Capella (CPLA) Q4 Earnings Lag, Revenues Meet Estimates

Shares of Capella Education Company (NASDAQ:CPLA) fell 2.8% to $75.55 on Mar 1, following the fourth-quarter 2017 earnings release.

The company reported adjusted earnings of 86 cents per share in the quarter, which fell shy of the Zacks Consensus Estimate of $1.00. In the year-ago period, earnings were 97 cents per share.

Revenues and Enrollment

Capella’s quarterly revenues of $112 million were in line with the Zacks Consensus Estimate but increased 0.7% year over year despite declining enrollment.

Capella reports under two segments — Post-Secondary and Job-Ready Skills. While the Post-Secondary segment comprises Capella University and Sophia Learning, the Job-Ready Skills segment covers Capella Learning Solutions, Hackbright Academy and DevMountain.

Post-Secondary: The segment reported revenues of $109.8 million, up 0.4% from the year-ago quarter in spite of a decline in enrollment. The upside was mainly attributable to higher revenue-per-learner. However, operating margin of 18% showed a year-over-year decline of 90 basis points (bps).

Capella University’s total active enrollment declined 1% to 37,517 learners, while new enrollment increased 5.7% on a year-over-year basis. Early cohort persistence improved approximately 1% from the prior-year quarter.

Job-Ready Skills: The segment reported revenues of $2.2 million in the fourth quarter, up 15.8% year over year. That said, the segment reported an operating loss of $17.7 million, compared with $2.4 million loss in the prior-year quarter. Investors should note that though the Hackbright and DevMountain acquisitions have positively contributed to the company’s top line, the additions have not achieved performance expectations, resulting in fourth-quarter 2017 goodwill and intangible asset impairment charges of $15 million.

Margins

Capella’s adjusted operating income from continuing operations was $18.3 million. On a GAAP basis, the company incurred operating loss of $1.6 million against operating income of $18.3 million for the same period in 2016.

Financials

Capella, in 2017, generated $63.7 million in operating cash flow from continuing operations, compared with $86.1 million in the prior-year period.

The company ended 2017 with cash and marketable securities of $181.4 million, compared with $162.3 million at 2016-end.

Dividend

During the fourth quarter, Capella declared a quarterly cash dividend of 43 cents per outstanding share of common stock. The dividend was paid on Jan 18, 2018.

Also, in 2017, Capella repurchased approximately 51,000 shares for a total consideration of $3.5 million. The remaining authorization was $27 million, as of the end of the quarter.

Capella-Strayer Merger

In October 2017, Strayer Education, Inc. (NASDAQ:STRA) and Capella announced an all-stock merger deal of equal transactions. The merger is expected to achieve annual cost savings of approximately $50 million to be fully phased in within 18 months of closing.

Notably, the transaction is expected to close in the third quarter of 2018. Post-completion, Strayer shareholders will own approximately 52% of the combined entity and Capella shareholders will own the remaining 48% of the company. The combined entity will be renamed Strategic Education Inc. and its ticker symbol will remain STRA.

The combined company is aimed to become a national leader in education innovation, wherein both the companies expect to accelerate innovation in key products and services, and return capital to shareholders through an expected annual dividend of $2 per share following the close of the transaction.

The merger is expected to ensure students’ success and positive employment outcomes. A shared effort by the companies is expected to improve academic outcomes by combining each of the university’s competencies. The merger will also facilitate a diversified product offering that will result in a more balanced revenue mix.

2018 Guidance

The company remains focused on continued revenue growth. To this end, Capella aims to achieve annual new enrollment growth, along with stable or improving early cohort persistence and continued revenue growth in the Job-Ready Skills segment. Moreover, the company expects the Job-Ready Skills segment to be less dilutive in 2018.

The tax rate for recurring operations for Capella is currently expected to be about 24% to 25% related to the United States tax reform legislation passed at the end of 2017.

Zacks Rank & Upcoming Peer Releases

Capella carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Public Education, Inc. (NASDAQ:APEI) reported fourth-quarter 2017 earnings per share of 51 cents, beating the Zacks Consensus Estimate of 33 cents by 54.5%. Adjusted earnings in the year-ago quarter were 42 cents.

Adtalem Global Education Inc. (NYSE:ATGE) reported second-quarter fiscal 2018 results with earnings surpassing the Zacks Consensus Estimate, while revenues missing the same. Earnings and revenues increased 18.8% and 1%, respectively. Revenues increased across all operating segments except U.S. Traditional Postsecondary segment.

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