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Capella Education Company (CPLA - Analyst Report) reported second quarter 2012 earnings of 85 cents a share, surpassing the Zacks Consensus Estimate of 64 cents. Better than expected revenues boosted earnings. However, the second quarter earnings were down 14% from the year-ago quarter due to decline in top-line and margin.

Revenue in Detail

Quarterly revenues of $106.2 million exceeded the Zacks Consensus Estimate of $105.0 million. Revenue fell a marginal 0.2% from the year-ago levels. The top-line decline was lower than management’s expectation of a dip in the range of 1% to 2%. Revenues benefited from the lower than expected decline in active enrollment coupled with stronger-than-expected growth in enrollment and improved persistence rates.

Total active enrollment dropped 4.6% over the prior-year quarter to 36,336 students, lower than management’s guidance of a drop in the range of 6%–7%. New enrollment declined 6.0% year over year due to tough market conditions. Management had expected new enrollments to decline in high single digits for the second quarter of 2012.

Total enrollments declined 2.8% for Ph.D./doctoral degrees, 11.7% for the Master's programs and grew 3.0% for the Bachelor’s programs. The Other segment, however, grew 164.3% year over year driven by an increased emphasis on certificate programs.

Costs and Margins

Instructional cost of services increased to $45 million in the second quarter of 2012, up 6% year over year primarily due to the company’s strategic initiatives and increased impairment and depreciation charges. General and administrative expenses also increased to $10.4 million, up 13% year over year, spurred by higher bad debt expenses.

Adjusted operating income came down to $18.1 million from $23.9 million a year ago, whereas operating margin contracted 550 basis points to 17%, due to higher brand-building related marketing expenses.

Other Financial Details

Capella ended the quarter with cash, cash equivalents, and marketable securities of $123.7 versus $128.5 million at the end of the previous quarter.

During the quarter, the company repurchased 0.39 million shares, for a cost of $12.5 million and has $34.2 million at its disposal under the current share repurchase authorization.


Management expects a 3.5%–4.5% year-on-year decline in revenues for the third quarter of 2012.Total enrollment is expected to decline between 3.5% and 4.5%, while new enrollments are expected to remain flat or grow slightly in the third quarter of 2012, due to an improving employment market.

For the third quarter of 2012, Capella expects operating margin to be in the range of 5% to 6%. The expected operating margin is down from 14.5% in the prior-year quarter due to revenue decline and higher investments in diversification, marketing and students outcome. The operating margins for fiscal 2012 are expected to be about 14% to 15%. Fiscal 2012 marketing expenses are expected to be lower than the 2011 level.

The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).

Despite challenging market conditions the company’s second quarter 2012 results remain encouraging.  We are encouraged by management’s expectations of witnessing increased enrollments in the second quarter.

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