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Capella Education Company’s (CPLA - Analyst Report) third-quarter 2013 earnings of 48 cents a share surpassed the Zacks Consensus Estimate of 40 cents by 20.0% on the back of better-than-expected enrollment trends in the quarter.

Earnings climbed 23.1% from the year-ago quarter due to higher year-over-year revenue and operating margins in the third quarter.

Revenues and Enrollments in Detail

Quarterly revenues of $100.7 million were ahead of the Zacks Consensus Estimate of $100.0 million by 0.7%, Revenues inched up 1.4% from the year-ago levels due to tuition increase of 3% and partly offset by grants and degree mix shift. The year-over-year top-line growth slightly surpassed management’s expectation of a flat to up 1% growth.

Total active enrollment dropped 1.4% from the prior-year quarter to 34,503 students. The decline was, however, significantly lower than management’s guidance of a decline in the range of 2.0% to 4.0% due to improving persistent rates and solid increase in new enrollments.

New enrollments declined 1.3% year over year versus a 12.7% increase in the prior-year quarter. The new enrollment decline was much lower than management’s expectation of a mid to high single-digit percentage decline.

Total enrollment declined 2.7% year over year for Ph.D/doctoral degrees and 5.8% year over year for the Master's programs. However, total enrollment for doctoral programs improved sequentially. Total enrollment for the Bachelor’s programs grew 6.8%, resulting in the sixth consecutive quarter of increase. The Other programs segment jumped 21.4% year over year.

Costs and Margins

Instructional cost of services decreased 3.0% to $45.9 million in the third quarter of 2013. As a percentage of revenues, instructional cost of services decreased 105 basis points (bps), primarily due to lower bad debt expense.  

Operating income went up 26.9% to $10.5 million, whereas operating margin inflated 210 bps to 10.4% due to disciplined cost management, lower depreciation expense and lower debt expense. Operating margin exceeded management's expectation of a range of 8% to 9% backed by cost management and better-than-expected revenues.

In August, Capella Education was approved by the Department of Education for a competency based degree. The program focuses on learning as opposed to meeting credit hour standards. Other universities are applying for similar status. This movement may help to reduce the cost of education and drive enrollments.

Fourth Quarter Outlook

For the fourth quarter of 2013, the company expects new enrollments to decline in a mid to high single-digit percentage range. Total enrollment is expected to dip 1.5% to 2.5% in the quarter.

Revenues are expected to decline 0.5% to 1.5% in the fourth quarter of fiscal 2013. Operating margin is expected in the range of 15% to 16% for the fourth quarter. The guidance reflects volatility in the educational market environment..

Other Stocks to Consider

Capella carries a Zacks Rank #2 (Buy). Some other education companies that are performing well are Devry Inc. (DV - Analyst Report), New Oriental Education & Technology Group (EDU - Snapshot Report) and TAL Education Group (XRS - Snapshot Report). All of these stocks carry a Zacks Rank #1 (Strong Buy).

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