Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Capella Education Company (NASDAQ:CPLA)

Q4 2013 Results Earnings Conference Call

February 18, 2014, 09:00 AM ET

Executives

Heide Erickson - Director, Investor Relations

J. Kevin Gilligan - Chairman and Chief Executive Officer

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

Analysts

David Chu - Merrill Lynch

Jerry Herman - Stifel

Jeff Silver - BMO Capital Markets

Timothy Connor - William Blair & Company

Jeffrey Volshteyn - JPMorgan

Corey Greendale - First Analysis

Adrienne Colby - Deutsche Bank

Peter Appert - Piper Jaffray

Trace Urdan - Wells Fargo Securities

Operator

Good morning. My name is Jenifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Capella Education Company Fourth Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. I will now like to turn the call over to Heide Erickson. You may begin.

Heide Erickson

Thank you, Jenifer, and good morning, everyone. Welcome to our fourth 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 and year end 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 fourth 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’ll 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. Let me start by saying that I’m very pleased with Capella’s execution and progress in 2013, including delivering annual new enrollment growth in a challenging market environment. While the pace of improvement has been a bit uneven quarter-to-quarter, we’re making steady progress towards achieving our goal of returning to sustainable total enrollment growth,

In today’s call, I’ll reflect back on the momentum we established in 2013, Steve will then discuss our fourth quarter results and our first quarter 2014 outlook, and then I’ll share with you how we’re thinking about the full year of 2014.

In 2013, we made progress on a number of important fronts. We continued our shift to a relationship in brand-driven marketing strategy, delivering annual new enrollment growth of 2%. We invested in long-term performance improvement through our learner success initiatives, resulting in a 4% improvement in our early cohort persistence. We drove innovation in our academic business models, resulting in the introduction of FlexPath and the strong performance of our leaner success grants.

And finally, we managed our cost structure in line with the business environment and our strategies, delivering improved operating performance and earnings per share growth over 2012 and lower revenue.

We entered 2014 in a stronger position than one year ago. We’re more competitive, we’re more differentiated and we’re proving we can execute successfully in tough market conditions. I don’t expect 2014 to be easy, but I do expect we can build on the solid progress we made in 2013.

I like to now hand the call over to Steve before I talk more about what’s ahead in 2014. Steve?

Steven L. Polacek

Thank you, Kevin. Earlier today we reported a solid fourth quarter 2013 fiscal year in the face of a challenging market environment. I’m particularly pleased with the work of our organization to drive efficiencies throughout Capella, achieve annual new enrollment growth and deliver year-over-year operating income improvement on lower revenue even as we continue invest in our long-term growth initiatives.

During the fourth quarter, we initiated our first quarterly cash dividend of $0.35 a share. This is a significant milestone as it speaks to the Board’s and management’s confidence in our business model and stabilizing business fundamentals.

Our first and foremost focus is investing the success of our learners and Capella’s long-term sustainable growth. Historically, we have returned cash to our shareholders through share repurchases which we expect to continue.

In the fourth quarter, our performance was in line with our expectation in terms of new enrollment, total enrollment, revenue growth and operating margin. Revenue for the quarter was $106 million, down 0.9% year-over-year, primarily due to lower total enrollment offset by tuition increase of 2.8% in July 2013 for Capella University.

Total enrollment declined by 2.5% for the fourth quarter and new enrollment declined by 6.8% from fourth quarter 2012. New enrollment in Doctoral and Master’s program increased slightly in the fourth quarter.

On annual basis, all our degree programs delivered new enrollment growth with graduate programs performing the strongest as a significant milestone and fixed to our value proposition and differentiation.

The decline in new enrollments during the fourth quarter was related our bachelor programs. We expected new enrollment to be volatile in the current market environment. In addition, we made changes to the ongoing of perspective learners, particularly in the bachelor programs which put pressure on new enrollment. It’s important to view these results in a context of positive persistence improvements.

Over last two years, we have systematically invested in our analyst capabilities and tested our assumptions to drive learner persistence. While our new enrollment for the bachelor programs was down, first course success rates were up significantly. This speaks to our increasing capabilities to segment perspective learners. We’re encouraging learners that are not ready for the academic experience at Capella to take additional steps to prepare which puts pressure -- putting pressure on new enrollment growth.

Assuming the strong first course persistence improvement continues to the next four quarters, we would expect bachelor persistence to improve and the financial impact of lower new enrollment to be minus to neutral on total enrollment and revenue over the long-term.

Early cohort persistence across the university improved by over 4% compared to last year. This metric is the change in four quarter moving average early cohort persistence rate, calculated from the learners first quarter census date through fourth quarter census date. Variability in this metric is constable; we’re pleased with the consistent strong year-over-year improvement throughout 2013.

Revenue per learner based on Capella University revenues was up slightly related to tuition increases offset by grants in [co-field] revenue. The consolidated operating margin for our fourth quarter was 15.8% compared to 14.1% last year.

As I said earlier, our teams were very diligent in managing cost across the organization. In addition, we had the benefit of decreased depreciation expense throughout 2013. As we focused on our -- as we increased our focus on learner success, we’ve also been able to reduce bad debt.

Bad debt expense was 3.6% of revenue compared to 4.8% during the fourth quarter of last year. Marketing and promotional expenses were up year-over-year, primarily due to the introduction of our branding campaign in late November and increased marketing spending in our new market including RDI, our international subsidiary.

As expected Capella University marketing cost in fiscal year 2013 were down from the prior year. Other income for the quarter was up primarily related to foreign currency exchange fluctuations. Let me now spend a moment on our full year financial performance.

As Kevin outlined earlier, our performance indicators strengthened in 2013. For the full year new enrollments grew 2% year-over-year. We began reporting an early cohort persistence metric at the beginning of 2013 and achieved improvements at all degree levels for the year. Across the university the improvement was 4%.

Average quarterly total enrollment growth for 2013 was down 2%, but improved two percentage points year-over-year from a decline of 4.1% in 2012. Revenue was down 1.5% and the operating income margin improved slightly to 14.4%. And operating earnings improved on lower overall revenue reflecting strong cost management.

Finally, capital expenditures in 2013 were 4.5% of revenue, primarily related to investments in our data warehouse, cyber and other security, the university website and upgrades in maintenance of our systems and software.

From a cash flow perspective, we generated $60 million in cash from operations during the quarter, $69 million for fiscal year 2013 and ended the quarter with the cash and marketable securities of $160 million. Capital expenditures for the fiscal year 2013 of $19 million with 4.5% of revenue, and are expected to be in the same general percentage range in fiscal year of 2014.

We repurchased 64,000 shares during the fourth quarter of 2013. The remaining share repurchase authorization as of the end of our fourth quarter is approximately $49 million. The dividend we initiated during the quarter was paid in early January.

Let's turn now to our outlook for the first quarter of 2014. We're expecting year-over-year new enrollment growth for Capella University to be slightly positive compared to the same period in 2013. Total enrollment to decline about 1.5% to 2.5%, and total revenue to be flat to down 1% year-over-year compared to the 2013 first quarter.

The main driver for slightly positive year-over-year new enrollment expectations in the first quarter is our execution in a volatile overall market environment. The expected performance of our bachelors programs is the [chasing point.]

After a significant year-over-year new enrollment decline in the fourth quarter, we expect bachelor new enrollment in the first quarter to still be under pressure but declined less than in the fourth quarter. Inquiry patterns for all our degree programs are strong and less predictable since we are engaging perspective learners earlier in their decision process.

The changes we are making to drive their success will continue affecting new enrollment. However, we don't believe it will have a significant impact on total enrollment over the long term, given the early persistence improvements we are seeing.

Total enrollment in the first quarter is expected to be down, primarily due to the new enrollment performance in the fourth quarter and quarterly fluctuations in re-registrations partially offset by continued early cohort persistence improvements.

We expect year-over-year revenue growth to decline less than total enrollment. This is primarily related to our expectation that Capella University revenue per learner for the first quarter will be up slightly compared to the first quarter of 2013 and due to the contribution of our businesses outside of Capella University.

Operating margin in our 2014 first quarter is expected to be about 14% to 15% of revenue compared to 14.4% during last year's first quarter. Investments in learner success and marketing are expected to be at similar levels as in the same quarter last year.

Other income and expense during the first quarter is expected to be similar to the 2013 first quarter. The tax rate for the first quarter and the full year 2014 is expected to be about 39%, down from 41% in 2013 primarily related to changes in our foreign tax rate.

We are ending 2013 with improved operating margins and are making progress towards returning to top line growth. We are confident in our strategy and our ability to continue to execute in the current environment. Our strong balance sheet and significant cash position allow us to make investments to drive short and long term performance and shareholder returns.

With that Kevin will talk more about our thinking for 2014. Kevin?

J. Kevin Gilligan

Thanks Steve. We're approaching 2014 with the same mindset as 2013, including that the market environment will remain challenging and volatile, that after stabilizing performance trends in 2013 further improvements are achievable and that by continuing to execute our strategies we will position Capella for long term sustainable growth.

In this environment we believe moderate annual new enrollment growth is attainable, while the timing of our anticipated return to total enrollment growth is shifting towards the latter part of 2014. We are confident that we're on a path to total enrollment growth. As important, we believe we can again achieve, on relatively flat revenues, operating margin improvements in 2014, including contributions from our businesses outside of Capella University.

The primary reasons for our optimism are improving annual trends we already discussed, encouraging demand trends particularly related to inquiry flow, continuing early cohort persistence improvements and our new innovative product offerings that we have not yet fully leveraged.

Let me touch on the underlying strategies that are fueling this optimism. First, our relationship focused brand marketing strategy; second, our learner success initiatives; and third, leveraging our competency-based learning model to drive innovation.

With regard to our marketing efforts, last year we continued to optimize our relationship focused brand marketing strategy and engaged with perspective learners earlier in the decision cycle. This strategy delivered new enrollment growth and supported our early learner success initiatives by attracting new learners that are better prepared to succeed at Capella. We made investments in new brand positioning, invested in our analytics capabilities to increase marketing efficiencies and effectiveness, and improved self service capabilities for perspective learners.

In 2014 we're completing the roll out of our new brand campaign. The purpose of our new branding campaign is to further increase the awareness and consideration of Capella by emphasizing that our competency-based programs are designed to teach our learners what they need to know to move forward in their profession.

Our course work is designed around professions so that our learners can immediately apply what they learn, and that Capella offers the most direct path to achieve their educational goals without wasting or money on the journey. We believe this will resonate perspective learners that can succeed at Capella and further differentiate Capella in the marketplace.

As we enter a perspective learners' consideration set, we want to engage with them in ways that will let them understand Capella's differentiation. To do this, we will leverage technology investments and continue to refine our marketing strategy to increasingly personalize a perspective learner experience.

With the analytics capabilities we develop, we believe we can provide perspective learners with the information they are looking for, when they are looking for it and to go beyond that to proactively provide additional relevant and useful information to them. The foundation of this strategy is the use of technology in analytics to create stronger personal connections. We believe this will ultimately create marketing efficiencies.

Our marketing strategy continues to evolve. In 2013 we achieved annual new enrollment growth for Capella University, while keeping overall cost for new enrollment below 2012 levels. Our goal for 2014 is to again deliver modest annual new enrollment growth without increasing cost for new enrollment, while building our marketing capabilities to position us for long term sustainable new enrollment growth.

We're entering 2014 with strong inquiry trends. Capella's consumer brand awareness is stronger than we've ever seen. Brand recognition has more than doubled since 2013 and early indications from our new branding campaigns are very positive. We're optimistic that we'll continue to hold our own in an increasingly competitive environment, and that we have the right marketing strategy in place.

The second driver for our performance in 2014 is learner success. We're excited about the momentum we've established around learner success and there's potential to create value for both our learners and our shareowners.

Our results in 2013 demonstrate that early cohort persistence can be improved significantly. For example, looking back over the last few years we had the highest first course bachelor success rate for the October cohort. These improvements came at a price of new enrollment growth. However, we believe that long term this is the right strategy.

We won't get it right every quarter and our learner success initiatives could cause disruptions for our current learner base. We are minimizing this risk by thoughtfully and deliberately implementing changes that we test whenever possible and then systematically introducing them across the university.

In 2014, we will continue backing our commitment to learner success with new investments as we are developing technology and new capabilities to support our learners more effectively and efficiently. For example, we launched the pilot in 2013 to further refine how we identify, track and support learners that are not succeeding in the course.

Faculty and advisors are now working in concert to help identify specific interventions that will help learners stay on track. By personalizing these interventions, we are in a much better position to effectively support learner needs and positively impact persistence.

We expect to fully roll out these new tools to all schools in 2014. We believe these and other initiatives will continue to drive early cohort persistence improvements in the 3% to 4% range, recognizing it will become increasingly challenging in future years and will require continued investment and innovation.

Finally, I'd like to touch on how we're leveraging our competency-based learning model to drive innovation and growth. The example we've talked the most about is our FlexPath offering. As a reminder, in our FlexPath program learners acquire and demonstrate the reclusive competencies, accessing material, peers and academic support on their own terms and at their own pace.

Learners must demonstrate that they have achieved the reclusive competencies through authentic assessments. They do not need to sit through classes to study material they already know. This can result in increased flexibility, speed to completion and significantly reduced cost.

We're at the leading edge of developing and offering new competency-based direct assessment learning models, and are in a position to set high industry standards for this new model. Our goal is to make sure we have the right learner experience and understand what our learners need to succeed.

We take this responsibility seriously as the first bachelor and masters level direct assistance programs approved by the Higher Learning Commission and the Department of Education. That's why we've limited FlexPath enrollments to below 100 learners in the fourth quarter.

Over the coming quarters we will assess early results, optimize requirements and continue to fine tune this program. Early indication is that the long term potential for this offering could significantly change higher education as we know it. We believe the demand will build as the market becomes more aware of this offering and its powerful benefits.

Beyond FlexPath we're working on a broader suite of new innovative offerings that are leveraging our competency-based learning model, direct assessment and deep analytics capabilities. These are particularly targeted to provide employers solutions. This is a very exciting time in education and we intend to be a leader.

We'll take continued innovation, differentiation and execution to drive long term growth. We are confident in our strategies, encouraged by demand trends moving in our direction and excited about our long term opportunities.

We are entering 2014 in a stronger position and we're working towards further improvements this year. It will require hard work and strong execution by our team that I believe are up to the challenge. We expect some quarterly choppiness and we'll measure our performance on our annual trends.

With that we'd now like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of David Chu with Merrill Lynch.

David Chu - Merrill Lynch

Hi. Good morning. Last quarter you mentioned that the Department of Ed. implemented these additional verification steps for certain masters' degree programs for students. Are you -- did you see an impact in the fourth quarter?

Steven L. Polacek

Yeah. Good morning, David. This is Steve. You know, as far as those verification procedures that didn't have as much of an impact in the fourth quarter as the primary factor, primarily again just the competitive nature of the bachelor programs in general, the competition there, as well as the volatility in the marketplace. We currently did those internal changes that we've talked about. That would have had more of an impact than really the verification procedures, more of our internal versus regulatory changes on our -- on impact relating to bachelors growth.

David Chu - Merrill Lynch

Okay. Thank you. And see, so is it -- will there be an impact on timing of start date from 2012 -- sorry, 2014.

Steven L. Polacek

You know, as far as the timing of starts, and I think maybe your question is leading to if we have different cohort starting maybe in second and third month, could that have an impact, for example, on our total enrollment numbers. And in the past that has happened and we would expect that to continue.

For example, in what we're seeing from a trend perspective here in the first quarter, that we're seeing probably more strength, I would say, in the back half of our first quarter than we probably saw in January. So that is an example where we could have some impacts going down into the second quarter relating to total.

David Chu - Merrill Lynch

Okay. And last question. You spoke about encouraging inquiry flow in the prepared remarks; can you provide some more details on what you're seeing?

J. Kevin Gilligan

Yeah. Hi David, it's Kevin. Good morning. So we launched our new brand campaign towards end of last year. And we're excited about it because we think the message is resonating very well with our target market. And in January we started to see a pickup in inquiry flow. It's a pretty healthy rate and that's continued into February. So we're excited about that and I think it's going to create opportunity for us as we go through 2014.

David Chu - Merrill Lynch

Okay. Thank you.

J. Kevin Gilligan

You're welcome.

Operator

Your next question comes from the line of Jerry Herman with Stifel.

Jerry Herman - Stifel

Thanks. Good morning, everybody. You guys spent money on new business developments, specifically SOPHIA and RDI. I'm wondering if you guys could frame the impact of those businesses in 2013, and how they might serve as a, I'm assuming positive swing in 2014; and also, if you can help us with any sort of uptake rates on the usage of SOPHIA.

Steven L. Polacek

Sure. Good morning, Jerry. This is Steve. So I'll respond to our diversification efforts and impacts on '13 and '14. So as far as from the financial perspective, the revenues outside of Capella University, for those businesses and some of the corporate solutions stuff that we do with some of our partners that's generally been about 4% of our revenues, and that's going to vary maybe quarter-to-quarter between 4% and 5%. So that's about sort of total impact on the top line.

When it comes to operating income performance, in total those have been diluted to our margins of about two to three points historically. As we move into 2014, as we scale up those operations, particularly as it relates to RDI, our U.K. international subsidiary, we're expecting to see continued operating losses in 2014 for RDI, but diminished a fair amount from 2013.

Part of that is just going to be relating to some purchase accounting amortization that falls off, but also we're seeing some revenue growth and better efficiencies in our marketing efforts there that are going to be included in our results. So as we -- we see that burden in '14 reducing, which we believe will have a positive impact on our overall margins.

Right into your second part of your question relating to SOPHIA, we're very pleased with SOPHIA on a couple of fronts, particularly as it relates to the SOPHIA pathways for college credit. We've got the primary customer continues to be Capella University. There is a large up-tick by our bachelor programs relating to taking those generic requirements. They generally take more than one SOPHIA course.

What we're seeing is success rates being excess of 80%. So that's encouraging. We're also seeing other students, even though we haven't significantly marketed it, take SOPHIA courses and then on their own go to other universities to get transferable credit because they have the ace credit recommendation on above 11 of our courses.

So we're seeing a nice sort of up-tick in there. You'll also note that we've done one other thing relating to SOPHIA as it relates to our bachelor programs that we have a success grant or an advance grant we call it, that a new learner and the bachelors program can elect to take our traditional 6,000 learning success grant, or take an advance grant that they can take their requirements, generic requirements under SOPHIA for free. And that would be a savings of around $13,000 to $14,000 on a bachelors degree. So we're using that as a differentiation, and we're seeing some nice applications relating to that program.

J. Kevin Gilligan

And Jerry, this is Kevin. I just would add the -- on RDI we saw growth in 2013 and we anticipate enrollment growth in '14. So as volume build on that business that creates opportunity as well.

Jerry Herman - Stifel

Great. And Ken, there's a follow up for you, just help me reconcile my thoughts there. You said that you had your highest first course success rates ever in October, yet I thought right after that you said it actually impacted the new enrollment numbers. And I mean that doesn't -- that seems to conflict with each other I guess. Actually it's more focused or making it through first course that would imply that that would actually help enrollment.

Steven L. Polacek

Jerry, this is Steve. Let me answer that. So what we're referring to is the some of the upfront things that we do relating to assessments and orientation have negative impacts to new enrollment. Those students then who actually have taken the orientation and going through the assessments articulated into Capella University take their first course. We've seen those rates go up significantly. So that is the upfront that impacted the new.

Jerry Herman - Stifel

Got it.

Steven L. Polacek

Not necessarily the path in the first course. What we then expect is with that higher level of first course success that as they go through their programs we've got a higher base of people, student -- learners going through their program which will improve persistence going forward otherwise we have lost those people probably in quarter or two anyway.

Jerry Herman - Stifel

Great. That makes sense. And then just a quick one, D&A for this year, Steve.

Steven L. Polacek

Yeah. Depreciation, amortization is going to be down probably a couple million dollars from 2013 level. That's reflective of the decline in capital expenditures that we've done over last few years. So we're at that 6% plus range. And for '13 and '14 we're looking around 4.5%. So we've got the decline in depreciation. And, as I mentioned, we have some purchase accounting amortization on RDI that’s burning off as well.

Jerry Herman - Stifel

Great. Helpful guys. I'll turn over.

Operator

Your next question comes from Jeff Silver with BMO Capital Markets.

Jeff Silver - BMO Capital Markets

Thanks so much. In your prepared remarks you mentioned some changes into the [unrewarding] pieces. I think it was specific for bachelor students. Can we just get a little bit more color on what happened? Thanks.

Steven L. Polacek

Yeah. Jeff, this is Steve. So this is consistent, what we've talked about relating to our last quarter call that we were increasingly putting additional tools and sometimes requirements for incoming students across our university, but particularly at the bachelors level. And so, the [unrewarding] pieces includes those assessments, those orientations, but also some of the support that we're providing to learners whether it'd be helping out with writing skills, time management, some of those particular tools.

We're also continuing to modify our first course offerings to be more geared towards those particular learners who need help, so segmenting them into the right sort of cohort. Those are the type of things that we're doing. And as we move into 2014 we're increasing those particular efforts across the university and across our programs.

Jeff Silver - BMO Capital Markets

Okay. Great.

J. Kevin Gilligan

Could I -- I just could add to that too. Underlying this is our analytics capability and we're not only applying analytics on people that apply to Capella to understand whether they're really prepared for Capella academic experience and what support they might need, but we're also starting to apply analytics up the funnel into our prospect base. And we believe the sooner we can get to know our prospect better, the more value we can deliver to that prospect ensuring getting them at the right place at the right time, so underlying capability is our analytics.

Jeff Silver - BMO Capital Markets

All right. Great. That's helpful. I appreciate that. I'm sorry to bring up some regulatory issues, but I was just wondering if you can comment on the new proposals for gainful employment. I know that they are nowhere near final yet, but it looks like it may adversely impact companies like yours or schools like yours that have a greater focus on graduate degree programs, they're talking about changing the way that they deploying calculating that. I'm just wondering if you look into that at all what you think the impact would be. And are there any courses that you might have to restructure or change? Thanks.

J. Kevin Gilligan

Sure. Well, this is Kevin. So I would say, I think it's really premature to speculate. There is still a lot of conversation that's going to occur before the final rules that are settled on. We would acknowledge that the requirements that are currently being discussed are probably a higher level than the previous requirements, but we've always been able to demonstrate our ability to meet emerging and unfolding regulatory requirements.

And I'm confident that we'll be able to do that going forward and adapt if we have to, if we find that we've got a particular program that needs some tweaking. I would also say that we were very actively engaged in the dialogue in the past. I feel like our voice was heard. And that we will, I believe, continue to be visible and vocal going forward.

Jeff Silver - BMO Capital Markets

Okay. Fair enough. Thanks so much.

Operator

Your next question comes from Tim Connor from William Blair.

Timothy Connor - William Blair & Company

Hi, thanks. It sounds like bachelors new enrollment was down significantly, maybe 20% or more. Do you feel like there are some changes you've made that over filtered bachelors new enrollment?

J. Kevin Gilligan

Yeah. Hi Tim, it's Kevin. So yeah, I think bachelors is more negative than we expected it to be. We expected it'd be down in the fourth quarter, but it was more negative, and I think there were really three factors. There was the impact from the orientation programs that we're putting in place to try to make sure that the learners were enrolling can be successful, but clearly we're impacted by the market. I think some of it was volatility and some of it was competition.

We are -- we have -- we continue to make refinements on a real time basis at all degree levels including the bachelors to address competitiveness issues. So, for example, we refreshed our learner success brands going into the first quarter. I think that will help us. We added a SOPHIA grant at the bachelors level and we're seeing nice interest in that new offering. And I think the new branding campaign is going to help as well.

So, I'd say from a strategic standpoint, I believe our undergraduate programs are competitively positioned well. And that I expect our bachelors new enrollment performance to improve as we go through 2014. As I think Steve mentioned in his remarks, we expect fourth quarter to be markedly better than our first quarter, to be markedly better than the fourth quarter. So I think it just reflects the fact that the market is competitive. And execution matters. And you have the [bigger] execution every quarter.

Timothy Connor - William Blair & Company

Got it. And FlexPath, you've limited the enrollment there in the fourth quarter. Not sure if you'd mentioned are you planning on eliminating in future quarters? And if so, when do you think you'd be prepared to exit the trial stage?

J. Kevin Gilligan

Yeah. So we talked about this I think at our last call. We really want to get a few quarters under our belt to get experienced with the academic model and really understand what it's going to take for learners to be successful. So I think we've got a few more quarters to go. So we are sort of managing new enrollments, constraining new enrollments in a very deliberate way.

I would say that early results; and this is on a limited sample, so we have to caution, but the limited results so far are very positive. We're seeing very high satisfaction rates and high completion rates which is great, very high re-registration rates and a significant percentage of the learners that participated in FlexPath move through the program faster than what you'd normally see as occurred at our program.

So that gives us reason to be encouraged, but I do think we need a little more time with the program before we start thinking about moving to the next phase. And I think we'll be evaluating that in mid year and having to make a decision about what's the right growth trajectory for this program and what's the appropriate level of investment.

Timothy Connor - William Blair & Company

In your full year new enrollment guidance start moderate growth, are you building any expectation for an increase from FlexPath, or any sort of other one-timer changes?

J. Kevin Gilligan

Yeah. We're -- we built in some modest contribution from FlexPath.

Timothy Connor - William Blair & Company

Okay. And final question for me, I think you said marketing spend per new enrollment should decline this year. It was up from the fourth quarter, was that more of one-time related to brand or FlexPath?

Steven L. Polacek

Yeah. Tim, well, this is Steve. You're exactly right. That was more related to the starting the roll out of our grand campaign and expensing a production type cost. In the quarter we started that in November and continued to roll that out in December. So it's more related to that. For the year '13 we saw with some 2% enrollment growth and some decline in overall marketing cost for Capella University, so our cost of enrollment declined in '13 and that's kind of going in plan for 2014 as well.

Timothy Connor - William Blair & Company

Thank you very much.

Operator

Your next question comes from Jeff Volshteyn from JPMorgan.

Jeffrey Volshteyn - JPMorgan

Hi. Good morning. Thank you for taking my question. If you give us a little more color on new enrollment dynamics by areas of study in the fourth quarter, and looking forward into the first quarter are there any notable differences between them?

J. Kevin Gilligan

Yeah. Good morning, Jeff. It's Kevin. I'll start. So I think we mentioned in our remarks that our graduate program showed modest growth. And the bachelor programs were weaker. We've commented on that. I'd say at a program level the programs that are healthcare related nursing for example, mental health, counseling, healthcare administration, programs of that nature continue to perform well in the fourth quarter. And I would say education continues to be the area that's the most choppy and challenging for us.

Jeffrey Volshteyn - JPMorgan

That makes sense. When I look at the admission expenses, it seems that they continue to realize cost efficiencies there even with declining revenues. How much productivity improvement these have left before it has to basically start reinvesting in the function?

Steven L. Polacek

Jeff, this is Steve. Relating to our admission advisory line item in our P&L so that takes -- includes our, primarily our enrollment councilor and some of the support staff that relates to that sort of part of the function. So we have in 2013 started to increase some of the staffing there. But we have -- we've been -- we still have tools and technology to help them become more efficient so that they can, have more pointed dialogues with prospects focused on the ones that are of the highest potential. So we still have an ability to drive efficiencies.

I would expect that as you go forward into 2014 that that line item is going to be relatively flat. So that even though we have some new enrollment growth expectations that we're going to be able to through our efficiencies continue to remain staffing levels pretty much where they are at. So I would say that we've got some -- still have some opportunities there, but we don't expect any sort of big jump in that line item.

J. Kevin Gilligan

And Jeff, this is Kevin. I just would add from a strategic standpoint so I can just elevate the question. I continue to believe that we have a good opportunity to continue to reduce our total cost per new enrollment over the long term. And I think as we -- and the key investments there are building our brand, strengthening our channels and continued application of analytics as a conversion tool. And we still have I think really exciting one way left there.

Jeffrey Volshteyn - JPMorgan

Very helpful. One last question for me. Is there an impact from the number of SOPHIA in the first quarter of '14 versus a quarter year ago? And this is impact on revenue per learner.

Steven L. Polacek

Jeff, this is Steve. As far as the fourth quarter in SOPHIA, that's going to be more flattish. We do have, as you know, a volatility in that metric and we saw that in the fourth quarter of 2013 where we had a decline there. But as far as the first quarter, we don't see that one way or the other. Generally we're expecting an increase in revenue per learner in the first quarter, primarily as it relates to the price increases rolling through. Everything else is pretty stagnant.

Jeffrey Volshteyn - JPMorgan

Great. Thank you so much.

Operator

Our next question comes from Corey Greendale with First Analysis.

Corey Greendale - First Analysis

Hey, good morning. Just a quick clarification. Steve announced in an earlier question, you said you expected similar trends in marketing and promotional in '14. Did you mean you expect a decline for Capella University? And specifically in Q1 you still have a flow through impact from the brandings that's higher than usual even that they start till November.

Steven L. Polacek

Hi Corey, this is Steve. Yeah, so it's relates to my comment on '14. It was really related to the cost per new enrollment. So the metrics of what our M&P spend will be versus the enrollment that we're going to get that we're expecting efficiencies to get there. So that's what really my comment was meant to be.

When it comes to the first quarter, as far as marketing spend, it's going to be pretty consistent with the last year's first quarter. We do have some of that brand spending coming into the first quarter, but then we offset weather decline and other sort of spend that we do. So we're diligent in managing our sort of overall budgets on a quarter-by-quarter basis.

Corey Greendale - First Analysis

Okay. Thank you. And then on a high level, in your commentary about the enrollment funds are encouraging and certainly the modest student growth in Q1 will be encouraging given that the comparison gets a lot tougher.

In the press release you also talked about expecting -- you don’t expect to return to total enrollment growth into the latter part of the year and I think last quarter, you were still hopeful it would happen in first half of ’14, so could you just comment on that and what has changed to making you think its later than you would have thought last quarter?

Steven L. Polacek

Yeah. Corey, this is Steve. So, what’s occurring for us to move from the goal that we had for returning from the second quarter to later into ’14 is a couple of factors. One is just related to the new enrollment performance in the fourth quarter which was little bit -- even though it was within our sort of overall expectations, it was on the lower end of it. So, that had an impact.

We also have the impact relating to re-registration, particularly as it comes to sort of later cohort. So, that can -- we have a -- in our forecasting model, we have some ranges on that and that can fluctuate long standard deviation one way or the other. So, we have a little bit of decline from there, but still kind of within overall expectation. So, that kind of pushes us out a little bit later into 2014.

We also can have some impacts relating to timing of the starts. I know there was a question earlier on the call. That can have impact on the total enrollment numbers. But when it comes to turning positive, particularly when you’re sort of at that breakeven point, you can have a quarter where it’s slightly positive and go slightly negative. It kind of depends on sort of enrollment patterns as well, but that’s really the dynamics.

For us to get the return to total, we’re going to have to have moderate new enrollment growth, which is what our expectation is and continued early cohort persistence improvements as we said in our prepared remarks that we’re planning for that as well. So, those are the dynamics that lead to that assessment.

Corey Greendale - First Analysis

And one last quick one from me. I know it’s early with FlexPath and I imagined you’re thinking a lot about how you’re going to position it. And I was thinking that offering is going to be attractive to a lot of your historical demographic in the working no population, so how are you thinking of marketing that positioning in relative to your legacy program so that it doesn’t cannibalize between [degree] investing program?

J. Kevin Gilligan

Yeah, hi Corey, Kevin. Thanks for the question. That’s a good question and it is one we’re giving a lot of thought to. So, I would say that there’s -- I think there’s clearly going to be some part of our traditional leaner base that’s going to attracted to FlexPath, but I think there’s the potential to expand our addressable market to address non-consumers of higher education today, because the existing credit-hour model doesn’t really meet their needs.

So, I think there’s going to be some of both and I’m comfortable continue to innovate even if it means we have some cannibalization of our current leaner base because ultimately innovation improves competitiveness and leads to growth.

Corey Greendale - First Analysis

Okay, fair enough. Thank you.

Operator

Your next question comes from Adrienne Colby with Deutsche Bank.

Adrienne Colby - Deutsche Bank

Hi, thanks for taking my question. I was wondering if you could comment on where you think you are in terms of road of mandatory orientation. Is that something you think would be fully rolled out by the second half of 2014?

Steven L. Polacek

Hey, Adrienne, this is Steve. Good morning. So, as far as the orientation, we will increasingly expand that across our program. This is going to take us a couple of more quarters. I will say that when we talk about mandatory across all our programs and all our leaners, that’s not necessarily what’s going to end up happening.

For example, there’s going to be some leaners that there’s no need for them to take an orientation. Example would be our bachelor graduates that go on to take another degree -- a Master’s degree at Capella University. And that’s say 20% or so of our graduates do that. There’s no reason for them to go through our orientation, because they’ve already proven that they can operate under a online environment.

So, as we look at it, we’re going to continue to increase the number of leaners that we’re going to be asking to do that. But there always will be some exceptions relating to their sort of real academic readiness and things of that sort. So, that is just going to take us at least a couple of more quarters before we fully get that rolled that.

J. Kevin Gilligan

And Adrienne I just would add -- this is Kevin. The idea here is we want to use whatever technology and tools we can to better understand leaners as early as possible so we can align them to the program and the make the most sense for them and giving the support that they need.

And so mandatory -- the orientation program that we’re talking about is one of the existing tools, but I think what you’re going to see at Capella is we get more refined and persecuting use of analytics that could be replaced by other things and so I think the way to think about it is we’re always going to be interested in finding ways to more deeply understand leaners early, so we can better support them. I think that’s the right thing to do.

Adrienne Colby - Deutsche Bank

Thanks, that’s helpful. And I think in the past you had commented that the contribution from non-Capella University revenues was about 5% in the second half and more towards the 4% in the first half. Is that fair to assume that’s for fourth quarter and as we go into 2014?

Steven L. Polacek

Yeah, Adrienne, this is Steve. So, the businesses outside of Capella University in the fourth quarter was closer to around 4.5% of our revenues -- so kind of in that general 4% to 5% range. It will be a little bit higher than that in the first quarter just related to some special projects that we have. But as we go forward into ’14, it’s going to still hover around that 4.5%.

Adrienne Colby - Deutsche Bank

Thanks. And if I could just ask clarifying question. I think David was asking if you’re about visibility into the first quarter. So, I want to make sure I understand correctly, so would you say that January is about equally as important as what you’re seeing in terms of enrollment trends for February, just trying to get a sense of the importance of those three months in the quarter.

Steven L. Polacek

Yeah, so as far as the enrollment numbers, when you look particularly in the first quarter, January is always going to be the quarter -- the first month of the quarters where you’re going to have the largest enrollment numbers coming in and then it trails off in the next couple of months. So, January is really important.

My comment was really related that we saw -- when you look improvements compared to a year ago; it’s more related to what we’re seeing in the -- in February and expectation for March.

Adrienne Colby - Deutsche Bank

Great. Thank you very much.

Operator

Your next question comes from Peter Appert with Piper Jaffray.

Peter Appert - Piper Jaffray

Thanks. So, haven’t you guys called out the inquiry patterns being stronger yet still fairly cautious around the start numbers? So, anything specifically about conversions or changes in conversion rates you’re saying.

J. Kevin Gilligan

Yeah, hi Peter. No, I think it has more to do with timing. The increase we generate in the current quarter are probably going to be supporting growth in future quarters. So, I would think about it more that way.

Peter Appert - Piper Jaffray

Got it. Thank you. And back to FlexPath, can you remind what the pricing is on that? I assume -- as that thing scale, the cost of delivery of those programs should be considerably lower than your traditional programs, can you speak about how you think about the margin implication in FlexPath growing?

Steven L. Polacek

Yeah, Peter, this is Steve. So, the pricing we have it at the two programs, so bachelor is the like a couple of thousand dollars and then the Master’s program is a few hundred dollars more than that. So, it’s clearly -- and they can take more than one course, they can take up to two courses at any one time. So, it’s a significant sort of benefit to them.

Your point, yes, there is lower cost and delivery, but we won’t see that yet today, because we need to -- you need to get to scale. And what happens, what’s important from a scale perspective, it’s not only going to be the delivery cost, it’s going to be the marketing cost.

So, are we going to be able to attract learners because of the unique differentiated product in the marketplace in a unique way that we can get enrollment at a lower cost new enrollment? That’s going to be part of the dynamics.

The third piece of it that’s going to be very important is going to be related to persistence efforts. We would expect if you have higher quality leaners that are motivated leaners. Their persistent trade will be higher than what you would see in the normal course offerings and the combination of those three we believe will have an attractive margin for Capella University. That’s our sort of modelling pieces today, but we need to prove that out as we scale up the programs.

J. Kevin Gilligan

Now, I just went -- I had one other point here and that is while FlexPath does not have the sort of traditional instructional cost, because leaners are learning at their pace to their means, our faculty do administer aesthetic assessments in our FlexPath program in a same way that we do in our credit-hour bearing program. And that’s a really important comment from the quality standpoint. So, that part won't be scalable compared to our traditional programs and it’s a very important part of the proposition.

Peter Appert - Piper Jaffray

Thanks. I know this is very early, but given the cost is so lower, you’re climbing some significant differential in terms of willingness of students to pay cash as appose to use their federal loan money to pay for the FlexPath program?

J. Kevin Gilligan

I would say it’s too early to indicate any patterns.

Peter Appert - Piper Jaffray

Okay. Thank you.

Operator

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

Trace Urdan - Wells Fargo Securities

Hey, thank you. I just wanted to follow-up quickly the response you gave to Jerry about non-Capella revenues and I think that you said that they were two to three point dilutive and I wasn’t sure if that was referred to 2014 or 2013?

Steven L. Polacek

Hey, Trace, Steve Polacek. Relating to the comment on two to three points, I was referring to historically over the last couple of years, they have been dilutive. Our non-CU business has been dilutive to our margins at that range over the last couple of year.

As we move into ’14, the impact will be diminished as we scale and have some reduced cost, particularly at RDI.

Trace Urdan - Wells Fargo Securities

Okay. And then would you sort of group whatever you’re investing in FlexPath into that comment as well or is that just referring to corporate in RDI?

Steven L. Polacek

I refer that to being the businesses outside of Capella University. So anything that we’re doing relating to FlexPath is within the Capella University, revenues, cost, all that.

Trace Urdan - Wells Fargo Securities

Okay. So -- and is it fair to think that if it’s diminished in 2014, it would be non-existent in 2015?

Steven L. Polacek

Yeah. Trace, I think it’s a little early yet. We early need to get scale on -- more scale related to RDI as well as SOPHIA, but once those scale-up as far as the margin expansion, it should be pretty good. But we’re not commenting into ’15 yet.

Trace Urdan - Wells Fargo Securities

All right. And then I know you’ve been asked about this from every possible direction, but I wondered if you can comment on who are the FlexPath students today? Does he accept that you can characterize their profile at all? Do you have any insights into sort of -- just the folks that have bounded so far and I know that you had kind of a soft rollout and you’re not aggressively targeting a specific population. But can you tell anything about who the people that that find this offering appealing?

J. Kevin Gilligan

Yeah, I would say -- hi Trace, its Kevin. I would say I think the key thing to understand about the early FlexPath adopter because that’s what we’re dealing with, is it’s a motivated career professional and they really see their job as a career not as a job and they bring a lot of experience and knowledge to the table.

And they recognize that they can demonstrate in a very authentic their knowledge and competencies to get academic credit for the areas they have the knowledge and then supplement that to get a degree. So, I think that would be the common profile at this very early stage.

Trace Urdan - Wells Fargo Securities

And I know that you had said in the prior quarter that you were referring some numbers these folks that were intrigued by the offering that you needed to refer them back to SOPHIA to sort of sure up their some credit. Is that still happening? Can you comment on that?

J. Kevin Gilligan

Yeah, but let me clarify that. So, we have established higher admission standard for FlexPath for both bachelors and Master’s level. So, for example, in our traditional credit-hour bearing courses, you can enroll at Capella if you haven’t completed all of your gen-eds. Although that’s not typical that happens. We require FlexPath learners that want to go into our bachelors’ business program to have successfully completed their gen-eds.

And then so if we encounter someone that’s in that situation, we offer both SOPHIA and our traditional credit-hour bearing programs as alternatives.

Trace Urdan - Wells Fargo Securities

Okay. Thank you.

J. Kevin Gilligan

You’re welcome.

Operator

Your next question comes from Tim Connor with William Blair.

Timothy Connor - William Blair & Company

Thanks. Three follow-ups. You -- the dividend yield is well below your free cash flow yield and you have the significant amount of cash in the balance sheet, what would it take you to get more opportunistic on buybacks or is there some other use of capital that there could be something you think about?

Steven L. Polacek

Yeah, Tim, Steve again. So, related to the use of cash, we have -- as I said in prior calls, we bought a fair amount of our stock back over the last several years, ’13 was a lower point from the last few years. And as our business stabilized, we thought another alternative that was -- we're getting -- we think industries were finding attractive us to do a quarterly cash dividend. So we initiated that in December, payable in January and then we intend as we go through the year to continue to be with our Board of Directors and declare those on a quarterly basis.

We will continue to use our share repurchases. Obviously, we’re using some of our cash for dividends. We will probably have a smaller pace of that, but over the period of time a number of factors. The first factor being that we want to make sure we have sufficient liquidity and ability to invest in opportunities at Capella University.

We’re fortunate to have those resources, no debt and cash flow generation capabilities. And we will continue to make sure that we have those investments in place. And then if the opportunity presents itself from a market perspective, we will be using -- buying share repurchases using buying back our stock. But like I said, it probably would be less levels than we probably did in the 2011-’12 timeframe.

Timothy Connor - William Blair & Company

Okay. And then final question from me. The returns in trends in early cohorts don’t seem to be matching the returns in trends in the overall business, probably due to graduation. I guess when do you start to see those to sort of trends converging? And what does that do for margins and returns looking out into the future?

Steven L. Polacek

Yeah. So as far as graduation, because of the large uptake in enrollments that occurred a few years ago, we were starting to see -- we saw last couple of years, significant increase in graduation level. That is starting to stabilize. In 2013, we had a little over 7,000 graduates. That was up about -- only up about 4%, 5%. Before that, it was in the double-digit range.

So, we’re starting to see that sort of stabilize. That is part of the thesis as we look forward into what our total enrollment would be as the depth is going to start leveling off. But again predicting that sort of pattern, we haven’t really laid that out.

Timothy Connor - William Blair & Company

Thank you.

Operator

At this time, we have no further questions. Hence I would like to turn the call back over to Kevin Gilligan.

J. Kevin Gilligan

Okay. Thank you, Jenifer. So, to everyone participating today, thanks for joining us. We hope that we’ve answered your questions. And we continue -- appreciate your continued interest in Capella. If you have any additional follow-up questions, please be sure to contact Heide Erickson. Thanks again and have a great day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Capella Education's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts