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Capella Education (NASDAQ:CPLA)

Q2 2013 Earnings Call

July 23, 2013 9:00 am ET

Executives

Heide Erickson

J. Kevin Gilligan - Chairman and Chief Executive Officer

Steven L. Polacek - Chief Financial Officer, Senior Vice President and Principal Accounting Officer

Analysts

Jeffrey M. Silber - BMO Capital Markets U.S.

David Chu - BofA Merrill Lynch, Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Adrienne Colby - Deutsche Bank AG, Research Division

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Timo Connor

David Warner - First Analysis Corporation

Operator

Good morning, my name is Connie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Capella Education Company Second Quarter 2013 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to your host, Ms. Heide Erickson. Please go ahead, Heide.

Heide Erickson

Yes, good morning, everyone, and welcome to our Second Quarter earnings release conference call. Kevin Gilligan, Capella's Chairman and Chief Executive Officer; and Steve Polacek, Senior Vice President and Chief Financial Officer, are here with us to discuss this quarter's results. Please note that this call may include information that could constitute forward-looking statements made pursuant to the Safe Harbor provisions to the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risks and uncertainties. Although the company believes that the expectations reflected in such statements are based on reasonable assumptions, the company's actual results could differ materially from those described in the forward-looking statements and are subject to a number of uncertainties and risks that the company has identified in the second quarter news release. These and other factors are discussed in the company's most recent 10-K and 10-Qs filed with the Securities and Exchange Commission. Other unchanged factors may also be discussed in future 10-K and 10-Q filings. All filings and reconciliations of non-GAAP financial information presented in this call are available for viewing on our website at capellaeducation.com. Following our prepared remarks, we'll take your questions. With that, I'd like to turn the call over to Kevin Gilligan. Kevin?

J. Kevin Gilligan

Thanks, Heide, and good morning, everyone. Thanks for being with us today. We're pleased that for the fourth consecutive quarter, we're reporting results that demonstrate our ability to compete in a very challenging market. Second quarter performance was much stronger than anticipated due to outstanding execution by the Capella team. New enrollment growth was higher than anticipated across all degree levels. Total enrollment exceeded our expectations due to very solid persistent improvements combined with our strong new enrollment growth. And operating margins were much better than anticipated due to higher-than-expected revenue, the timing of marketing spending and disciplined cost management across the organization.

We continue to be encouraged by the results we're delivering in a difficult market environment. Steve will go into additional details about second quarter performance and our near-term outlook, I'd like to provide you with some high-level comments on our current performance and on our strategy to build a long-term sustainable and profitable business model. To start, I'd like to give you our perspective on the strength of our new enrollment performance this quarter.

New enrollment is an important metric, but the drivers for our total enrollment and revenue performance are the combination of new enrollment and persistence improvements. Therefore, our strategies are focusing on a measured and balanced approach to deliver long-term sustainable total enrollment growth.

This quarter, new enrollment exceeded our expectations. However, as you know, new enrollment growth can be volatile in any market, especially this one. That's why it's important to look at multi-quarter trends versus performance in just 1 quarter.

After our very strong second quarter new enrollment performance, we expect year-over-year new enrollment declines in the mid-single-digit percentage range in the third quarter of this year. This volatility in new enrollment growth has not changed our goal to return to total enrollment growth in the first half of 2014, but makes it more challenging.

Quarterly fluctuations will be part of this journey, particularly as we tackle our next challenge of delivering growth-on-growth, generating new enrollment growth, while also lapping positive new enrollment growth comparisons for the first time in the third quarter.

We are managing towards sustainable annual year-over-year new enrollment growth improvements and believe Capella is well positioned to grow new enrollment above the market rate.

I talked earlier about a balanced approach. New enrollment and persistence are both part of the equation driving total enrollment growth. At times, we'll make choices that may create a headwind for new enrollment growth, but improved persistence will be ultimate goal of driving sustainable long-term total enrollment growth. The results of our persistence initiatives are very promising, and we believe we can continue to improve early cohort persistence by applying a comprehensive and integrated approach that relies heavily on analytics and the expertise of our faculty and staff. We see many more opportunities for further improvement as we focus on learner lifetime value.

Over the last few months, we've rolled out a number of persistence initiatives across all programs and degrees that we previously tested. For example, beginning in the second quarter of 2013, new learners in every degree level are now required to complete assessments as part of the admissions process. We are very pleased with the results to date. The next step is orientation. We've done a lot of work to update orientation content and requirements and are further personalizing the learner experience to better prepare our learners for success at Capella.

Going forward, we will increasingly make orientation mandatory at all degree levels. Just like with assessments, we'll continue to evaluate and adapt orientation based on our learnings and anticipate that this change may affect new enrollment growth by a few percentage points. However, it's the right thing to do as we continue to focus on improving learner success and driving learner lifetime value.

We're also implementing enhancements to motivate and hope our learners demonstrate and articulate the value of their Capella Education to employers and managers. This helps learners persist and builds our brand. For example, we're rolling out competency maps, an infographic-style tool that shows learners their progress relative to each course competency. Learners will visually see their accumulated knowledge, skills, abilities and professional attributes required to successfully complete the course and their program. We believe that this will connect learners' short-term performance goals, such as grades, with long-term mastery of competencies required to graduate and improve their career outcomes. Our objectives are to increase motivation and persistence and help our learners demonstrate and articulate the value of their Capella Education to their employers and managers.

We're excited about the momentum we've established around learner success and its potential to create value for both our learners and our shareowners. The results to date demonstrate that as we increase learner success, our financial performance follows. Let me remind you though that we expect some volatility in our early cohort learner persistence. We will not always get it right every quarter. However, we're minimizing the risk to learner disruption by thoughtfully and deliberately implementing changes that we test whenever possible and then systematically introduce across the university. We're backing our commitment to learner success with investments as we are developing technology, processes and tools needed to support our learners more effectively and efficiently.

Now let me shift the conversation a little bit and talk about our business model for driving earnings growth. The basis is moderate new enrollment growth, early cohort persistence improvements and continued productivity improvements.

Our goal is to grow enrollment faster than the market, create shareholder value and generate a high return on investment for our learners by delivering a high-quality relevant education. It will take continued innovation, differentiation and execution of our strategies to drive long-term growth above the market level.

Let me update you on 3 exciting innovation initiatives that position us for the long term. First, the most significant development on the innovation front has been the approval by The Higher Learning Commission of the 2 direct assessment programs for which we applied, the bachelors in business and the master's in business administration. As you might recall, 3 other traditional higher education institutions were also invited by the HLC to take part in the development of processes around direct assessment. We are currently waiting for approval by the Department of Education of our FlexPath offerings before opening enrollment into the programs.

With our FlexPath offerings, we're leveraging our unique expertise and competency-based programs and curricular infrastructure to offer a new academic delivery model that will move away from seat time and credit hour requirements. This is a huge opportunity to drive innovation in higher education.

Highly motivated learners will be able to learn in their own way and at their own pace while demonstrating they've mastered the required competencies necessary to receive a university degree.

Direct assessment provide an opportunity to improve affordability, which not only includes tuition cost, but also time to completion, flexibility and return on investment for our learners.

We're excited about the long-term opportunity to expand our served market through our FlexPath offerings. However, our initial goal is to get the academic model right for our learners and grow the offering in a responsible way.

Secondly, on the innovation front, SOPHIA's self-paced pathways for college credit offering continues to progress nicely. I touched on this last quarter. You might recall that SOPHIA is our subsidiary that offers a social education platform and empowers students to learn in many ways. SOPHIA's self-paced pathways for college credit has a recommendation from Ace, the American Council of Education's College Credit Recommendation Service, for 9 of SOPHIA's courses to be eligible to be considered for transferable college credit. Undergraduate learners have the option to apply for general education credit for courses successfully completed through SOPHIA pathways. While the first course only became available during the fourth quarter of 2012, early results are encouraging.

Learners have a completion rate over 80%, and interest in the offering continues to grow. We continue to evaluate other opportunities for SOPHIA to create value for Capella and our shareowners.

Finally, we entered into a professional development partnership with Knowledge Delivery Systems or KDS, a leading provider of strategic professional development for K-12 school districts and educators. This partnership provides us with additional access to school districts and educators that are looking to meet professional development requirements through KDS. Educators successfully completing certain courses offered by KDS are eligible to receive college credit at Capella. Key for this relationship was our competency-based curriculum infrastructure and a rigorous evaluation process to align professional development with demonstrated competencies required for Capella credit. This relationship is a significant opportunity for Capella to enhance our brand awareness and to develop an attractive marketing channel.

Innovation in Capella is taking place at all levels as we're building a long-term sustainable business model. We're increasing the lifetime value of our learners through higher levels of learner success. We are refining and optimizing our marketing efforts to drive new enrollment. We're strengthening our differentiation to affordability, speed to competency and employer alignment strategies, and we're expanding our served markets through new models and new offerings. We're confident in our strategies to successfully compete in a challenging market environment. We're making steady progress. And while we expect quarterly volatility, we like our positioning. I'd like to now hand the call over to Steve.

Steven L. Polacek

Thank you, Kevin. As I reported this morning, second quarter new enrollment -- total enrollment revenue and operating margin all exceeded our expectations. The driver for this outperformance was stronger than anticipated in new enrollment and strong persistent improvements, which drove total enrollment and revenue growth above our expectations.

Revenue for the quarter was $103.7 million, down 2.3% year-over-year. Total enrollment declined by 0.9% from second quarter 2012. Total enrollment for bachelor degrees was up 8.8%, the fifth consecutive quarter of growth. Year-over-year total enrollment growth for our doctoral and master's degrees are also showing sequential improvements.

New enrollment, calculated from census data for the second quarter, was up 12.7% compared to the same quarter in 2012. All our degrees had year-over-year new enrollment growth this quarter in the double-digit percentage range.

Early cohort persistence improved by approximately 5% over last year. This metric is a change in a 4-quarter moving average early cohort persistence rate calculated from the learners' first quarter census date to fourth quarter census date. So as we start reporting this metric for the fourth quarter 2012, we have seen consistently strong year-over-year improvements.

Cohort persistence is not easy to move, and we are very pleased that our initiatives have been successful to date. Revenue per learner, based on Capella University revenues, declined as expected by 2.2%, primarily related to lower colloquial revenue, learner success grants and degree mix shift.

Consolidated operating margin for our second quarter was 16.8% compared to 17% last year. This is strong comparable performance, as in the second quarter of last year, the margin was positively impacted by a favorable accrual reversal reflected in the general administrative expense line. The primary reason for the better-than-anticipated opting performance is stronger-than-expected revenue performance combined with diligent cost management across Capella, a timing shift in marketing expenses and lower bad debt expenses.

Instructional costs and services as a percent of revenue was 43.3%, down from 44% last year. Starting in the second quarter of this year, depreciation and amortization dropped off related to the enterprise resource and planning system implementation a few years ago. In addition, bad debt expense as a percentage of revenue was 3.2% compared to 3.3% during the second quarter of last year. We continue to make significant investments in instructional delivery, including our learner success initiatives. For example, we're upgrading our course room, which we are rolling out over the next several months.

The upgrade of the course room for all undergraduate programs and some master of programs is already complete, and we are very pleased with the early results. Marketing and promotional expenses were below our expectations, primarily due to the timing of expenses. We continue optimizing our marketing efforts and are increasingly integrating marketing in our learner success initiatives to drive learner lifetime value.

Over the last several months, we have done significant work to deepen our understanding of our target customers and their needs and motivations to pursue and persist in higher education. As an extension of this work, we are refreshing our brand messaging to these perspective learners. We'll be highlighting our high-quality, competency-based learning model and professional alignment in a real and meaningful way. The new branding campaign is scheduled to be rolled out in early fourth quarter of this year. In addition, we continue to optimize other marketing channels, improve our visitor center experience and continue our work professional organizations and employers to build our reputation and develop new marketing opportunities. The KDS partnership that Kevin mentioned earlier is just one example.

From a cash flow perspective, we generated $23.4 million in cash from operations during the quarter and ended the quarter with a cash position of $145 million. We continued to pause our share repurchases during the second quarter, as we evaluate the best use of our cash in delivering shareholder value, including investments in our core business and diversification. The remaining share repurchase authorization as of the end of the second quarter is approximately $6 million.

Let's turn now to our outlook for the third quarter of 2013. We're expecting year-over-year new enrollment growth for Capella University to be down in the mid-to-single digit percentage range, total enrollment to be down 2% to 4% and total revenue to be flat to up 1%.

As we indicated last quarter, the third quarter 2013 year-over-year new enrollment comparison will be more challenging, as we now need to generate new enrollment growth while also lapping a very positive new enrollment growth comparison or generate growth-on-growth. In addition, we are implementing new learner orientations.

Our total enrollment growth is expected to decline year-over-year, primarily due to weaker new enrollments and timing of new enrollments during the quarter. We expect year-over-year revenue growth to be flat to slightly up due to the contribution from our businesses outside of Capella University, including a significant employer project, which we primarily reflected in the third quarter. Capella University revenue per learner for the third quarter is expected to be up slightly, compared with the third quarter of 2012, driven by a tuition increase of less than 3%, which became effective in July 2013, offset by a shift in degree mix towards bachelor learners and our learner success grants. Operating margin in third quarter 2013 is expected to be about 8% to 9% of revenue, compared to 8.3% during last year's third quarter.

We are diligently managing our cost structure on our path to returning to top line growth and are balancing long and short-term investments. In addition, while our business outside of Capella University are contributing to revenue, they are not yet profitable. We continue to expect full year 2013 operating margins to be about 13% to 14% of revenue.

During the third quarter, we expect to make additional strategic investments in FlexPath and employer solutions, reflected in instructional costs and services. In addition, bad debt expense as a percent of revenue is expected to increase from second to third quarter 2013, primarily due to seasonality, but decline as a percent of revenue from the same quarter of last year. We expect marketing expenses as a percent of revenue to be up year-over-year due to the timing of some of the marketing initiatives from second to third quarter 2013.

While we do have a very strong operating margin performance during the first half of 2013, we are making significant investments in the second half to drive future performance. The income tax rate for the third quarter is expected to be about 44.5% due to the quarterly fluctuations in the rate, primarily related to seasonality and the mix of U.S. versus non-U.S.-based income or losses. We expect the annual tax rate to continue to be about 41.5%.

In closing, we are confident in our strategies and our ability to return to growth in a still-challenging market environment. We're pleased with the execution against our strategies and our progress, our strategy to have focused on building Capella for long-term sustainable growth. We're optimistic of achieving this goal as we are executing well against these strategies.

With that, we will take your questions.

Heide Erickson

Connie, we are ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jeff Silber with BMO Capital Markets.

Jeffrey M. Silber - BMO Capital Markets U.S.

Initiatives that you mentioned on the call. Specifically with SOPHIA and the partnership with KDS, can you describe what the business model is for both of those initiatives from an economics perspective?

J. Kevin Gilligan

Yes, Jeff, this is Kevin. We got the end of your question. Could you just repeat it to make sure we hear the whole thing?

Jeffrey M. Silber - BMO Capital Markets U.S.

I'm sorry. Specifically on SOPHIA and the KDS partnership, if you can talk about the business model for those innovations?

J. Kevin Gilligan

Yes. So I would say, let's start with SOPHIA. So our principal focus on SOPHIA has been developing a low-cost platform to serve the higher education market, and we now have 9 courses that are general education courses that are approved by ACE. Our initial marketing effort was to existing Capella learners, to offer them an alternative in their undergraduate programs, and now we're looking at expanding that beyond the Capella base. So we see a couple different opportunities there. With regards to KDS, it's really a partnership that gives us a broader access to the K to 12 market. KDS focuses at the district level, so the business model there, I think, will ultimately evolve in a way where we can increase our penetration at the district level.

Jeffrey M. Silber - BMO Capital Markets U.S.

Is that a revenue sharing agreement, the latter one?

J. Kevin Gilligan

No.

Jeffrey M. Silber - BMO Capital Markets U.S.

Okay. And on SOPHIA, can you just give me some general price points for that?

J. Kevin Gilligan

Well, a general education course at SOPHIA prices for around $300. So it's $100 a credit hour if you want to think about standard credit hours. Each course is a little different, but that gives you a rough idea. So now it's very attractive at a price point, very attractive price point.

Jeffrey M. Silber - BMO Capital Markets U.S.

Okay. And just a couple of modeling questions. Capital spending, what are we expecting for the year?

Steven L. Polacek

Jeff, this is Steve. I would expect for the 2013 that it's going to be around 5% for the year.

Jeffrey M. Silber - BMO Capital Markets U.S.

Okay, great. And I know you're not giving fourth quarter guidance, but is there anything -- any onetime items, any timing issues that we should be aware of between the third quarter and fourth quarter?

Steven L. Polacek

Nothing, too, that jumps out other than what we talked about in our prepared remarks, and that is that we are going to be rolling out a new brand messaging campaign in the fourth quarter. So there could be some timing related to that, but we do expect that the marketing to be elevated in the third quarter. Generally it is from a seasonality perspective, but also some of the timing of moving some expenses from the second quarter into the third quarter. Other than that, I think when you look year-over-year, as we're expecting in the third quarter, we'd expect the same thing in the fourth quarter. And that's our level of bad debt expense that's reflected in our instructional costs and services line that, that would be a down from year-over-year in the back half, which would include the fourth quarter.

Operator

Your next question comes from the line of David Chu with Merrill Lynch.

David Chu - BofA Merrill Lynch, Research Division

You touched on this briefly in your prepared remarks, but what are you doing differently than others in the front end of the funnel that helps explain the outperformance in terms of start trends?

J. Kevin Gilligan

Hi, David, it's Kevin. We get that question a lot. I guess the way I would frame it, we're doing a lot of things. I think the central theme is that we're approaching the market with a mindset that the market's flat. If you want it really, you have to create your own growth, and it has to come through market share. And from that flows a number of strategies around building our brand, strengthening our brand awareness, optimizing the lead flow through our channels, and that's a very dynamic environment. And we're constantly optimizing on a daily basis and then working to strengthen our value proposition, which helps improve conversion rates, and working with our enrollment counselors to improve the productivity. So I'd say, it's all of those things in combination. At the end of the day, we have always had the ability to convert learners once they apply. I've mentioned in previous calls that our competitive loss rate has always been quite low, and that remains unchanged for this cycle. So for us, it's about creating more awareness about Capella's offerings and then having conversations with learners which articulate and demonstrate our differentiation.

David Chu - BofA Merrill Lynch, Research Division

What are you saying in terms of conversion rates today? And if you can compare that to, say, 6 months ago or 1 year ago?

J. Kevin Gilligan

Yes. So conversion rates continue to improve. We had improvement in the second quarter on a year-over-year basis, and we've had improvement in the prior quarters. So we're getting nice traction around conversion rate.

David Chu - BofA Merrill Lynch, Research Division

Okay. And as a follow-up, you mentioned a significant employer project in 3Q. Can you just describe that in a bit more detail?

J. Kevin Gilligan

Yes. So this is a medical device manufacturer that we've worked with. They were looking to take their ground-based sales trading initially into an online environment to improve productivity. And they were particularly interested in our ability to measure learning, because their sales people have to be validated in order to go into an operating suite. So our unique ability to take the competencies that they wanted to -- their salespeople to have and not only put them in a learning model, but measure the learning outcome, was extremely valuable. And from their perspective, unique in the industry. That's how the relationship started, and it's growing. We're doing more work across divisions for them. But there's a finite life to this contract, and then we'll continue on with them more on a usage-fee basis.

David Chu - BofA Merrill Lynch, Research Division

Okay, that's helpful. And how much contribution in revenue is it expected to contribute?

Steven L. Polacek

Yes, David, this is Steve. So if you look at the revenues outside of Capella University, in 2012, our non-CU revenues were about 3%. In the front half here of 2013, it was around 4%, was outside of Capella University. And we look at the third quarter, because of this contract, it's going to bump up for that group outside of CU to about 5% of revenues for the quarter.

Operator

Your next question comes from the line of Peter Appert with Piper Jaffrey.

Peter P. Appert - Piper Jaffray Companies, Research Division

So I'm noting that in -- it looks like in 4 or the last 5 quarters, the margins have been nicely ahead of the guidance range you guys had originally proposed. And I'm understanding that you obviously have some specific costs facing you here in the second half. But I'm wondering if we might interpret this performance as an evidence or as some evidence that maybe we've passed the bottom from a margin perspective and we could see some potentially meaningful year-to-year margin improvement in '14 in the context of any sustainable positive enrollment growth. What do you think of that thesis?

Steven L. Polacek

Sure. Peter, this is Steve. So let me respond to the -- sort of the margin profile as we're here in '13. As we've said on our last call, in the back half of '13 here, we're expecting improvement in our operating margins year-over-year, and we still expect that. We've reaffirmed our guidance for the year at 13% to 14%, depending on any additional investments we make. For what we've done here in the first half, we're probably going to be closer to the upper part of that range, mid-to-upper versus on the bottom side of it. But again, that depends on what happens in the fourth quarter and what investments we make. I've been looking to '14, we're not giving specific guidance on that. But as we've said, that as we get enrollment and total enrollments growing, if we have relatively stable revenue per learner, we could have -- with revenue growth, you'll have margin expansion. But at one level, it's going to depend upon the sort of revenue growth that we have. But we would expect that operating income would grow faster than revenues as we leverage up.

Peter P. Appert - Piper Jaffray Companies, Research Division

So, Steve, just a follow-up to that. The costs you've been able to take out of the business over the last 6 quarters, we can look at those as permanent reductions in operating costs?

Steven L. Polacek

That's what we've been able to achieve. Now there'll be some fluctuations quarter-to-quarter at times. But for the cost that we have taken out and how we've realigned the organization to our strategic objectives and being much more efficient, we feel very good about that, but we also believe there's additional productivity enhancements in front of us. We've had that in the marketing line. We think we can continue to go ahead and do that.

J. Kevin Gilligan

So Peter, this is Kevin. The only thing I'd add to that is you just have to balance that with investment opportunities for growth. So FlexPath is an exciting new opportunity for us to expand our served market. And we're going to have to make decisions as we go into '14 about at what rate we fund that. So all that needs to be considered into the margin conversation.

Peter P. Appert - Piper Jaffray Companies, Research Division

Sure, I appreciate that. And Kevin, one of the things the -- you guys have done great here relative to the industry in terms of the start trend. Can you just give us a snapshot of how you're assessing the competitive environment and how you see it evolving?

J. Kevin Gilligan

Yes, so I think the environment continues to be intensely competitive and expect it to remain that way for the foreseeable future. We've got a situation where demand remains weak, and we've got a lot of people chasing the demand. So you have to be able to win through execution and differentiation. So that's the environment that we are -- we expect will carry into '14, and we're going to plan accordingly.

Operator

Your next question comes from the line of Jason Anderson with Stifel.

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Kevin, a high-level kind of pricing question here. Do you feel the situation here is we're in a permanent gross/net price situation, or do you see that being more temporary? And with that, do you see any need to get more aggressive with your learner success grants?

J. Kevin Gilligan

Yes, Jason. Well, I'll take the first part, maybe Steve can talk about the grants. The way I think about environment, it's -- price is part of a bigger affordability equation. And I think there's going to continue to be pressure on affordability. There's lots of ways to improve affordability, reducing prices is one way, but redesigning programs, creating new models like SOPHIA at $100 a credit hour, there are other ways to do it. Finding ways to reduce overall program cost for learners, their ability for them to go faster with things like direct assessment. So from a strategic point of view, I think the best way to address the affordability pressure is through product innovation and business model innovation that allows you to deliver the same benefit at a lower overall program cost and still achieve your margin objectives. Now having said that, there is price pressure. It varies by program. Some programs, there's more price pressure than others, and that's where the success grants come into play a little bit. So maybe Steve would comment on that.

Steven L. Polacek

Yes. So as far as that learner success grants, we continue to offer those to qualified new enrollments that are coming into certain programs. We continue to evaluate those. It's been relatively stable. We've added a few more programs. Our enrollments related to programs that have success grants is still around that 50% level that it's been over the last few quarters, and we like the way they're performing. But having said that, we still have new enrollment growth outside of those grant programs that's greater than the grant programs, and that speaks to our selectivity and where we offer those programs where we -- and they have more competitive intensity. So pricing and a different value proposition might be needed. Or we're, frankly, we may not be as differentiated to date. Programs are who we are, we don't believe that we've -- we didn't need to do that. Maybe to speak to, as well to just sort of revenue per learner as you're looking at your sort of modeling, as I mentioned in my prepared remarks, that there we expect that to be slightly up here in the third quarter. But as you kind of look at it, it will have some volatility to it. Some of that relates to your mix shift, as well as what we have as far as seminar revenue. But for the back half, we expect that to be relatively flat. And given kind of what we've seen from a historical enrollment performance here, we think that we're in the competitive range for our learners.

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Great. And a quick follow-up. You guys have alluded to your rev productivity improving. Is there any measures you could give us to help us with that? Or where are you now? Where do you want to get to? And maybe also your staffing levels, I mean, any potential add to rev staffing?

J. Kevin Gilligan

Well, so from our enrollment counselors, obviously an integral part of our new enrollment processes and even ongoing many times, learners staying revved with a relationship with those enrollment counselors though their course of study. As far as the numbers, as we were going through the declined enrollments, we did obviously, during 2011, had some workforce reductions. We've had attrition. We have over the last quarter or 2 started to add back some of the numbers, but we are significantly below what we would have been at the high point. We're providing more and more tools to our enrollment counselors to make them more productive. Things such as engaging in social media and chat and things of that sort, expanding hours of service, things of that sort. So we still see additional opportunities, but we measure it a number of different ways, their effectiveness, as well as the amount they enroll. But we continue to believe that there's some improvements there, yes.

Operator

The next question comes from the line of Adrienne Colby with Deutsche Bank.

Adrienne Colby - Deutsche Bank AG, Research Division

You mentioned that you're still rolling out mandatory orientation programs. I'm wondering what percent of the programs currently have a mandatory orientation? And when do you expect that to be fully rolled out across the offerings?

J. Kevin Gilligan

Yes. Adrienne, thanks for your question. So we're just getting started with the orientations. We began implementing assessments a little bit over a year ago. And the assessments are part of the admissions process, and it allows us to better understand the preparedness of a potential learner coming into Capella and what the risk factors might be. Now what we're able to do is take those assessments, when we learn the assessments, and to more personalize the orientation and build in different learning modules into the orientation that more directly address the unique specific needs of an individual learner. So it's this ability to take the assessments and offer a personalized orientation, which we think is pretty exciting. We're going to be rolling it out over the next few quarters. We'll pace it. We have to get some more experience with it. So it could take more than a few quarters depending how it goes, or it could go faster if we like the traction we're getting with it. So like with everything we do with Capella, we pilot it and then we roll it out in a disciplined way. When we're confident we got it right, we accelerate execution. But there are times where we have to slow down during execution and make changes to make sure that we get it right. So I think next quarter, we'll be able to give you more color on the actual expected timeline.

Adrienne Colby - Deutsche Bank AG, Research Division

Great. And as a follow-up, I was hoping you could talk a little bit more about the student learner that you're targeting with the FlexPath programs. Maybe how this learner is different from those that you are already serving? If you're planning to launch this more through your corporate partnerships?

J. Kevin Gilligan

Yes, so we do see it as a different part of the market that we're not serving today. It's -- they have to be highly motivated learners that have the capacity to learn on their own. It doesn't mean that they won't -- some level of support won't be available, but it's definitely going to be different than the traditional structured instructor-led course from experience. And I think it really remains to be seen, what level of support actually could be required for success. And that's why we're going to take it in a very disciplined way. We want to get the academic model right. This is a different -- I view this as a different offering to serve a different part of the market. I think some number, some small percentage of our existing members may choose to go down this path, but I think this is definitely targeting a different type of learner. So for the next -- for the foreseeable future, our focus is on understanding once we get approval from the department to roll it out, really understanding what level of support is required. We have our view of what's -- would it be necessary. But getting some real experience in the market will be extremely valuable to scaling this.

Adrienne Colby - Deutsche Bank AG, Research Division

Maybe it's too early to ask this too, but I guess I'm wondering will the degree or the credential actually indicate that the learner enrolled in the competency program? And will the transcript look identical to sort of a standard Capella degree? [indiscernible]

J. Kevin Gilligan

The learners under the Flex program have to meet all the same requirements in terms of being able to demonstrate the learning outcomes of the competencies as an instructor-led course. So it should have -- it should be viewed similarly in the marketplace. And I should also mention, by the way, our faculty are going to play a very significant role in our FlexPath offering. It's our faculty who are -- who do the work to map the learning objectives of the program to the competency requirements, and it's our faculty that apply robust assessments to validate that the learning occurred. So this is not a faculty-less environment, it's just that the day-to-day instruction that's available will be different. But in terms of the rest of the program and the academic rigor and the role of the faculty, that will still be there.

Operator

Your next question comes from the line of Jeff Volshteyn, JP Morgan.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Just following up on FlexPath program, do you have a sense of the price points for those programs? Or that's early to tell?

J. Kevin Gilligan

Yes, I think -- Jeff, I think it's a little early. We definitely expect that learners are going to be able to move through the programs faster, based on the experience we've had at the program level. And that's going to be a very significant affordability value proposition. And we're still evaluating what the right price point would be. But I'll go back and say, right now, our focus is to get in the academic model right, and we're going to be addressing those commercial issues once we're confident that the academic model is in the right place.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

And then you had conversations with the department. Do you sense sort of a degree of cooperation in a sort of conducive environment to expanding these offerings going forward, from the department and their accreditor?

J. Kevin Gilligan

Yes. So the department is on record, is encouraging the development of direct assessment programs. We are in active conversation with them now, and I would characterize the conversations as very constructive.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Great. And a couple more model-related questions. Could you update us on the seasonality of new enrollments now? I think it's been a little while since we've talked about it.

Steven L. Polacek

Yes, Jeff, this is Steve. So the high point for the year is generally in the third quarter from a number perspective. For Capella, we have the monthly starts. And so, what is particularly acute in the third quarter is that we have the third month start being September in our quarter being much higher than any other third-month start of any sort of quarter. So that's really the -- consistent with a go back-to-school type of timeframe. The other one that would be large, would be the fourth quarter. That seems to be the back half of the calendar year, seems to be the higher period. And obviously, the lower ones is going to be more in the second quarter.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

And last question, what is your percentage of leads coming from third-party lead generators now?

Steven L. Polacek

As far as the enrollments coming out of that particular channel, it's been around that little less than 10%. It's still hovering around that. It's been like that for a few quarters.

Operator

Your next question comes from the line of Trace Urdan with Wells Fargo Securities.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

I'm wondering if you could -- it looks like that once again the bachelor's enrollment seem to be the strong point. And I understand that there's sort of at the leading age and we might see some group greater strength reflected in the other master's and PhDs on a go-forward basis. But I'm wondering if you could just talk about whether you have a target mix long term of what the right balance is between bachelor's, master's and PhD programs and how you think about allocating resources in the recruiting process for those different degree types?

J. Kevin Gilligan

Trace, it's Kevin. Well, for starters, just to clarify, we had strong new enrollment growth in the second quarter across all degree levels. So we were very pleased with the performance of our graduate portfolio. And long term, it's our goal to remain largely a graduate-focused institution. When we are in a growth mode, the bachelor's segment was growing at a faster rate than the graduate segment, and I would expect that to continue to pace -- continue to be the case when we get back into a growth mode. But we want to manage our mix, so that we remain graduate-focused. And I think the opportunities are there to do that.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Do you think -- I mean, with respect to your comments earlier about the competitive environment and where we are, do you feel like that's a blanket that applies across all the group programs? Or are there differences that you can perceive between the demand characteristics of the different programs?

J. Kevin Gilligan

Yes, I think that's a good point. I think that we operate a very large and fragmented market. And I think that the way you win in that market is you pick the segment you want to serve and you intensely focus on that segment. So I think there is going to be a portfolio management approach to our strategy going forward.

Operator

Your next question comes from the line of Tim Connor with William Blair.

Timo Connor

I wanted to ask about the language in the release about the census date for new starts, what exactly that means? And it's the first time I think I remember seeing it, so could you dive into that a little bit?

Steven L. Polacek

Yes. Tim, this is Steve. So for the second quarter, what we've done is we've aligned our definition of new enrollment growth to be consistent with our learner success metric. So in our early cohort persistence metric, we start the measurement of census date in the first quarter of their course of study through LQ4, their fourth quarter to census date. And so, we wanted to -- as we got some experience with that measurement and looking at our learner success initiatives, we are saying it's really important to get enrollment to that census date, because that is the point where we start comping [ph] our early cohort persistence. But in addition, that's the point where they are 100% financially obligated for their quarter's work. Now if they withdraw after that, we would have a refund going back to the Department of Education, but then we would have to try to collect those funds from the learners. So we're trying to make sure we're aligning our new enrollment metric to that persistence metric. As we look at recent history, there really isn't much difference between the metrics of how we used to do it versus this new metric that we're doing in the second quarter of 2013 on a go-forward basis.

Timo Connor

Okay. And then will you be revising any of the older metrics just to get them in touch? Or are you going to be...

J. Kevin Gilligan

No, we don't plan to do that because the differences were not significant at all. So from that perspective, there was no need for us to go ahead and do that. It was just really immaterial. And they bounce either way. Sometimes a little bit better growth, sometimes a little bit less. But qualitatively, they're pretty much the same.

Timo Connor

Got it, okay. And then you called out a difficult comparable in the third quarter. Is it fair to say that's slightly easier comparable on the fourth quarter?

J. Kevin Gilligan

I'm sorry, Tim. I don't know if I understood your question.

Timo Connor

I think last year in 2012, you had some timing differences between the third quarter and the fourth quarter. And in the release, you talked about a pretty tough comparable for starts in the third quarter. Is it right to say that, that's a slightly easier comparable in the fourth quarter?

J. Kevin Gilligan

Yes. So last year's numbers, we had about 10% growth in the third quarter last year, and then I think it was a little bit less than 1% in the fourth quarter. And what we commented there is that we had a significant pull forward into the third quarter last year. So last year, we kind looked at the back half being about 5%. As we look at the third quarter here, we obviously have that top comp. It does get easier from a comparable perspective in the fourth quarter. But we don't have a lot of visibility in this marketplace, considering the volatility in the market and the demand environment and the competitive environment, whether or not that's going to be easier or harder to achieve. I think we just don't have the visibility today to speak to that.

Timo Connor

Got it, okay. And then final one for me. The new branding campaign, how is that different than the prior one that you've had in place over the past few years? And then how long do you expect this to last?

J. Kevin Gilligan

Yes. So the other branding campaign that we had was out there for a little bit over 1 year. We like the results that it had achieved from the standpoint of getting the awareness of Capella out in the marketplace to a greater extent that helped us make our -- all our marketing channels more efficient. Just in normal course, you need to refresh your messages out there, and that's what we're planning on doing. I would say that our campaign that we're looking at here in the fourth quarter will be more emphasizing our competency-based model. We think that's a differentiator that we have as Capella, whether it's against our traditional competitors, being the for-profit institutions or traditional universities, and we think that that's a differentiator. But also matching it up with our learners success initiatives. So as I made a comment in my prepared remarks, aligning our marketing strategies with our learner success initiatives is critically important, and we're getting more and more alignment with that as we move into that next campaign. How long it lasts? It'll really depends on the results. But you do need to refresh it every couple of years or so.

Operator

[Operator Instructions] Your next question comes from the line of Corey Greendale with First Analysis.

David Warner - First Analysis Corporation

This David Warner for Corey. Notwithstanding, I guess, the Q3 starts guidance, are you still expecting, I guess, looking on a second half to second half basis, tab starts increase in the second half of 2013 overall?

J. Kevin Gilligan

This is Kevin. I think as Steve just commented, the visibility is limited on the fourth quarter right now. So we're not commenting on the fourth quarter. What we have said is we believe Capella is in a strong position to grow faster than the overall market on an annual basis, and that's our objective. And we think we're operating in a relatively flat to down market. So any positive new enrollment growth in this environment, I consider to be a good outcome.

David Warner - First Analysis Corporation

Okay. And for the past few quarters, you've indicated an earlier retention, early cohort retention rate of 4% to 5%. Does that anniversary in Q3? I realized it's sort of an ongoing process, but does that, I guess, low-hanging fruit sort of anniversary in Q3 or Q4?

Steven L. Polacek

No. This is Steve. That rolling 4-quarter average we have, it's just measuring the early cohort persistence we have. But we continue to do more and more relating to our learner success initiatives, piloting things, expanding in broader, see what works to go ahead and improve our overall persistence rates. So we're expecting to have continued improvements at early cohort persistence. It wasn't just -- we've got a couple of pieces of low-hanging fruit and then we're going to grab those and there's nothing else to do. I think this process we've talked about, that Kevin mentioned relating to assessments and orientation that that will better prepare learners. There'll be some learners that will eventually will opt out of coming to Capella University. Because once they go through the assessments and orientation, they may not decide to come. That's going to be a little bit of a headwind relating to new enrollment. But having the learners that are more prepared, that should help us improve our persistence rate. So that's just another part of that process.

David Warner - First Analysis Corporation

Okay. And then just one last quick one. On FlexPath, have you began marketing FlexPath, either radio or TV or what have you? And I guess any indications on -- early indications, a demand for that type of offering?

J. Kevin Gilligan

Yes. So we have not started to actively marketing the program. We've had press releases around what's happening with FlexPath, but we're waiting for approval from the department before we begin that.

Operator

[Operator Instructions]

J. Kevin Gilligan

Doesn't sound like we have any more questions, Connie.

Operator

Okay. We have no further questions. I would now like to turn the call over to Kevin Gilligan for closing remarks.

J. Kevin Gilligan

Okay. Well, thanks, everybody, for joining us today. We appreciate your good questions. We are very excited about our momentum and look forward to updating you on our progress next quarter. In the meantime, if you have any questions, please give Heide or Steve a call. Thank you.

Operator

Ladies and gentlemen, thank you for participating. This does conclude today's conference call. You may now disconnect.

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