Capella Beats Q2 Earnings, Revs on New Enrollment

Capella Education Company CPLA witnessed a 13.5% rise in its share prices as the company beat both top and bottom-line estimates in the second quarter of 2014 on the back of better-than-expected increase in new enrollment. This education company has also projected a positive outlook for the third quarter of 2014.  

Capella's second-quarter 2014 earnings of 86 cents a share surpassed the Zacks Consensus Estimate of 84 cents by 2.4%. Earnings increased 3.6% year over year owing to an increase in revenues.

Revenues and Enrollments in Detail

Capella's quarterly revenues of $104.8 million beat the Zacks Consensus Estimate of $104 million by 0.8%. Revenues inched up 1.1% from the year-ago level as a 2.9% increase in tuition fee in Jul 2013 and double-digit improvement in student starts were partially offset by unfavorable degree mix and softer total enrollment. However, revenue exceeded the company's expectation of flat to up 1%

Total active enrollment of 35,791 dropped 0.6% from the prior-year quarter, which was slightly better than Capella's anticipation of 1.0% to 2.0% decline. During the second quarter of 2014, the company reported positive total enrollment growth in master's degree programs, especially driven by new enrollment of heath care and business related programs.

The company also witnessed a 4% improvement in early cohort persistence. Capella continues to expect doctoral programs to be the last to achieve total enrollment growth as the duration of these programs are the longest.  

New enrollments rose 11.1% year over year due to new enrollments in heath care and business related programs during the quarter. New enrollments were well above Capella's expectation of mid-single digit increase.

Costs and Margins

Operating income went up 4.0% year over year to $18.2 million. Operating margin increased 50 basis points (bps) to 17.3%, which is toward the higher end of the expected range of 16.5% to 17.5%.

Instructional cost of services of $45.5 million in the second quarter of 2014 increased 1.3% year over year. As a percentage of revenue, bad debt expense of 3.2% declined 10 basis points sequentially and remained flat with the prior-year quarter level.   

Third Quarter 2014 Outlook

Capella provided a positive outlook for the upcoming quarter. Total enrollment is expected to rebound in the third quarter and estimated to increase 1% to 2% on the back of an increase in new enrollment increase and persistence rate. For the third quarter of 2014, the company expects new enrollments to increase at the same growth rate as the second quarter of 2014.

Revenues are expected to increase 1.0% to 2.0% year over year in the quarter on the back of solid new enrollments and average tuition increase. The company intends to increase average tuition fee by 2.5% from Jul 2014. Operating margin is expected in the range of 10.5% to 11.5% for the third quarter compared with 10.4% in the prior-year quarter.

2014 Outlook

The company expects positive growth rates in new enrollment, total enrollment and revenue in 2014. Operating margin is expected to be around 14.5%.   

Capella Education currently carries a Zacks Rank #2 (Buy).

Two other education companies to report in this week are Strayer Education Inc. STRA and Grand Canyon Education, Inc. LOPE. The Zacks Consensus Estimate for Strayer Education' and Grand Canyon Education's earnings stand at $1.25 and 45 cents respectively.

DeVry Education Group Inc. DV is a better-ranked stock in the education industry with a Zacks Rank #1 (Strong Buy).

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