APOL Apollo Education Grp., Inc.

Capella Education Company (CPLA), the provider of online education, recently delivered better-than-expected third-quarter 2011 results. The quarterly earnings of 66 cents a share beat the Zacks Consensus Estimate of 59 cents, but dropped 17.5% from 80 cents earned in the prior-year quarter.

Behind the Headline

Total active enrollment dropped 7.5% to 35,755 during the quarter. Management had earlier guided enrollment to fall by 6% to 8% in the quarter. New enrollment plunged 36%, reflecting tough market conditions, changes with respect to program accreditation, and stringent admissions criteria.

The quarterly revenue of $102.3 million came in ahead of the Zacks Consensus Estimate of $101 million but fell 2.6% from the year-ago quarter. The decline in the top line dovetails with management’s guidance range of 2.5% to 4% fall. Capella now expects revenue to plunge by 3% to 4.5% in the fourth quarter of 2011.

Operating income for the quarter plummeted 29.3% to $14.9 million, whereas operating margin contracted 550 basis points to 14.5%. Capella now expects operating margin in the range of 18% to 19% in the fourth quarter.  

Enrollment Falls, Forecasts Softer Declines

We observe that Capella is witnessing a fall in enrollment. After falling 1.5% in second-quarter 2011, total active enrollment dropped 7.5% in the third quarter. However, Capella now expects total enrollment to decline but at a softer rate between 4% and 6% in the fourth quarter.

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 cautioned that new enrollment in fourth-quarter 2011 is expected to tumble but at a lower rate of approximately 10%, following a sharp of decline of 36% in the third quarter, 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, which rose 13.8% to $33.7 million during the quarter. To counter sluggishness in students’ enrollment, education companies are also resorting to restructuring their cost base.

Other Financial Details

Capella ended the quarter with cash and cash equivalents of $52 million, shareholders’ equity of $175 million and no debt. Cash flow from operations for nine-month period was $55.7 million.

During the quarter under review, the company repurchased 694,000 shares, aggregating $25.2 million. Capella indicated that it has $34.8 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 that translates into a short-term ‘Hold’ recommendation, and correlates with our long-tem view.

 
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