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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

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

Timothy Connor - William Blair & Company L.L.C., Research Division

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

David Chu - BofA Merrill Lynch, Research Division

Paul Condra

Adrienne Colby - Deutsche Bank AG, Research Division

John D. Crowther - Piper Jaffray Companies, Research Division

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

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

Capella Education (CPLA) Q3 2013 Earnings Call October 22, 2013 9:00 AM ET

Operator

Good morning. My name is April, and I will be your conference operator today. At this time, I would like to welcome everyone to the Capella Education Company Third Quarter 2013 Earnings Call. [Operator Instructions] Thank you. I will now turn the call over to Heide Erickson. Ma'am, you may begin.

Heide Erickson

Thank you, April, and good morning, everyone. Welcome to our third quarter 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 today 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 upon 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 third 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, 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 will take 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 joining us today. I'm pleased to report solid third quarter performance in what continues to be a very challenging environment that's exhibiting volatility, particularly in quarterly new enrollment growth. For 2013, we're executing our plan to grow above the market rate in what we believe is a flat to down market and deliver on our annual goals, including annual new enrollment growth for 2013. We're taking advantage of short-term market opportunities, managing through quarterly fluctuations and building Capella to deliver long-term sustainable growth. For the third quarter, new enrollment, total enrollment and revenue were slightly above our expectations. Total enrollment and revenue benefited from a slightly better-than-anticipated new enrollment performance and solid early cohort persistence improvements. Our operating margin performance was over 100 basis points above the high end of our guidance with revenue performance and diligent cost management across the organization. We are pleased to see the company return to operating earnings growth. We're making steady progress towards returning to sustainable total enrollment and revenue growth and expect to achieve operating earnings growth in the second half of 2013. Our expectation for fourth quarter year-over-year new enrollment declines in the mid-single percentage range reflects the volatility in the environment, but does not change underlying fundamentals. We are confident that we have the right strategies in place as we pursue our goal to grow enrollment above the market rate. We are managing through these quarterly fluctuations to achieve our annual and long-term goals. In a moment, Steve will provide additional details about third quarter performance and fourth quarter outlook.

I'd like to provide you with some context for how we are thinking both our near-term performance and how we are positioning to succeed over the coming years. As you know, the driver for our near-term performance is the combination of new enrollment and persistence improvements, which drive our total enrollment and revenue performance. Some of the changes we're making to drive persistence improvements have a short-term impact on our new enrollment, but we believe will positively impact future performance as we are focusing on a balanced approach to deliver long-term sustainable total enrollment growth. We delivered early cohort persistence improvements in every quarter in 2013 when we expect moderate annual new enrollment growth for 2013. To achieve our goal of total enrollment growth in the first half of 2014, we will need to deliver new enrollment growth in early 2014 and continued early cohort persistence improvements. Quarterly new enrollment growth volatility makes this more challenging, but we are not backing away from this goal. Taking a longer view, I'd like to take you through 4 key elements that I think position us for successful growth over the long-term, including continued successful execution of our brand-driven marketing strategy, demonstrated ability to improve the success of our learners, a differentiated competency-based learning infrastructure and the introduction of new and innovative learning models such as FlexPath. Starting with marketing. We have demonstrated that we can compete effectively based on increasing new enrollment from our higher converting channels, lowering cost for new enrollment year-to-date compared to 2012 and expected 2013 annual new enrollment growth. Over the next few months, we'll continue to optimize and execute our relationship-driven brand marketing strategy. This includes rolling out an exciting new branding campaign in November, driving enrollment counselor productivity through new tools which simplifies access to perspective learner information and marketing our FlexPath programs which create a point of differentiation that reflects positively on our other business programs. We have a competitive advantage if we continue to be nimble, take advantage of opportunities and execute our marketing plan designed to deliver sustainable new enrollment growth. Our new enrollment performance and our early cohort persistence improvements are interlinked. The quality of the inquiries generated through our marketing effort is a contributing factor in learner success, but by no means the only one. We're making real progress and we improved early cohort persistence by about 5% in the third quarter. We rolled out mandatory orientations across all degree levels, are about halfway to phasing in requirements and expect to complete that change in the first half of 2014. Our initial results from the broader implementation confirm that these increasingly personalized orientations help our learners to be better prepared and start their education successfully. Some learners are not moving past these additional steps to enroll, which impacts new enrollment growth. However, requiring orientation is the right thing to do since these learners were unlikely to persist despite our best efforts to support them.

In addition to expanding orientations, we continue to make investments in technology, processes and tools to more effectively support our adult learners. Our goal is to build an ecosystem supporting learner success and we are very encouraged by our progress. Looking over the long-term, we believe our competency-based learning model and the curricular infrastructure that supports it, puts us in a strong position to differentiate Capella. We've talked about our competency-based model on previous calls, but I think it's important to reiterate that our model is built on 3 distinct pillars. First, our ability to define and align competencies required to meet professional standards and employer needs; second, our ability to authentically assess those competencies; and third, scholar practitioner faculty that is at the center of the model. This system which is deployed across all of Capella programs is a product of a decade of investment, data collection, analysis and development. Our model aligns every detail of our program offering at an assignment, course and instructional level to help our graduates achieve the competencies required to be successful in their professions. We believe this is a competitive differentiator because our 10 years worth of working investment designing cohesive curriculums that are fully express these competencies is not easily replicated. The evidence of the effectiveness of our model is found in the outcomes of our learners as seen in the Department of Education's gainful employment data, independent third party surveys such as the Noel-Levitz data, external awards, the approvals of our regional and program accreditors, as well as our employer partners who have all cited our competency based learning model as a differentiating strength.

Our new FlexPath offering is a great example of how we're leveraging our unique expertise in competency based programs while offering new academic delivery model. As you know, this program is only one of two programs approved by the Higher Learning Commission and the Department of Education to offer courses based on the directive assessment of learning rather than the credit hour. To understand the innovation offered by FlexPath, it's useful to look at how it's different from our more traditional competency based courses. Learners in our credit hour based degree programs are mandated, interact with course materials, faculty member and classmates frequently and at predetermined points in time over a fixed number of weeks. Comparison, FlexPath learners acquire and demonstrate the requisite competencies accessing material, course mates and academic support on their own terms and at their own pace. We'll provide them with materials, but we care about the demonstration of competency rather than the source of knowledge. Because FlexPath is measuring learning instead of time, thus the potential to allow learners to move at their own face pace through their degree programs. They can demonstrate competencies and do not need to sit through a class just to study material they already know. This can result in increased flexibility and speed to completion and significantly reduce cost. Earlier this month, learners started in our first FlexPath bachelor and Master's programs in business. Marketing of FlexPath began in September, with interest building nicely. Our primary goal is to get the academic model right for these highly motivated learners and to grow this offering in a responsible way. We are therefore targeting the initial enrollment to 50 to 100 learners in total for the fourth quarter. With the additional application requirements for our FlexPath learners, admissions process may take longer. However, we're already seeing the branding benefit from this offering as prospective learners recognize Capella as an innovative university. We're excited about the opportunity FlexPath presents for the long-term growth. We believe it can be the foundation for a paradigm shift in higher education. Now, financially it is awarded, now we think about time based constraints like the academic calendar. We are supporting federal policy changes allow us to operate without the restrictions of the academic calendar and create space for even greater innovation. We're unique and can be overused, but in this case, I think you can really call Capella's ability to design and deliver a program like FlexPath unique. By being on the leading edge of developing a competency-based direct assessment learning model, we're in a position to set high industry standards for this model going forward. It will take continued innovation, differentiation and execution of our strategies to drive long-term growth above market levels. We're building a long-term sustainable business model and we're making steady progress. Our focus remains on executing our strategies to the volatility over the market. We are committed to reaching our goals and I'm confident we had the right plan in place to achieve our growth. I'd like to now hand the call over to Steve.

Steven L. Polacek

Thank you, Kevin. As we reported this morning, third quarter performance was slightly better than our expectations in terms of new total enrollment and revenue growth, with operating margin performance significantly better than our expectations. Revenue for the quarter was $100.7 million, up 1.4% year-over-year, primarily due to the contribution from businesses outside of Capella University, including a significant employer project, made tuition increase of less than 3% in July for Capella University. Total enrollment declined by 1.4% from third quarter 2012 with bachelor programs growing year-over-year. New enrollment for the third quarter was down 1.3% compared to the same quarter in 2012. Early cohort persistence improved by approximately 5% over last year. This metric is the change in a four quarter moving average early cohort persistence rate calculated from the learners first course census date to the fourth quarter census date. While volatility in this metric is possible, we are pleased with the consistent, strong and year-over-year improvements. Early cohort persistence will remain a strategic focus for Capella. Revenue per learner based on Capella University revenues increased slightly as expected by 0.3%, primarily related to the tuition increases offset by grants and degree mix shift. Consolidated operating margin for our third quarter was 10.4% compared to 8.3% last year. The primary reasons for the better than anticipated operating performance was diligent cost management across the entire organization and stronger than anticipated revenue. Year-over-year operating margins improved related to higher revenue, decreased depreciation expense and lower bad debt expense. Bad debt was 4.1% of revenue compared to 5% during the third quarter of last year. Marketing and promotional expenses were up year-over-year, primarily due to the timing of marketing initiatives.

From a cash flow perspective, we generated $11.6 million of cash from operations during the quarter and ended the quarter with a cash position of $151 million. During the quarter, our Board of Directors increased our share repurchase authorization by $50 million. Our focus is on leveraging our strong cash position to deliver shareholder value, including investments in our core business and diversification. We did not repurchase a significant number of shares during the quarter. Remaining share repurchase authorization at the end of our third quarter is approximately 53 million.

Let's turn now to outlook for the fourth quarter of 2013. We're expecting year-over-year new enrollment growth for Capella University to decline in the mid-single-digit percentage range and total enrollment to decline about 1.5% to 2.5%, and total revenue to be down 0.5% to 1.5%. Main driver for new enrollment declines in the fourth quarter is volatility in the overall market environment and changes we are making to drive learner persistence, which are primarily affecting the bachelors programs in the fourth quarter. Kevin already discussed the volatility in the overall market. Environment is still very sensitive. Events on the margin like the recent government shutdown are not helping the confidence of the consumer. However, there's no single event driving this volatility. With comparisons deposited new enrollment growth for the third quarter 2012 through the second quarter 2013, we know that our next challenge was delivering growth on growth. In our model, a few hundred learners can be the difference between mid-single-digit percentage new enrollment growth or year-over-year declines. In the third quarter, the year-over-year comparison was particularly difficult given last year's 10.5% new enrollment growth. However, we did perform better-than-anticipated which points to our strong execution. Volatility and difficult new enrollment comparisons will stay for us -- stay with us for the upcoming quarters. In the short-term, we also expect headwinds that are particularly affecting the bachelor programs. These include initiatives that we are implementing to drive learner success, including mandatory orientation and additional verification steps required by the Department of Education for certain bachelors to receive financial aid. We know the additional steps in the new enrollment process discourage some learners from enrolling. We also know that if we further personalize learning experience, we are better preparing learners for success. Orientation is an important step in this process and we believe it will improve learner success across all degree programs. Upcreased [ph] headwinds, making these changes is the right thing to do as we are driving learner lifetime value. Our business is much more stable compared to a few quarters ago. The challenge now is to move to the next step and deliver growth on growth. During the fourth quarter, year-over-year total enrollment growth is expected to be slightly less favorable compared to the third quarter of 2013 year-over-year comparisons, primarily due to the timing of new enrollment starts. As Kevin mentioned, our goal is to achieve total enrollment growth in the first half of 2014. With modest new enrollment growth and continued early cohort persistence improvements, this goal is within reach. We expect year-over-year revenue growth to decline less than total enrollment, primarily due to the contribution from our businesses outside of Capella University. Capella University revenue per learner for the fourth quarter is expected to be about flat compared to the fourth quarter of 2012. Operating margin in the fourth quarter 2013 is expected to be about 15% to 16% of revenue compared to 14.1% during last year's fourth quarter. Instructional costs and services, as a percent of revenue are expected to decline year-over-year, primarily related to lower depreciation and bad debt expenses, offset by continued investments in our learner success initiatives and new innovative learning models. Marketing and promotional expenses are expected to be up on a dollar basis year-over-year, but down sequentially from the third quarter 2013. Even though we are rolling out our new branding campaign in November, the year-over-year increase is primarily related to increased depreciation and additional marketing spending in our businesses outside of Capella University. For the fiscal year 2013, we expect to report annual new enrollment growth and early cohort persistence improvements in each of our 4 quarters. In addition, operating earnings are expected to be at similar levels in 2013 and in 2012 on lower overall revenue, reflecting strong cost management throughout the organization and learner success improvements. Capella University marketing costs are expected to be down from last year. Annual tax rate is expected to be about 41%. Overall, we expect to deliver a solid annual performance given the challenging market environment. While annual revenue is expected to be down year-over-year, we expect to drive relatively flat annual operating income. In closing, we are making steady progress against our strategies to return to growth. We are pleased with our execution during the quarter and we'll continue to build Capella for long-term sustainable growth. With that, we will take your questions. April, could you please open up the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Jerry Herman with Stifel.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Just a question about the orientation. Is there a way to quantify what sort of impact that had in terms of new student enrollment, guys?

Steven L. Polacek

Jerry, this is Steve. Yes, relating to the orientation that we started rolling out on a pilot basis, kind of earlier in the year and then start expanding it during the third quarter, we looked at it as being probably a few percentage points on our -- impacting our new enrollment, particularly at the bachelors level. So with our negative new enrollment being down a little over 1%, we probably would have been in a slightly positive territory without the orientation impact. But as we said before, the reason we put that in place is that we think these are learners that probably wouldn't have progressed with us in our academic model here in that it will behoove us, be better for us in the long-term for the learners who do go through it and increased persistence rates that we move forward.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And what is the participation rate, if you will, in that? In other words, how much of the student flow is currently subject to orientation programs?

Steven L. Polacek

So, all of the degree programs are implementing orientation and we will increasingly require more mandatory orientations. So we expect that the complete rollout would happen probably -- it will probably end through the second quarter of next year.

J. Kevin Gilligan

Jerry, it's Kevin. So we're about halfway there and we're initially focusing on the learners that we feel that are least prepared, because they'll benefit the most from the orientation.

Operator

Your next question comes from Corey Greendale with First Analysis.

Corey Greendale - First Analysis Securities Corporation, Research Division

First question. I think, Steve, in your script you mentioned something about additional verification steps the department is requiring. Can you elaborate on what that is and how much of an impact is that?

Steven L. Polacek

Yes, so what the Department of Education has laid out and, I think, it was effective with the new financial aid year for us and what it is, is additional verification procedures relating to learners that have attended maybe a number of universities, maybe haven't been successful in getting courses completed and so they get flagged by the Department of Education for additional verification procedures by all universities, including traditional universities. And so what's needed to happen there is that we need to verify what their educational purpose is if they're borrowing money for, for example, tuition, things of that sort that they're going to be using it for educational purposes. It's essentially a testament to that. They may have to have that verification notarized, for example. So when you go through those additional steps, whether it's your academic record or the verification procedures, that can go ahead and kick somebody out of the enrollment process or extend it to the extent that they are, in fact, learners that are joining universities for the right reasons.

Corey Greendale - First Analysis Securities Corporation, Research Division

And I think you said it applies to undergrad. That's only an undergrad thing or to graduate learners as well?

Steven L. Polacek

It expands to others as well, but the more pronounced impact will be to bachelors learners, more than it would be, for example, a Master's or graduate learners.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. And then on FlexPath. Kevin, I think you said that you're seeing sort of a halo effect from that with people think Capella as being at the cutting-edge. Can you just speak more strategically or elaborate on the strategy around the brand. And the question is, Capella is seen as kind of a high-end brand in the market and FlexPath is at least on the cost side at the low-end of what's available. What do you think that, that is -- those things can coexist or whether there could end up being brand confusion with the high-end perception and the low-end cost?

J. Kevin Gilligan

No, that's a great question. So we don't correlate low-cost with low quality. I think the Capella brand is well-established. It's a premium brand offering very high quality academic model and we believe we can demonstrate to the market that with FlexPath, you get the same rigor -- academic rigor, the same quality, the same professional outcomes in a more efficient model. So I think it's really positioning us as an innovator, more than a low-cost player. Our learners are concerned about affordability, but they don't look at affordability in just the price of tuition. They look at the amount of time it takes to complete the program because that's a huge value driver for them and they look at that outcomes that they could get and that's an integrated equation from their point of view. So what we're doing with FlexPath is we're making it more affordable on tuition because they can go faster, which means they have less opportunity cost and they get to the outcome better and because they -- at the same competency benefit from on the FlexPath approach as they do with the credit hour approach, the currency of the degree and the market is the same. So I think it's more about positioning us as an innovator than anything else.

Corey Greendale - First Analysis Securities Corporation, Research Division

Just this last one and I'll turn over. Given that perspective, why -- 5 years from now, if you've got FlexPath available for every program area, why would anyone go to do higher cost Capella if you get the same outcomes, same career outcomes for lower-priced, FlexPath?

J. Kevin Gilligan

I think it will depend upon what they needs are and what level of service that they want. They may -- predicting the future is difficult, but they may want to have some courses that they can do on a self-paced basis. Others where they want more support. Today, learners have to pick a particular path, but I think over time, as we get more experience with the model, there may be opportunities to blend that model.

Operator

Your next question is from Tim Connor with William Blair.

Timothy Connor - William Blair & Company L.L.C., Research Division

To follow up on Jerry's question, can you quantify the difference in early cohort persistence between students who have gone through the orientation and those that haven't?

Steven L. Polacek

Timo, this is Steve. It's a little bit too early to quantify that since we're -- as Kevin said, we're about halfway through that particular process and we're just kind of getting into the second sort of course to see what they're successful at. Our expectation would be, is that, things of this sort, when we pilot them before did you see some increased persistence. But this is kind of -- and our overall roadmap for our learner success initiatives. This was something that we had identified as an important metric to continue to move the bar up on persistence. So we've had consistent improvements. We think this is just another part of that, but it's a little too early to really identify the impact directly relating to the orientations.

Timothy Connor - William Blair & Company L.L.C., Research Division

Okay. And then what was the trigger to decide to roll this out on more than a trial basis?

Steven L. Polacek

Well, it was more related to the outcomes that we had that we felt that the learners were going to be better prepared, that some of them that struggled in their first course, because maybe they needed to enhance their skills relating to time management or writing skills, things of that sort. So we identified those as barriers to first quarter -- first course success rates and we just said, we look at this and say, this is the right thing for these learners. Also, to make sure that they recognize the time it's going to take, the efforts it's going to take for this academic endeavor and not get to a point where they're engaging the course, incur student loan debt and then fail. So this is kind of the workings that we had out of the pilots.

J. Kevin Gilligan

Timo, this is Kevin. I would say it's an extension of the work we've been doing for the last couple of years. We began implementing assessments a while back. We then use those assessments to more personalize the first course, because not every learner came into the same level of preparedness and we saw improvement with that. And we thought the next step will then to develop a more personalized, customized orientation ahead of first course as one more step to help learners become prepared. So I think you should view it as a -- just a continuous improvement initiative to help our learners succeed.

Timothy Connor - William Blair & Company L.L.C., Research Division

Okay. And then the -- you said it would have been a couple of percentage points of new enrollment or there was a couple of percentage-point impact on new enrollment in the quarter. So it's safe to assume that it would have had a similar, perhaps larger impact on your guidance for fourth quarter new enrollment?

Steven L. Polacek

That's correct.

Timothy Connor - William Blair & Company L.L.C., Research Division

Okay. And then final one for me. The 50 to 100 new FlexPath students that you expected, was this number -- it sounded like it was restricted, so there was potentially more demand for the program than just those 50 to 100?

Steven L. Polacek

Yes, that's correct. We've seen -- it's early days, but we've seen a very nice uptick in increase for our business programs and in the short-term, we're not converting a lot of that to new enrollment in part because we want to restrict it to get experience with the model. But in part, some of these learners don't meet all the requirements. We have a higher admission standards and they can't meet the requirements today, but we inform them of what's required and I think we're going to see some of them cycle back once they've satisfied those requirements. As an example, at the bachelors level, we require a FlexPath learner a business program to have completed all their generic courses. And we're getting some increase where they have some, but not all of them. So in some cases, those learners are taking advantage of SOPHIA as a way -- as a very cost-effective way to complete their generic courses and I believe that they will cycle back. I also think that demand for this offering is going to build as the market becomes more aware of it.

Operator

Next question comes from Jeff Volshteyn with JPMorgan.

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

I wanted to ask about the government shutdown. Is there a measurable impact on new enrollment or is it just more of a -- just general uncertainty in demand environment?

Steven L. Polacek

Jeff, this is Steve. Yes, it was more just related to just additional uncertainty in the marketplace. It always seems there is something going on in the broader economy or events that are affecting people's lives. So it's more related to that than it is any sort of direct impact relating to our specific sort of learners.

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

Makes sense. And when we think about the revenue contribution and really the revenue per learner impact from your non-Capella University businesses, how should we think about them going forward?

Steven L. Polacek

So relating to -- we look at consolidated CEC revenues. It's about -- 95% is related to Capella University, particularly here in the back half. So with our contributions outside of Capella University, which would be RDI, SOPHIA, some of our employer sort of solutions that we have, that's been about 5% in the back half. So when you're doing your revenue per learner calculation, you'll need to take about 95% of our consolidated revenues and then look at that from a total enrollment perspective to look at what revenue per learner would be. As I indicated we expect -- even though we had a little bit of uptick in revenue per learner in the third quarter, it's expected to be flat in the fourth quarter. That's primarily related to -- we do have the price increases offsetting any sort of grants as well as mix shift, but we also have lower colloquial and seminar revenues year-over-year in the fourth quarter that mutes that revenue per learner a little bit, but it's going to be essentially flat, we think.

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

Last question for me. Can you just remind us the seasonality of new enrollments among the 4 quarters?

Steven L. Polacek

So the -- yes, the seasonal high, generally, is in the third quarter where we have a couple larger intakes, both being in July and then in September. The other quarters, you see much more of a normalized pattern where the first month of the quarter for Capella is generally going to be larger and then it drops off in the second, third months. But the seasonal high ends up being in the third quarter. The other ones are more consistent.

Operator

Your next question is from David Chu with Merrill Lynch.

David Chu - BofA Merrill Lynch, Research Division

So 4Q starts are expected to be comparable or slightly worse -- despite 8,000 basis points easier comparison. So other that orientation, is there anything else to mention here?

J. Kevin Gilligan

David, it's Kevin. I think it really reflects the volatility in the marketplace. As I look back over 2013, I think we could say volatility can work for and against you. We've had some very strong quarters. I think we benefited from volatility working the other direction and now in the fourth orders it's working a little bit against us. So I think you need to -- our -- my view is you need to step back and view performance over a longer period of time. So if I look at the -- our year-to-date performance or take our full year 2013 performance, we're going to achieve moderate new enrollment growth, which we think is good execution in a flat-to-down market. That was the goal we came into the year with. We believe we could do it. We weren't really sure how it's going to fall by quarter and that I think, the volatility, that challenge still remains, but we think the company is in a position to grow faster than market and that's the mindset we're going to be applying to our 2014 planning.

David Chu - BofA Merrill Lynch, Research Division

Okay. Now that's great. Maybe it's a little bit too early, but any thoughts on start transfer 2014? I mean, do you think we can actually see an improvement versus '13?

J. Kevin Gilligan

Well, it is a little early. We're right in the middle of the planning. I just would repeat myself and say that we're approaching '14 with the same mindset we approached '13 and that is the market is going to be challenging. Our goal is to grow our new enrollments faster than the rate of the market. It's going to take continued strong execution around inquiry growth and conversion rate. Our fundamentals there have improved through the first 3 quarters of this year and our goal is to extend that momentum into '14. I think we got some exciting things in the pipeline like our new branding campaign to help with that. But I also think it's going to be quarterly visibility and '14 will probably be as challenging as '13. So we're approaching it with that mindset, I would also say, let's not forget about the persistence improvements. They're an important part of our total enrollment profile and we've been able to demonstrate improvement in every quarter in '13 and we're going to be approaching '14 with an expectation of continued improvement.

David Chu - BofA Merrill Lynch, Research Division

Okay. And last question, so what percent of prospective students for bachelors are required to meet the additional verification steps?

Steven L. Polacek

I don't think I've got the exact number, David, but it's going to be really related to -- we probably have, I would say, we've said in the past, probably half of our learners or more come with transfer credits. So the ones that don't, you generally have to get some sort of verification procedures and even the ones that were, maybe attending these other institutions have. So it's a fairly significant number, which is why we've called out that it's impacted more of the bachelor's programs than the graduate programs.

Operator

The next question is from Paul Condra with BMO.

Paul Condra

I just wanted to double check, I think you mentioned first half enrollment for 2014, you expect that to be positive over the first half of 2013?

J. Kevin Gilligan

Paul, it's Kevin. What we said was and we said this a few calls ago, that our goal is to return total enrollment growth into positive territory in the first half of 2014. So we're talking about total enrollment. And that's still our goal. I'd say it's more challenging because of the new enrollment performance in the third quarter and the outlook of the fourth quarter, but the goal is still within reach and we want to continue to challenge ourselves to get there.

Paul Condra

And what kind of assumptions do you have about starts to reach that goal?

J. Kevin Gilligan

It's going -- Steve mentioned in his comments, it's going to take positive new enrollment growth in the first half of 2014, coupled with continued persistent improvements to get there.

Paul Condra

Okay...

J. Kevin Gilligan

It's going to be close. I think, it's the way I would describe it.

Paul Condra

It sounds like you have a little bit more, I don't know, positive outlook on the next few quarters. I'm wondering what gives you that kind of, I don't know, confidence just looking out that far ahead?

J. Kevin Gilligan

What I would say, I feel like our strategies are the right strategies for the market we're operating in and we're confident in the strategies. I think we're also confident in our ability to grow new enrollment on an annual basis. But I will just reiterate, quarter-to-quarter, you can have lots of ups and downs. That's the first point. The second point I'd make is that, we have a number of things on our pipeline that we'll be rolling out in the fourth quarter and the first quarter and I think those are going to contribute to our performance, but it think it's going to take new initiatives on an ongoing basis if you want to continue to increase share in a flat market.

Paul Condra

Okay, that's great. And I also wanted to ask about -- with the FlexPath, what's the marketing strategy there right now? Have you made a big push with that product and how do you market it relative to the traditional degree programs?

Steven L. Polacek

So we had a television campaign and recent to the market. And we're also marketing it through other channels, but I'd say we're -- our thought process is initially to pace the marketing with our enrollment expectations. And I think once we get more confident in demonstrating the efficacy of the academic model, then I think you'll start to see us scaling more activity.

I should restate that. We'll be getting get more experience with efficacy at the academic model.

Paul Condra

I mean, can you put any kind of timeframe around that at this point?

Steven L. Polacek

It's going to take a few quarters of experience. I guess, what I'm thinking at a high level is, middle of next year we'll sort of evaluate where we are.

Paul Condra

Okay, that's great. And then maybe I would just -- just one last question. On the third quarter, can you just walk us through again -- you had guidance for starts down in the mid-single-digit, so obviously you outperformed that. What were the key sources of outperformance there?

Steven L. Polacek

Paul, this is Steve. The primary variance between what we have when we set out guidance during our second quarter call and our final result really related to what we saw in the second and third month starts for the quarter. So we have more visibility to the July starts than we did to August and September. And as I mentioned earlier, in the third quarter, September is a large enrollment period as well. It's the largest third month of any quarter that we have. So we have a lot less visibility to that. We had outperformance there versus our expectations. And so that's really related just to sort of timing and marketing initiatives, things of that sort that can have things go one way or the other. We had the same thing a year ago where -- when we put learner success grants in place, we had a lot of sort of pull forward in one particular month. Now we didn't have any sort of pull forward this quarter, but I think it just shows some of the lack of visibility that you would have when you look at what the new enrollment rolloff is going to go ahead and be.

Operator

Your next question is from Adrienne Colby with Deutsche Bank.

Adrienne Colby - Deutsche Bank AG, Research Division

So to follow up on Paul's question. I'm wondering since you said that the first month of the fourth quarter tends to be more important than the following 2, if you see that you have better visibility in your expectations at least around enrollment turns for the fourth quarter than you did for the third.

Steven L. Polacek

Yes, typically, because of the -- what I said in the phenomena with that third quarter being -- that third month being important or significant, it's a little bit harder to have visibility in that third quarter. So when we look here in the fourth quarter, because of that, we have probably a little bit more sort of confidence. But we are looking at as we said in our guidance, that's sort of mid-single-digit sort of declines. And as we reiterated, some of that is going to be negatively impacted because of some of these verification procedures we need to do particularly at the bachelor's level.

Adrienne Colby - Deutsche Bank AG, Research Division

Okay. And a follow-up on the question about the government shutdown. I'm wondering if you were seeing some significant trends within your military population, particularly for the month of October.

Steven L. Polacek

No. We really did not. We have a relatively small military base as far as getting the reimbursement. I think it's maybe 3% or so of our enrollments that have, for example, tuition assistance type of benefits. Similar to what we saw with the sequester and the impacts that were there, we essentially had a lot of communications going with our military learners, how to keep them engaged in the courses, what other sort of benefits can they take advantage of. And so we work very, very closely with that group and we did not see much of an impact with the government shutdown.

Adrienne Colby - Deutsche Bank AG, Research Division

Great, that's helpful. And if I can just ask one last one. It looks like the trends in Master's have sort of remained at around minus, I guess, minus 5.8% year-over-year. Just wondering if you could talk broadly about what your expectations are for enrollment trends at the Master's level and also the PhD doctoral level fourth quarter, maybe into the beginning of next year?

Steven L. Polacek

So from a trend perspective, as far as when you look at the various degree levels, bachelors degrees had the earliest enrollment growth and we've had pretty consistent enrollment growth at bachelors for the last 6 to 8 quarters or so. And then Master's started showing some new enrollment growth. And then PhD was a couple of quarters ago. And our third -- our second quarter performance, as we mentioned on our call, we had double-digit growth across all our programs. So we're really early in the growth on the doctoral side and in the Master's piece of it, I think when we look at the sort of trend lines, we see, obviously, less negativity and turning to some positive. We see that kind of sort of continuing. There are certain programs at the Master's level that we have more stress on, that would be, for example, in the Master's in Education which is a very, very competitive degree offering. But we see better sort of performance when it comes to some of our healthcare, for example. So it's kind of a -- volatility exists not only for Capella University, it does exist at the degree level. I will say because of the revenue per learner impacts, we are clearly focused in on growing our graduate programs. That's -- we're primarily, predominantly a graduate focused university. We're very well known for there. We think that, that has an important differentiation in the marketplace, so we're focusing on growing that as much as the bachelor's program.

Operator

Your next question is from Peter Appert with Piper Jaffray.

John D. Crowther - Piper Jaffray Companies, Research Division

This is John Crowther on for Peter. You guys have sort of talk about, obviously, the orientation headwind, the verification headwind which sound like they might ramp here modestly over the next couple of quarters. That on top of sort of tougher new enrollment comps, it seems like you guys, obviously, it's not guidance for new enrollment growth in the first half of '14, but it's sort of a target to get back to flat enrollment there. You've highlighted in a previous question, pipeline and new initiatives in Q4 into next year that might be helping that. What beyond just sort of your persistent efforts -- persistence efforts and new marketing campaign might be there that could sort of help that better enrollment performance?

J. Kevin Gilligan

John, this is Kevin. I think it's our ability to execute sort of through the noise in this environment. And we're approaching the market with a mindset that says, if we're going to grow, we have to create our own growth. And we're focusing on brand building activities, which increase demand. We're continuing to use data analytics to optimize our marketing channels to maximize inquiry flow and the quality of inquiries we get and continue to make changes to existing programs to strengthen our differentiation and work with our normal accounts on conversion. And so it's not one thing. It takes a complete effort in this environment and we've had some quarters where we've had flawless execution. We've had some other quarters where the noise in the system has tempered the benefit of the execution that we're getting. So I'd say it's a wide range of things. We need to do well every quarter in order to deliver growth.

John D. Crowther - Piper Jaffray Companies, Research Division

Great, I appreciate expanding on that a little bit.

Operator

[Operator Instructions] Your next question comes from Trace Urdan with Wells Fargo Securities.

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

Kevin, did you -- I guess my first question is, why is the screening or the orientation program happening now? This has been a topic in the sector for a couple of years now? And I'm wondering what was the impetus to sort of introduce this into the system at this point?

Steven L. Polacek

Trace, this is Steve. I'll take it and then Kevin can add on to it. So relating to the orientation, why now? We've actually -- when we look at establishing the learner success program a year ago -- 2 years ago or so, we have sort of a long term sort of roadmap building a, infrastructure, looking at the data we want to be able to get out of learner interactions, learner behavior, faculty behavior, things of that sort. That was sort of our initial sort of investments that we we're making. And then we said, how do we motivate learners to continue for them to stay with their programs and for example, not take a quarter off and that's where learners success grants came in place. The next sort of part of our -- after development of ecosystem and that, we said, what are some the other things that we're seeing? Where do we see some significant fallout in these first 4 quarters and we see a lot in that first quarter. And so we had identified what do we need to do. We said, let's put some assessments in place to see -- pilot them and then expand them to look at what are the attributes successful learners have versus unsuccessful learners. And then the piece of that was, well, if they're not scoring as well as they should on the assessments, we need to put them through some additional education, some additional tools that are personalized to them. That's where the orientations came in. It didn't have anything to do with anything particular relating to the -- we got to have new enrollment growth or are we going to hit a tough comp. It wasn't related to that. It was a really related a roadmap of learner success, just like we have other initiatives that we're going to be rolling out in '14. This is just the next step and the building block for that.

J. Kevin Gilligan

And I would add to that. If you think of it as a sequence, we started with the assessments and the assessments gave us insights into where the opportunities were to help learners and the area we thought we'd have the best return for our learners was personalizing the first course and segmenting first course. And so that was the first step we took. And then once we got that in place, then we said the next best thing we can do is to more personalize the orientations as a step into that personalized first course. So I think it was more about applying our resources where we felt it can make the biggest impact for our learners.

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

Okay. And then I'd like to ask -- I don't mean this to be a proforma question. I recognize that the risk you guys are relatively low within the sector, but I wondered if you could just address the TCPA changes that took place in October. I'm guessing you don't use auto-dialers, maybe you could confirm that. But maybe beyond that, just talk about how much third-party lead gen you do rely on and how you're working with your partners who presumably have to do some level of screening for the buyers that are not Capella, that do engage with auto-dialers.

J. Kevin Gilligan

We're happy to answer that question. I think you got it right. We're not expecting any material impact to enrollment from this new law. From a telemarketing standpoint, Capella does not engage in auto-dialing or prerecorded messages, so we don't make any changes for internal operations and we now are down to where aggregators are less than 10% of our new enrollment and so it's not a big part of the action to begin with and our aggregators are very well aware of Capella's expectations and standards, and we've had conversation with them and we have no indication that it's going to be an issue.

Operator

Your next question is from Alex Paris with Barrington Research.

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

This is Joe. One last quick question here. Just looking at your cash balance and based on your comments, it sounds like -- that you continue to grow. Maybe just kind of update us on your thoughts on use of cash over the next 6 to 12 months.

Steven L. Polacek

Sure, Joe. This is Steve. So related to our use of cash, so we ended the quarter with about $150 million in cash and cash equivalents. We did have an additional authorization for share repurchases from our Board and during the quarter of about $50 million. We fully intend to utilize that authorization over the next year or so. During the quarter, we've essentially just used any sort of securities from an options or restricted stock units invested. We've gone ahead and bought those back. But we are very mindful of the balances that we have there and as to-date, after investing in the business, we've gone ahead and done quite a bit of share repurchases over the last 3 years. So in addition to looking at that comments that we made before is that, as the fundamentals of Capella continue to stabilize, we would look at, if that makes sense, to maybe pay a cash dividend. So that's in our sort of dialogue and discussion. Nothing has obviously been said and still yet on that, but it's something we continue to evaluate. But we are very mindful of the buildup in the balance and that we have an authorization out there that we do intend to go ahead and utilize.

Operator

[Operator Instructions] And there are no further questions at this time. I will now like to turn the call back over to Kevin Gilligan for closing remarks.

J. Kevin Gilligan

Okay. Thank you, April. I just want to thank everyone for joining us today. We continue to be very excited about the progress we're making in the market. And if you have additional questions, please contact Heide Erickson. Thanks again and have a great day.

Operator

Thank you for joining today's conference call. You may now disconnect.

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