities and Exchange Commission (SEC) and any updates or developments described in our Quarterly Reports on Form 10-Q, or other documents the company files with the SEC.

Conference Call

Capella will discuss its second quarter 2017 results and outlook during a conference call scheduled today, July 25, 2017, at 9:00 a.m. Eastern time (ET). To participate in the live call, investors should dial 800.794.6623 (domestic) or 785.424.1227 (international) at 8:50 a.m. (ET), conference ID# 8176. The webcast, including the accompanying presentation, will be available on the Capella Education Company Web site at www.capellaeducation.com in the investor relations section. A replay of the call will be available starting on July 25 through Aug. 1, 2017, at 800.839.2670 (domestic) or 402.220.7230 (international), conference ID# 8176. It will also be archived at www.capellaeducation.com in the investor relations section.

About Capella Education Company

Capella Education Company (http://www.capellaeducation.com) is an educational services company that provides access to high-quality education through online postsecondary degree programs and job-ready skills offerings needed in today’s market. Capella’s portfolio of companies is dedicated to closing the skills gap by providing the most direct path between learning and employment.

  CAPELLA EDUCATION COMPANY   Consolidated Balance Sheets (In thousands, except par value)         As of June 30, 2017 As of December 31, 2016 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 118,023 $ 93,570 Marketable securities, current 42,940 45,458 Accounts receivable, net of allowance of $6,198 at June 30, 2017 and $6,682 at December 31, 2016 20,676 20,708 Prepaid expenses and other current assets 11,308   17,877   Total current assets 192,947 177,613 Marketable securities, non-current 18,583 23,320 Property and equipment, net 35,793 34,121 Goodwill 23,331 23,310 Intangibles, net 8,827 9,221 Deferred income taxes — 1,853 Other assets 7,821   7,875   Total assets $ 287,302   $ 277,313   LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,755 $ 4,367 Accrued liabilities 24,300 31,302 Dividends payable 4,978 4,945 Deferred revenue 14,811   12,398   Total current liabilities 46,844 53,012 Deferred rent 12,957 13,693 Deferred income taxes 577 — Other liabilities 2,087   2,316   Total liabilities 62,465 69,021 Shareholders’ equity: Common stock, $0.01 par value: Authorized shares — 100,000, Issued and Outstanding shares — 11,672 at June 30, 2017 and 11,545 at December 31, 2016 117 115 Additional paid-in capital 125,806 121,581 Accumulated other comprehensive loss (3 ) (93 ) Retained earnings 98,917   86,689   Total shareholders’ equity 224,837   208,292   Total liabilities and shareholders’ equity $ 287,302   $ 277,313       CAPELLA EDUCATION COMPANY   Consolidated Statements of Income (In thousands, except per share amounts)         Three Months Ended June 30, Six Months Ended June 30, 2017     2016   2017     2016 (Unaudited) Revenues $ 109,584 $ 106,725 $ 221,372 $ 212,173 Costs and expenses: Instructional costs and services 48,369 45,502 96,781 90,813 Marketing and promotional 27,308 24,922 54,833 50,802 Admissions advisory 7,440 7,285 15,103 14,708 General and administrative   11,096   10,944     21,683   21,251   Total costs and expenses   94,213   88,653       188,400   177,574   Operating income 15,371 18,072 32,972 34,599 Other income, net   56   42       163   33   Income from continuing operations before income taxes 15,427 18,114 33,135 34,632 Income tax expense   4,672   7,040     11,209   13,282   Income from continuing operations 10,755 11,074 21,926 21,350 Income (loss) from discontinued operations, net of tax   —   (1,379 )   95   (2,357 ) Net income $ 10,755 $ 9,695   $ 22,021 $ 18,993   Basic net income (loss) per common share: Continuing operations $ 0.92 $ 0.95

$

1.89

$

1.82

Discontinued operations   —   (0.12 )   0.01   (0.20 ) Basic net income per common share $ 0.92 $ 0.83   $ 1.90 $ 1.62   Diluted net income (loss) per common share: Continuing operations $ 0.90 $ 0.93

$

1.83

$

1.79

Discontinued operations   —   (0.11 )   0.01   (0.20 ) Diluted net income per common share $ 0.90 $ 0.82   $ 1.84 $ 1.59   Weighted average number of common shares outstanding: Basic 11,644 11,648 11,602 11,701 Diluted 11,992 11,872 11,965 11,912 Cash dividend declared per common share $ 0.41 $ 0.39 $ 0.82 $ 0.78     CAPELLA EDUCATION COMPANY   Consolidated Statements of Cash Flows (In thousands)     Six Months Ended June 30, 2017     2016 (Unaudited) Operating activities Net income $ 22,021 $ 18,993 Income (loss) from discontinued operations, net of tax   95     (2,357 ) Income from continuing operations 21,926 21,350 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debts 5,225 4,814 Depreciation and amortization 10,112 10,349 Amortization of investment discount/premium, net 855 1,113 Impairment of property and equipment 440 — Loss on disposal of property and equipment 243 144 Share-based compensation 3,479 4,432 Excess tax benefits from stock-based compensation — (348 ) Deferred income taxes 2,443 (352 ) Changes in operating assets and liabilities Accounts receivable (5,194 ) (5,713 ) Prepaid expenses and other current assets 294 (4,522 ) Accounts payable and accrued liabilities (9,470 ) 6,492 Income taxes payable 3,219 929 Deferred rent (735 ) (472 ) Deferred revenue   2,413     4,603   Net cash provided by operating activities - continuing operations 35,250 42,819 Net cash provided by (used in) operating activities - discontinued operations   95     (476 ) Net cash provided by operating activities 35,345 42,343 Investing activities Acquisitions, net of cash acquired — (32,118 ) Capital expenditures (12,116 ) (9,977 ) Investment in partnership interest (354 ) (3,203 ) Purchases of marketable securities (29,456 ) (12,737 ) Maturities of marketable securities   35,995     13,625   Net cash used in investing activities - continuing operations (5,931 ) (44,410 ) Net cash provided by (used in) investing activities - discontinued operations   3,243     (74 ) Net cash used in investing activities (2,688 ) (44,484 ) Financing activities Excess tax benefits from share-based compensation — 348 Net payments related to share-based award activities 1,273 1,551 Payment of dividends (9,479 ) (9,214 ) Repurchases of common stock   —     (15,012 ) Net cash used in financing activities - continuing operations (8,206 ) (22,327 ) Effect of foreign exchange rates on cash   2     (9 ) Net increase (decrease) in cash and cash equivalents 24,453 (24,477 ) Cash and cash equivalents and cash of business held for sale at beginning of period   93,570     88,027   Cash and cash equivalents and cash of business held for sale at end of period 118,023 63,550 Less cash of business held for sale at end of period   —     (2,109 ) Cash and cash equivalents at end of period $ 118,023   $ 61,441   Supplemental disclosures of cash flow information Income taxes paid $ 5,562 $ 12,703 Non-cash investing and financing activities: Purchase of equipment included in accounts payable and accrued liabilities $ 741 $ 342 Declaration of cash dividend to be paid 4,847 4,609     CAPELLA EDUCATION COMPANY   Segment Reporting (In thousands)         Three Months Ended June 30, Six Months Ended June 30, 2017     2016 2017     2016 (Unaudited) Revenues Post-Secondary $ 106,974 $ 105,789 $ 216,455 $ 211,216 Job-Ready Skills   2,610     936     4,917     957   Consolidated Revenues $ 109,584   $ 106,725   $ 221,372   $ 212,173   Operating income (loss) Post-Secondary $ 17,754 $ 21,566

$

38,005

$

39,285

Job-Ready Skills   (2,383 )   (3,494 )   (5,033 )   (4,686 ) Consolidated operating income 15,371 18,072 32,972 34,599 Other income, net   56     42     163     33   Income from continuing operations before income taxes $ 15,427   $ 18,114   $ 33,135   $ 34,632    

Note: The summary of financial information by reportable segment above excludes the results of operations for Arden University, which are presented as discontinued operations in our Consolidated Statements of Income.

  CAPELLA UNIVERSITY   Other Information         June 30, Capella University Enrollment by Degree (a): 2017     2016 % Change Doctoral 9,052 9,729 (7.0 )% Master's 17,714 17,706 — % Bachelor's 9,760 9,798 (0.4 )% Other 1,062 998 6.4 % Total 37,588 38,231 (1.7 )%  

(a) Enrollment in the table above includes learners who are actively enrolled during the last month of the quarters ended June 30, 2017 and 2016, respectively.

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Capella Education CompanyInvestor Contact:Heide Erickson, 612-977-5172Heide.Erickson@capella.eduorMedia Contact:Mike Buttry, 612-977-5499Mike.Buttry@capella.edu