Capella Education's (CPLA) CEO Kevin Gilligan on Q1 2016 Results - Earnings Call Transcript

| About: Capella Education (CPLA)

Capella Education Co (NASDAQ:CPLA)

Q1 2016 Earnings Conference Call

April 26, 2016, 09:00 ET

Executives

Heide Erickson - Director, IR

Kevin Gilligan - Chairman & CEO

Steve Polacek - SVP & CFO

Analysts

David Chu - Bank of America Merrill Lynch

Henry Chien - BMO

Trace Urdan - Credit Suisse

Corey Greendale - First Analysis

DeForest Hinman - Walthausen & Company

Operator

Good morning my name is Zack and I will be your conference operator today. At this time I would like to welcome everyone to the Capella Education Company First Quarter 2016 Conference Call. [Operator Instructions].

Heide Erickson, Director of Investor Relations, you may begin your conference.

Heide Erickson

Good morning everyone. Welcome to our first 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 to discuss the first quarter results. Please note that this call may include forward-looking statements made pursuant to the Safe Harbor provisions of 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 uncertainties and risks, including those identified in the Company's first 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 risks may be discussed in future 10-K and 10-Q filings. All filings and reconciliations of non-GAAP financial information presented in this call are available for viewing on our website at capellaeducation.com. Following our prepared remarks we will take questions.

With that I would like to turn the call over to Kevin Gilligan. Kevin?

Kevin Gilligan

Thanks, Heide and good morning everybody. Thanks for joining us this morning. I'm pleased to report that 2016 is off to an exciting start. Our first quarter operating results were generally in line with our expectations. Earnings exceeded expectations due to revenue at the high end of our range and disciplined cost management. These results combined with our second quarter outlook keep us on track with the full year guidance we provided for 2016 in our last earnings call. Steve will walk through the details in a moment.

I'm particularly excited about our progress to position Capella for accelerated growth. In 2017 and beyond and I would like to focus my comments on that work. We have succeeded over the last three years in reestablishing enrollment and revenue growth in our degree granting business at Capella University despite a persistently challenging external environment. This speaks to the strength of our differentiates and our ability to adapt and execute in a difficult and changing market. And as I’ve said before while low single digit revenue growth in this environment is respectable I believe we have the opportunity to do better. As our market place evolves our strategy of leveraging our unique competency based learning and assessment capabilities to create the most direct path between learning and employment is the key to unlocking new growth opportunities. The most direct path means there is no wasted time, money or effort in obtaining job ready 21st Century skills that are on high demand by employers.

Our most direct path innovations will drive growth by expanding our addressable market, creating new sources of revenue and better positioning us to deliver differentiated value to both consumers and employers. We're making good progress expanding our product portfolio and go to market channels to develop these new growth opportunities. FlexPath was our first significant most direct path innovation and we remain pleased with our results and excited about the potential of creating a new game changing category in higher ed.

With FlexPath learners can break away from the traditional credit hour system obtaining degrees based on the authentically assessed demonstration of competencies as opposed to the accumulation of credit hours. This is a hugely important innovation for working adult professionals who bring significant work experience and competencies into the course room.

FlexPath provides them with unprecedented levels of flexibility, speed and affordability while mastering new competencies that improves their employment outcomes. We now have over 2000 learners enrolled in our FlexPath programs and over 200 graduates. The experience of our initial graduates demonstrates the potential of meaningful time and cost benefits available through FlexPath.

For example, our Bachelor's and Business FlexPath graduates through the end of 2015 completed their degrees in half the time and cost compared to the average experience of similarly situated learners in our traditional credit hour program. FlexPath MBA graduates finished in about two-thirds of the time compared to the average experience in our traditional credit hour program. These results validate that for the right learners FlexPath is a very attractive choice and a powerful value proposition. We believe overtime that upto 40% of the working adult market will prefer a flexible degree and Capella is poised to lead the charge. As exciting as it is to talk about FlexPath, it's equally exciting to share with your our early progress on RightSkill, our second most direct path initiative.

It's a well understood fact that there are millions of open employment positions in the United States that are not been filled. According to the Bureau of Labor Statistics' most recent job report, there are more than 5.4 million open positions in the United States and a recent study conducted by Career Builder show that over 50% of employers cannot find qualified candidates to fill these positions. BLS data continues to show that the number of people being hired in the private sector is less than the open jobs created each month. This presents a serious matching problem on both the supply and demand side of the employment value chain.

To address this opportunity, Capella has partnered with Career Builder to create RightSkill, an innovation program that uses real time labor data paired with competency based education to design learning experiences directly aligned to bridge the talent gap. RightSkill combines Career Builder's unparalleled understanding of labor markets and employer needs with Capella's ground breaking competency based learning programs to build a first of it's kind workforce development program that creates job ready candidates. RightSkill uses labor data to design online learning programs that lead to employment in high demand fields.

Our RightSkill program is simple, job seekers use rightskill.com to learn about available learning solution and high demand occupations. Once a Job Seeker is prequalified for a particular program he or she will complete an intensive interactive online learning program designed to be done in less than 60 days.

After the program is complete and the job seeker passes a rigorous assessment verifying their new skills Career Builder will help the job ready candidate find a new employment opportunity.

One of the most compelling parts of this program sit that it guarantees the outcome. RightSkill candidates are guaranteed job offers within 90 days of completing their learning program, if they are not offered a job we'll give them their money back.

We lost our initial RightSkill pilot last quarter focusing on closing the skill gap in the area of front-end web development. Progress has been encouraging, we have had good success building a pipeline of candidates who are demonstrating the ability to successfully progress through the program including some early completers who are now interviewing with employers. We’re optimistic about their placement potential and the positive response we’re seeing from employers.

While we continue to learn and adapt RightSkill based on our experience, we’re now moving beyond the pilot phase and beginning to scale the program. Last week we introduced two new RightSkill learning solutions, one for retail management and one for technical support and plan to introduce additional products throughout the balance of 2016.

RightSkill will play a prominent role in our strategy to establish Capella as a leader in up-skilling and re-skilling the 21st Century workforce with job ready skills. Our most recent most direct path initiative was announced last week with our acquisition of Hackbright Academy, the leading non-degree software engineering school for woman. Hackbright aligns perfectly with Capella strategy and mission. Like Capella Hackbright provides access to those underserved by traditional models filling critical skill gaps, producing powerful completion and employment outcomes and maintaining strong relationships with employers seeking to meet their high demand workforce needs with skilled female software engineers.

The success of their graduates speaks for itself. Here are some data from graduates of Hackbright's fellowship program, an immersive 12 week software engineering program between June 2012 and April 2014, 90% of these graduates seeking employment got tech jobs and the average starting salary for graduates with full time roles was $89,000. Hackbright's mission to change the ratio of woman in technology is compelling and provides Capella a highly differentiated platform for entering into the rapidly growing coding and software engineering market.

Capella's strength comes from our shared social and business missions, our social mission is to provide access to high quality relevant education, providing the most direct path between learning and career advancement. This is our heritage and it's our future. As we successfully deliver on this mission, we will meet our business objectives and create long term sustainable growth and shareholders value.

In the first quarter of 2016 we made significant progress to accelerate our long term growth opportunities by expanding in the job ready 21st century skills market. Our work is just beginning. This is an exciting time to be part of Capella as we execute our plan, drive innovation in education, further differentiates our offerings and expands our market opportunities.

Steve will now take you through the numbers.

Steve Polacek

Thank you, Kevin. The first quarter results we will be discussing today are for our continuing operations. As you know we’re in the process of divesting Arden University, our UK subsidiary which has reflected separately as discontinued operations in our financial statements.

For the first quarter 2016 results were in line with our expectations, revenue was at the high end of our expectations, total enrollment growth, operating margins and the tax rate were slightly better than expected and new enrollment was at the low end of our guidance. The overall performance led to strong bottom-line results with diluted earnings per share from continuing operations of $0.86. New enrollment performance was down 3.7% versus last year and total enrollment growth was 2.6%. Revenue decreased slightly by 0.2% and our operating margins was 15.7% compared to 16.7% in the prior year's first quarter. Revenue for the quarter was $105.4 million slightly done year-over-year primarily due to degree mix shift and our change in accounting for revenue recognition related to learners who would draw from Capella University with an outstanding balance.

For these learners revenue is now being recognized at the time of cash collection. This was partially offset by total enrollment growth a tuition increase of approximately 2% in July 2015 for Capella University. The same factors also impacted revenue per learner for Capella University which was down slightly compared to last year's first quarter. Our total enrollment increased 2.6% for the first quarter compared to last year. This is strong performance given our new enrollment decline in increases in year-over-year gradations, positively impacting total enrollment performance with a consistent early core persistence improvements over last year and a higher percentage of returning learners.

Our FlexPath offering continues to perform very well and is now a 9% of our bachelor and master's total enrollment, it is also one of our strong new enrollment growth performers.

New enrollment for Capella University declined 3.7% compared to the significant enrollment growth of 15.3% in last year's first quarter reflecting the volatility that comes with new enrollment performance. And looking at new enrollment trends by degree the doctorate programs were again the best performing degree programs. This is now the second consecutive quarter of doctorate new enrollment growth and we’re pleased with our progress of strengthening and differentiating our doctorate offering.

During the first quarter, early cohort persistence continued to improve by 2%. The consolidated operating margin for continuing operations for our first quarter 2016 was 15.7% compared to 16.7% in 2015 slightly higher than our expectations. During 2016 we're making investments in the development of our job ready skill offerings which were more heavily weighted in the first quarter compared to last year.

Instructional cost and services increased year-over-year primarily due to investments to deliver a quality learner experience and support academy quality and innovation. Marketing expenses were slightly lower deepened compared to the first quarter last year due to timing. We increased investments in admissions and advisory as we continue to deepen and personalize our dialogue with prospective learners.

Bad debt expense for the quarter was 1.8% of revenue down 120 basis points compared to the first quarter of last year, more than half of the decline was related to the revenue recognition change I mentioned earlier. Depreciation and amortization expenses were slightly below 2015 levels.

Moving to the cash flow and balance sheet. From a cash flow perspective we generated $22.7 million in operating cash flow from continuing operations during the quarter ending the quarter with cash, cash equivalents and marketable securities of $163.2 million. Capital expenditures in the first quarter of 2016 were 5.3 million in-line with our full year expectations of about 5% of revenue for the fiscal year.

During the quarter we paid a cash dividend of $0.39 a share or $4.6 million. We significantly increased the number of shares we repurchased compared to first quarter of last year, repurchasing a 165,000 shares of common stock during the quarter. Our remaining share repurchase authorization as of the end of our first quarter was $48.5 million.

Shifting now to our outlook, financial results for the Hackbright acquisition will be include in our consolidated financial statements as of the close of the transaction on April 22nd. We purchased Hackbright for approximately $18 million in cash and expect the partial year impact of the acquisition to contribute about a 0.1 of revenue growth to Capella's fiscal year 2016 results. We expect dilution of $0.15 to $0.25 per share in 2016 half of which relates to the impacts of purchase accounting and transaction related expenses.

The transaction cost are expected to be more concentrated in our second quarter. Hackbright is still in the early stages of development and is very well positioned for accelerated growth, our outlook for the second quarter of 2016 excludes the impacts of the Hackbright acquisition and its post acquisitions operating results.

[Indiscernible] new enrollment growth patterns remain volatile. We’re expecting year-over-year new enrollment growth for Capella University to be up slightly compared to the second quarter 2015. Total enrollment is expected to be 1.5% to 2.5% primarily due to strong persistence.

Consolidated revenues are expected to be about flat to up 1% year-over-year absorbing the impact from the accounting change which will reduce the annual revenue by about 1.5%. Operating income from continuing operations for the second quarter is expected to be about 17% to 18% of revenue compared to 17.3% for the same period last year. The tax rate for the second quarter and full year 2016 is expected to be about 38% to 39%.

Capital expenditures for full year 2016 are again expected to be about 5% of revenue. In closing, our goal for 2016 is to deliver another year of new and total enrollment growth and to position Capella for accelerated growth in 2017 and beyond. We continue to execute our growth strategies for both Capella University and the job ready 21st century skill space. Our focus remains on building upon Capella's strong financial foundation and differentiating capabilities to expand our market opportunities and to position Capella for long term sustainable growth.

We would now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And we will go first to David Chu with Bank of America. Please go ahead.

David Chu

Just more broadly on start expectations, are you still comfortable with mid-single digits start growth for 2016?

Kevin Gilligan

Yes we’re. As I said before I think it's an appropriate goal for Capella and I think it's appropriate we have demonstrated our ability to do that over the last four years, maintain positive new enrollment growth. I think we have got -- we're well-positioned I think from a competitive standpoint with differentiated offerings and some exciting channel initiatives. As we go into the second half of the year I think our comps get easier which should help our outlook for the full year and I can also tell you that we have got a very strong application trend that I think we can leverage going forward into the second half of the year as well. So I think that remains the appropriate goal and we're not backing off of it.

David Chu

Can you quantify where starts came out for each of the three degree verticals. I know you mentioned doctorate was the strongest, but just wondering if you can speak to Master's and Bachelor's as well.

Kevin Gilligan

Yes. So as we have talked about before, the Bachelor market remains the most challenging. It's the most competitive, it's got the most sort of uneven demand pattern quarter to quarter. So the bachelor portfolio performed the weakest from a new enrollment standpoint in the first quarter, the PhD professional doctorate performed the strongest that was really on back of the professional doctorate and Master's was flattish and that wasn't I don’t think a bad outcome for the first quarter. We have had a number of very strong quarters at the Master's level and at some point I think that was going to come down a little bit. So I would say the pattern was not that much different than what we have seeing in the past.

David Chu

And then lastly the $0.15 to $0.20 dilution, if I understand it correctly that’s on a GAAP basis, correct?

Steve Polacek

So it's $0.15 to $0.25 was the range that we provided and that is on a GAAP basis. So about half of that will be related to purchase accounting type impacts and half just related to operations as we provide additional investment in to Hackbright to accelerate it's growth on a go forward basis.

Operator

And we'll go next to Jeff Silber with BMO. Please go ahead.

Henry Chien

It's Henry Chien calling for Jeff. Just question on Hackbright, is there any additional financial color you can provide on the business whether it's growth rates or margins or anything you can share?

Steve Polacek

So what we have commented in our prepared remarks is that for 2016 we responded to the dilution question that David had and as far as from a top line perspective for the post acquisition period or the sub-period in 2016 we’re expecting about a 0.1 impact relating to Capella's growth. When you look at Hackbright on a historical basis, it essentially was a bootstrapped operation that did not get external funding. So they were sort of living on their sort of means but they were profitable but we’re going to be able to provide resources whether it be from operating capabilities and capacity as well as capitals to help them executive their growth plans. We feel really excited about because we think it's a very unique opportunity in the software and engineering space that is taking care of a very significant gap in the marketplace for woman software engineers. So we’re really excited about -- but that’s sort of the comments. When we get to finalization of our sort of our purchase accounting, I think we will be able to narrow down the range a little bit but that will take us a quarter or so to go ahead and get that completed.

Henry Chien

So the company is still profitable and I guess will the negative impact will be expected to normalize in 2017 and beyond?

Steve Polacek

As we just commented on 16 thus far but as we get into the year we will provide more color on 2017 but historical they have been profitable.

Operator

We will go next to Trace Urdan with Credit Suisse. Please go ahead.

Trace Urdan

So I know you said you’re finalizing the purchase accounting and you will have more detail but I just want to go back to this question because I can't connect all the dots here. So half of the dilution is purchase accounting which I presume means noncash but you also referred to transaction cost that we'll see in the second quarter can you quantify those?

Steve Polacek

So just related to any sort of banker fees or legal fees that we have, we need to expense those in the quarter of the transaction. So that's going to happen in the second quarter. So when you look at the $0.15 to $0.25 dilution it's going to be a little bit more concentrated in the second quarter and essentially it's going to be even in the third and fourth quarter as you go through. So that’s just the way the accounting will lay out from that.

Trace Urdan

I'm just more concerned about the cash elements. So is there some way to tease out what the cash component of that dilution is?

Steve Polacek

The half that is not the purchasing accounting is going to be your cash dilution.

Trace Urdan

Okay. And then off that I presume some will be transaction cost, the rest will be related to this investment in the business?

Kevin Gilligan

The way we look at it is [indiscernible] is we separate out sort of the onetime cost and the purchase accounting and I put the transaction cost with the onetime piece, so that’s going to be effecting the second quarter and then obviously it won't go forward.

Trace Urdan

I'm worried that people are putting words in your mouth. So historically it's been profitable but obviously you’re making some investments in the business going forward, is it fair to think that those investments will continue into 2017? I mean when would we expect this business to begin contributing cash to your overhead I guess is really my question.

Kevin Gilligan

I think we'll give you that as we move forward into 2016, Trace. We need to go ahead and look at making sure that we balance growth with academy, the quality of the educational offering and expanding that to make sure that because that’s extremely important to us just like it is at Capella University and so we're going to be working with the management team at Hackbright who is continuing with the business to go ahead and lay out those particular plans and so again we will give you some more comment once we get into our next earnings call.

Trace Urdan

Is management locked in some way or intended to stay with you for some period of time?

Kevin Gilligan

Yes.

Trace Urdan

Okay. And then do you anticipate that there is any kind of cross promotion or joint marketing opportunities going forward?

Kevin Gilligan

Let me just go back to your earlier question. So the way I think you should think about Hackbright academy is that it's a growth platform, their most immediate growth opportunity is to expand within the Bay Area where they already have an established position and overtime expanding to new markets and so the reason I think Steve is hesitating on the exact financial impact is we’re going to have to figure out as we go forward what pace we want to move and how many locations we want to expand to overtime and that’s the variable in the equation and as I think we get more experience with the management team we'll firm those plans up, but to be clear the intent is to grow Hackbright both in the Bay Area and outside the Bay Area.

Trace Urdan

I guess what I would really love to hear from you is aside from the kind of general excitement that exists out there around coding and how great it is to see businesses that are nontitle for related that people are making investments in. This one seems really far field for you guys, right, it's a ground base business which is not what you know, you didn't go into buy a coding business, it's online which would have been a little bit more of a straight forward connection. I know in the press release you talked about -- you’ve got a lot of woman in your business, they have got a lot of woman in their business and what I would really love to hear is why this for you now. Why make this investment? How does this make you better going forward from investor's perspective?

Kimberly Boren

So let me tell you what I'm excited about with Hackbright, I would say at the highest level we're excited about as we try to position for Capella for accelerated growth in 2017 and beyond, it gives us access to a new growth market with a differentiated platform and we think Hackbright is going to be very differentiated in the software engineering space for a couple of reasons. One is there mission, we love their mission, you know changing the ratio of women in technology we think is a fantastic opportunity and no one better than Capella understands the power of mission and culture in building a growth business and using culture as a defensible means to support a competitive strategy.

So we relate very well to their mission and I think there is good synergy between Hackbright and Capella. So as an example as Hackbright begins to scale their business, there are Capella capabilities they can leverage whether those are tools and processes around enrollment or leveraging consumers marketing or other aspects of our model that we can support them in their growth. At the same time I think there are synergies the other way. The content that Hackbright is developing we could embed into our degree program to make them more professionally relevant and more differentiated. Hackbright has extensive employer relationships at a very high level that we can leverage to support our degree earning business. So there is a lot of synergy potential. And my expectation is not only will Hackbright turn out to be a growth platform for Capella but the synergy with Hackbright can support accelerated growth in our core degree earning business.

Trace Urdan

If I could switch gears just briefly, the PhD doctoral programs were a strength in terms of starts this quarter. Do you feel like you have turned the corner there? Can we expect that will be the story in that aspect of your business going forward or would you still expect to see some choppiness in doctoral enrollments?

Kevin Gilligan

So I would say professional doctorates continue to perform well and we have an expectation that will continue. The PhD is a work in progress as we're reinventing some of those programs and redesigning them. The newer ones are performing to expectations, but we haven't completed their work of the entire PhD portfolio, so it will be with us for a while.

Trace Urdan

But professional doctoral is now growing to a level where that is becoming a more relevant piece of that--

Kevin Gilligan

Yes.

Operator

We'll go next to Corey Greendale with First Analysis. Please go ahead.

Corey Greendale

A few kind of incendiary topics. First of all, the guidance in Q2 implies less I think the entire differential between enrollment and revenue would be the 1.5 points from there rec change. Does that suggest that you expect the mix shift away from PhD's to normalize to the point where on an ongoing basis revenue per learner is flat at Capella? Or why is the differential less in Q2 than it was in Q1?

Steve Polacek

You have it essentially correct that the major change is the accounting change which was about 1.5 in revenue. When you look at the first versus the second quarter you can have shifts that happened related to starts, monthly starts as well as this mix shift. I would say for the second quarter, the one you are referring to, is that yes, we have the accounting change. We still have this mix shift because we're not expecting doctoral to turn positive from a total in growth perspective for awhile here yet. What's being offset by that mix shift is our price increases that we have. So that 2% increase is offsetting some of the mix shift you have.

Corey Greendale

So can we extrapolate and assume similar differential between enrollment growth and revenue growth in Q3 and Q4?

Steve Polacek

Yes, I think that will be pretty much when we're in line. It is going to be continuing this trend line of making sure that we have the long term trends of that gap between growth at the doctoral level that negative growth dissipates. So that is really going to be the headwind that we have got. But I think overall on a basis we would expect revenue per learner to be down about one and a half maybe up to a couple of this point and half maybe up to a couple of points for 2016 just mainly relating to that accounting change.

Corey Greendale

Okay. The improvement in bad debt in Q1 was that entirely due to the accounting change so we should see a similar improvement for the rest of the year?

Steve Polacek

It was a little bit more related to the accounting change. So it was 3% last year and 1.8% [ph] this year so that 120 basis points was a little bit more weighted towards the accounting change side of it. I don't know if you are going to quite see that differential going forward. I think that is going to dissipate a little bit as we come in, but we do obviously expect the improvement year-over-year until we lap this accounting change in first quarter next year I guess.

Corey Greendale

Steve, I'll keep going with you if that's all right.

Steve Polacek

That's okay.

Corey Greendale

The higher G&A from stock based comp does that continue for the rest of the year?

Steve Polacek

No, it doesn't. And the reason it is higher in the second quarter is just related to our annual grant periods happen in the first quarter and just from the way we do our accounting related to when somebody is retirement eligible we accelerate the expensing of those costs. So you saw the same thing I think last year that we had higher in the first part of the year than the second part of the year. So that will start coming down throughout the rest of the year.

Corey Greendale

Okay and then a couple of questions on the new initiatives. So on Hackbright which we have dissected a bunch of different ways now. Some thoughts on why the decision to acquire an academy that is entirely focused on female students? I understand they are probably an underserved population but it also narrows the addressable market, so can you just talk to why you made that decision?

Kevin Gilligan

Yes, Corey, it is Kevin. So I would say we actually see it as a big market. Woman are significantly underrepresented in IT. And we know from our diligence and our interaction with Hackbright that employers are actively seeking ways to increase women's participation in their companies.

So, A, we see a big market. I would say, secondly, I think coding and software engineering is a growth segment but at some point will mature and you are going to need differentiation and we see Hackbright as a highly differentiated model both in terms of what they offer because they go beyond coding into the fundamentals of software engineering which I think provides more career currency for their graduates and we think they are well positioned with their user experience.

Corey Greendale

Is the thesis that there is a population of female students who are uncomfortable being among male students or what? Why do you need a separate academy for female students?

Kevin Gilligan

I think what Hackbright discovered is that an immersive experience, an immersive culture to give their learners in this case women the tools and confidence to be successful in that environment. I think they have discovered there are challenges in that environment and their model directly addresses those need. And the proof is in the pudding, they are having great success.

Corey Greendale

And Kevin, one other on both Hackbright and RightSkill and the answer may be different, what is the population that is being attracted to those? Is it generally people who already have Bachelor's degree or is anyone using those as a substitute for degrees?

Kevin Gilligan

So I can tell you in the case of Hackbright thus far most of their students and graduates have a degree and what they are looking for is a pathway into technology careers and Hackbright is providing that. They are not only providing the content and the training but they are providing the cultural support to do that as well. In the case of RightSkill our initial product was mobile web development. And the folks that were attracted there were people that had some web development skills but couldn't do mobile. And there it was a mixed bag I would say of some people with degrees and some not.

As we expand depending upon the segment I think --and RightSkill is really a discreet skill set that we're trying to give people in a relatively short period of time that allow them to take that next step. So I would say RightSkill is definitely not replacing degrees at all. It is more about increasing people's portfolio to help them be competitive for a job that their current skill doesn't allow them. I would say in the case of Hackbright I don't know that it is necessarily a replacement for a computer science degree, but it begins to approach that in some cases.

Corey Greendale

I had a couple of more but I will get back in queue and let someone else have a turn.

Operator

[Operator Instructions]. We'll go next to DeForest Hinman with Walthausen & Company. Please go ahead.

DeForest Hinman

A couple of questions, on the Hackbright is the course cost differentiated from what we're currently charging or is it pretty much in line or is that something we need to evaluate going forward?

Steve Polacek

So related to the course cost for Hackbright they have two basic programs; one is there immersive full time fellowship program and the tuition for that is around 16,000. And then they have a part time program which is really mainly related to people who already have jobs but are getting some introductory into programming. That pricing is consistent with others that are in the San Francisco Bay marketplace for coding software engineer schools.

DeForest Hinman

And what would that be?

Steve Polacek

I'm sorry. I didn't understand the question.

DeForest Hinman

What would that price be?

Steve Polacek

Well, I said it is consistent with what the market is in the Bay area.

DeForest Hinman

Okay. And then is that a model that could translate to online or do you think it is a brick and mortar type of model only?

Steve Polacek

The current model is obviously immersive in person, intensive studying there. Someday some road down the future there could be certain components of it that you might have as pathways into the fellowship program. I think it is really important to note that the experience that she receives within the fellowship program is very, very unique and that the mentorship that is provided, the community support that is provided things of that sort would be more challenging to go ahead and replicate online. So we have no intentions here in the front end to convert that into an online program. It was meant for the sort of model they have. But down the road there are aspects of it that you could go ahead and migrate.

DeForest Hinman

Okay. And then a different line of questioning on capital deployment, we continue to have pretty high cash balance, no debt, and pretty good free cash flow. We just did the Hackbright acquisition, we continue to buyback stock. What should we expect going forward? Are we still looking at additional deals or is it more let's see how quickly we can grow Hackbright and focus on the core business and continue to buyback stock or do we get a little bit more aggressive on share repurchases?

Steve Polacek

That is a question we get a lot and we will probably get that even more now that we have done an acquisition. I would say that our capital allocation has not changed from what we have said in prior calls. Obviously the first thing that we look at is to invest in our core business to increase its differentiation and innovation in to new models so what we do in the competency based learning area and FlexPath things of that are important to us. Beyond that we obviously have significant liquidity in our balance sheet and doing the acquisition of Hackbright doesn't significantly alter that.

We continue to look for others opportunities in the 21st century skills marketplace for other offerings that are out there to get into access to other markets, but nothing in a large transformational way. It would be more modest from that perspective. This doesn't really alter the way we look at our dividend policy or even related to share repurchases. We continue down that particular path because we do generate a significant amount of free cash flow. We're very mindful of the liquidity we have and have been very shareholder friendly in returning that back to the shareholders.

I would also mention in our allocation process part of the divestiture of Arden University the analysis was redirecting some of our resources from the international marketplace into the U.S. domestic 21st century skills, so that was part of the our analysis as well. And as you know we're in the process of divesting of Arden that we would expect that to be completed here sometime in2016.

Kevin Gilligan

If I could just jump in here, because I want to make sure that the larger point around all of this is not missed in today's discussion and that is that we have a very strong position in our core business but we're looking to accelerated our growth.

And we're trying to position the Company to take advantage of changing demand patterns and new models that are unlocking new forms of growth. So whether we're talking about FlexPath or RightSkill or Hackbright or some other model we may choose to invest in the future all of that is around positioning the Company for accelerated growth and positioning ourselves to take advantage of changing demand patterns in the market place.

So when the question is asked would we consider additional acquisitions, our answer is we're always looking for investment opportunities that make strategic sense that will enhance both our growth rate and our ability to create shareholders value. I just want to make sure it is clear that this is about positioning the portfolio for accelerated growth and there is more work to do is the point I'm making here.

DeForest Hinman

Okay. And then along the lines of the U.K. business we're look to sell. On the balance sheet we have it as there is no assets tied to that business [indiscernible] and there is liabilities only. Is selling that business a cash contributor or is it a cash use to sell that business?

Steve Polacek

The expectations was in the disposition that it is going to be we're going to have cash proceeds coming to Capella.

Operator

[Operator Instructions]. We'll go next to Corey Greendale with First Analysis. Please go ahead.

Corey Greendale

This will be quick. On FlexPath I know the or I think the department has significantly slowed or stopped approvals of new programs, so is that a net positive for you temporarily because there are not that many programs out there so you have a competitive barrier or at some point do you think the growth in those programs slow if you don't get new programs approved?

Kevin Gilligan

So I wouldn't say they stopped. I think what we're seeing is that both the department and the creditors are being deliberate and we understand that. We have to keep in mind a direct assessment programs are new to everybody and the creditors and the regulators they want to get it right. And so we support that, that they are being deliberate in their approach. And I would expect that at some point as they get more experience with it we see the cycle times improve.

So that is how I would characterize the environment. In terms of Capella we're waiting for approval on our FlexPath BSN program. But in the mean time we have a lot to work with. So we're focusing on growing the programs that are improved. By the way we're seeing very good growth on our BSN FlexPath without federal financial aid. I think that indicates the potential of that market. So it is a process that we're working through and as we -- and I think what it is going to do is it is going to make for a healthy category which is really key to the long term sustainability of this growth for Capella and anybody else that is going to be in this category.

Corey Greendale

Okay. And my last quick one, the portion of the dilution from Hackbright the half that is not the amortization or transaction cost, will that be weighted in marketing and promotional costs or what lines will we expect that dilution to come in?

Steve Polacek

I think it is going to come across mostly from the probably in the marketing and general administrative line.

Operator

[Operator Instructions]. It appears we have no further questions. At this time I would like to hand it back over to Kevin Gilligan for closing remarks.

Kevin Gilligan

Okay. Thank you, Zach. I just want to thank everyone for being on the call this morning. To wrap up I would like to remind you of our goal is to outperform the education market and as I said earlier accelerate our growth trajectory to deliver long term sustainable shareholder value.

I think we're uniquely positioned with our competency based infrastructure and direct assessment capabilities to build accelerated growth in the job ready skill market and we're excited about our progress. We're off to I think off to a good start. Thank you for joining us today and if you have follow up questions be sure to contact Heide Erickson. Thanks again and hope everyone has a great day.

Operator

Thank you. This does conclude today's conference. You may now disconnect and have a wonderful day.

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