Capella Education's (CPLA) CEO Kevin Gilligan on Q2 2016 Results - Earnings Call Transcript

| About: Capella Education (CPLA)

Capella Education Co (NASDAQ:CPLA)

Q2 2016 Earnings Conference Call

July 26, 2016, 09:00 ET

Executives

Heide Erickson - Director, IR

Kevin Gilligan - Chairman & CEO

Steve Polacek - SVP & CFO

Analysts

Trace Urdan - Credit Suisse

David Chu - Bank of America Merrill Lynch

Peter Appert - Piper Jaffray

Jeff Silber - BMO Capital Markets

Ken Wang - First Analysis

Operator

Good morning. My name is Tony and I will be your conference operator today. At this time I would like to welcome everyone to the Capella Education Company's Second Quarter 2016 Earnings Call. [Operator Instructions]. Heide Erickson, Director of Investor Relations you may begin your conference.

Heide Erickson

Thank you, Tony and good morning everyone. Welcome to our second 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 second quarter results. Please note that this call may include forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities and 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 second quarter news release.

These and other Risk Factors are discussed in the Company's most recent 10-K and 10-Q's 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 www.capellaeducationcompany.com. Following our prepared remarks we'll take questions.

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

Kevin Gilligan

Thank you, Heide, and good morning everybody. Thanks for being with us there morning. We like where we are this quarter. First we made significant steps toward our goal to provide the most direct path between learning and employment in the job-ready skills market by acquiring Hackbright Academy and DevMountain. We believe our entry into software, engineering and coding markets with this acquisitions and our innovative offerings including RightSkill will drive accelerated growth by expanding our addressable market.

It is creating new sources of revenue and better positioning us to deliver differentiated value to both consumers and employers. Second, we delivered second quarter operating results at the high end or exceeding the expectations we set during last quarter's a call and, third, we believe we're on track for solid performance in 2016 and accelerated growth in 2017 and beyond. Steve will walk through our second quarter details and our outlook in a moment. I would like to focus my comments on our strategy of creating the most direct path between learning and employment and how we are positioning Capella in the job-ready skills market.

The most direct path means there's no wasted time, money or effort in obtaining a post-secondary degree or a job ready 21st Century skill that are in high demand by employers, that is the mindset we apply to all our product offerings across our portfolio and that's a big part of what differentiates Capella. It's enabled us to grow new enrollment for Capella University in a flat to down market. We have made significant investments to redesign courses and programs in our credit hour offering to deliver the most direct path without compromising academic quality and we have invested in learner success to help our learners complete their degree to get the highest return possible on their educational investment. This is ongoing work and we will continue to position Capella University to deliver growth and learner success.

To further differentiate Capella University we have leveraged our competency based learning model, direct assessment capabilities in an excellent regulatory track record to innovate app and develop FlexPath, a unique direct assessment program. FlexPath learners break away from the traditional credit hour system by 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 improve their employment outcomes.

At the end of the second quarter FlexPath was about 10% of Capella University's Master's and Bachelor's total enrollment. New enrollment in our newest FlexPath program, the RN-to-BSN was particularly strong generating the second highest number of new enrollments for FlexPath. Starting in the third quarter we are offering financial aid to nurses pursuing their RN-to-BSN now that we have received approval for this program by the Department of Education.

Our FlexPath offering is highly differentiated. We believe that overtime additional competition will enter the direct assessment space and in the process help drive awareness of this new category in higher education. It will require continuing innovation and optimization to remain the leader in direct assessment and we intend to do so. This includes investments in the next-generation of FlexPath which leverages our insights from the last three years to further enhance the experience for our learners and increase operational efficiencies to support the future growth of our FlexPath program.

Outside of Capella University we have most recently made investments in the job-ready skills market, a market where we believe we are uniquely positioned to help employers close significant skill gaps particularly to RightSkill in our software, engineering and coding schools. It's well understood that while we have low employment that are millions of open employment positions in the United States that are not being filled because of a lack of qualified candidates. That's why we developed RightSkill in partnership with Career Builder and introduced our first program late in the first quarter of 2016.

RightSkill is an offering through our Capella learning solution subsidiary, what makes this offering so unique is that we are leveraging Capella's competency based learning and assessment capabilities in combination with Career Builders' real-time labor market data and access to job seekers and employers to build high-quality, professional learning solutions to bridge the growing talent gap in our country. We rolled out our first RightSkill program late in the first quarter of this year and we now have six offerings in the market. What we have learned so far is validating the significant market opportunity and we are very encouraged by the response of job seekers and employers. There's more work to do to optimize in every phase of this program including recruiting and screening appropriately qualified job seekers, upscaling and assessing job seekers through a high-quality learning and assessment experience, securing employer demand for candidates through a multi-channel approve and placement of RightSkill verified candidates into employer's open job opportunities.

We are making good progress in building out our business model and adapting quickly to realize this opportunity. RightSkill will play a prominent role in a broader strategy to establish Capella as a leader in providing the most direct path between learning and employment by upscaling and reskilling the 21st Century workforce with job-ready skills.

Our commitment to this strategy is also reflected in our acquisitions of Hackbright and DevMountain to software, engineering and coding schools. We acquired both these mission driven organizations because of their highly differentiated platforms for entry level positions in the market. What makes these companies so appealing to Capella is their growth potential, focus on strong outcomes and differentiated value propositions. Hackbright's mission is to change the ratio of women in technology. Women in technology have been massively under served by traditional models. Hackbright is filling critical skill gaps, producing powerful completion in employment outcomes and maintaining strong relationships with employers seeking to meet their high demand workforce needs with skilled female software engineers.

DevMountain's mission is to be the most accessible and impactful coding school in the country by bringing affordability to the highest quality hands-on education in the industry. Both companies have made a strong name for themselves in the software, engineering and coding market as quality providers. Since acquiring these schools we have had the opportunity to really engage with these teams at a deeper level. The passion of Hackbright and DevMountain's team is infectious, the opportunity is real and there are important synergies between these two schools as well as Capella University and Capella Learning Solutions.

We are in a unique position to support Hackbright and DevMountain in achieving their missions faster and to leverage the capabilities from each of our subsidiaries across our portfolio. To provide access to more learners Hackbright is in the process of adding an additional facility in the San Francisco area and DevMountain will add an additional cohort in Provo, Utah later in the third quarter. These expansions speak to their commitment to make their unique value propositions accessible to more people. Our goal is to position Capella Education Company for strong long-term growth. This requires solid performance by Capella University and expansion into the job ready 21st Century skills market results we delivered in the first half of 2016.

We are just starting to develop these opportunities and I am really excited about the future of Capella as we drive innovation and education and workforce development, create value for our learners and employers and offer differentiated products that lead to the most direct path between learning and employment. The career success of our learners and providing highly qualified candidates for employers means achieving our mission of providing access and creating shareholder value.

Steve will now take you through the numbers. Steve?

Steve Polacek

Thank you, Kevin. The second quarter results we'll be discussing today are for our continuing operations. As you know we are working on divesting our Arden University, our UK subsidiary and reflecting Arden's second quarter results separately as discontinued operation in our financial statements.

For the first time we are also disclosing revenue and operating income for our post-secondary segment which prices Capella University and also Sophia. We refer to it as Capella University during this call since Sophia is a very small part of this category. The other segment is our job-ready skills segment which consists of Capella Learning Solutions, Hackbright Academy and DevMountain. We acquired Hackbright on April 22 and DevMountain on May 4th and therefore only results since the acquisition dates are reflected in second quarter results.

Today I will give a perspective on our performance against the expectations we set during our first quarter earnings call, provide you with some additional insights into Capella University's performance and our job-ready skills segments and discuss our outlook for the third quarter and the full year. For the second quarter of 2016 we reported Capella Education Company consolidated revenue of $106.7 million, up 2% year-over-year and operating income of $18.1 million, flat with the previous year. Included in operating income our $1.4 million in transaction related costs and $500,000 in purchase accounting related to the acquisitions of Hackbright Academy and DevMountain. Bad debt expense for Capella education for the quarter was 2.7% of revenue, down 20 basis points compared to the second quarter of last year.

During our last earnings release we laid out our expectations for the second quarter excluding the acquisitions we made this quarter. We expected revenue for Capella Education Company to be flat to up 1% year-over-year and delivered growth of 1.1% just above our expectations. Operating margins were expected to be about 17% to 18% of revenue and we delivered 19.2% in operating margins, significantly better than anticipated primarily due to the performance of Capella University.

Capella University total enrollment growth and new growth were at the high end of our expectations. We are making significant investments to increase the portion of our portfolio that serves high growth areas, supports learner success and delivers long-term sustainable growth. For Capella University this means continuing to optimize processes and expanding our core business within the markets we serve. For our job ready skill segment we are expanding into new markets and providing and building a new business model to provide learning solutions designed to solve the 21st Century skills gap.

Shifting now to the performance of Capella University, new enrollment was up 2.5% versus the second quarter last year, early core persistence in the second quarter improved by 4% and total enrollment growth was up 2.4% at the high end of our expectations of 1.5% to 2.5% growth. Revenue for Capella University increased by 1.2% and our operating margin was 20.4% compared to 17.7% in the prior year's second quarter. The primary driver for new enrollment growth was a strong performance of our bachelor programs reflecting quarterly volatility in new enrollment growth particularly at the degree level. That said we are pleased by the year-over-year improvement in our bachelor programs which was primarily related to strong performance in our FlexPath offerings. In addition for our doctoral programs, new enrollment grew for the third consecutive quarter. We'll take multiple quarters of strong new enrollment growth to be reflected in total doctoral enrollment growth due to the large size of current cohorts, higher numbers of graduations and our learner success efforts.

Total enrollment growth of 2.4% for the second quarter compared to last year benefited from new enrollment growth and a higher percentage of returning learners. Revenue for Capella University was up 1.2% but not as strong as total enrollment growth primarily due to degree mixed shift and our change in accounting for revenue recognition beginning in the first quarter related to learners who withdraw from Capella University with an outstanding balance. For these learners revenue is being recognized at the time of cash collection. This is partially offset by total enrollment growth and a tuition increase of approximately 2% in July of 2015 for Capella University. The same factors also impacted revenue per learner for Capella University which was down slightly compared to last year's second quarter. The operating margin for Capella University for our second quarter 2016 of 20.4% was significantly higher than our expectations driven by revenue growth, good cost management and the timing of expense recognition.

Shifting now to the job-ready skills segment, revenue for the quarter was $936,000, we are in the development phase of a job-ready skills market as RightSkill is in the pilot phase and we therefore don't expect significant revenue in 2016. DevMountain and Hackbright Academy are still in early stages of reaching their potential but are generating the majority of the revenue for the quarter. We are investing in the job-ready skills market which is reflective of the operating loss for the quarter of $3.5 million.

Moving to the cash flow and balance sheet for Capella Education Company, from a cash flow perspective we generated $20.1 million in operating cash flow from continuing operations during the quarter and in the quarter with cash, cash equivalents and marketable securities of $132.8 million. Cash, cash equivalents and marketable securities were down $26.5 million compared to year-end 2015 primarily due to our acquisitions of Hackbright Academy and DevMountain for a combined $33 million during the second quarter.

During the quarter we paid a cash dividend of $0.39 a share or $4.6 million and we increased the number of shares we purchased compared to the second quarter of last year, repurchasing 143,000 shares of common stock during the quarter. Our remaining share repurchase authorization as of the end of the second quarter was $41 million. Capital expenditures in the second quarter of 2016 were $4.7 million in-line with our full year expectations of about 5% of revenue for fiscal year.

Shifting now to outlook, we recognized that with the acquisitions it will be more challenging to get a good perspective of our performance in 2016. Therefore, before I get into the details for the third quarter I would like to anchor you on our expectations for the full year. For Capella Education Company continuing operations we expect 2016 annual revenue to be in the $424 million to $428 million range and earnings-per-share to be $3.30 to $3.40 per share. Included is these expectations are the $1.4 million or $0.9 in earnings-per-share in transaction related costs and an estimated 1.2 million or $0.7 in earnings-per-share in purchase accounting related items.

For the quarter we expect an estimated $350,000 for preliminary purchase accounting allocations and another $300,000 in the fourth quarter. To put our performance year-to-date in perspective I would like to take a moment and look back at what we expected at the beginning of the year. Making it an apples to our apples comparison and only including business units we had at the beginning of the year we are outperforming our expectations. For example, we expected annual revenue growth to be down by 1.5% after the accounting change and now expect positive revenue growth while absorbing this change.

We are outperforming because of strong execution particularly related to Capella University's focus on learner success and retention. And new enrollment growth in 2016 for Capella University is expected to be in the low single digit percentage range. We believe that in this market mid-single-digit new enrollment growth on an annual basis is possible even though the overall market is flat to slightly down, that is the goal that we are setting for ourselves on an annual basis but we will not achieve this goal every year. The primary revenue contributors for the job-ready skills segment in 2016 will be our software, engineering and coding schools. We are in an investment cycle for this segment and don't expect a positive operating income contribution in 2016. We now expect the dilution for the Hackbright and DevMountain acquisitions combined to be about $0.25 to $0.30 for 2016 of which $0.16 relates to the acquisition-related transaction cost and purchase accounting impacts.

Shifting now to the third quarter of 2016, starting with Capella Education Company, our third quarter expectations for Capella Education Company is for consolidated revenues to be up about 4.5% to 5.5% per year over the last year. Absorbing the impact from the accounting change and include revenue for Hackbright and DevMountain for the full quarter. The operating income margin from consolidated continuing operations for the third quarter is expected to be about 10.5% to 11.5% of revenue compared to 14.1% for the same period last year.

Operating margins are expected to decline year-over-year primarily due to our investments in the job-ready skills segment and the timing of expenses within Capella University including expected increases in instructional cost and services for Capella University. The tax rate for the third quarter and the full year 2016 is expected to be about 38% to 38.5%.

Shifting now to our third quarter expectations for Capella University. We expect quarterly new enrollment growth to be slightly up compared to the third quarter of 2015. New enrollment is expected to be up 2% to 3% year-over-year primarily due to new enrollment growth and continued strong persistence.

The performance for Capella University has been very strong year-to-date and it's on track to outperform our total enrollment expectations from the beginning of the year. The primary driver is our continued strong early cohort persistence improvements, this combined with prudent cost management is also translating into strong operating margin performance.

Shifting to our job-ready skills segments the third quarter will be the first quarter reflect a full three months of operating results for Hackbright Academy and DevMountain. For the job-ready skills segment, we expect revenue during the third quarter to be about $2.5 million to $3 million and operating losses to be in the $2 million to $2.5 million range.

Please note for the acquisition of DevMountain we agreed to additional cash consideration of up to $5 million dependent upon future revenue and operating profit performance through 2018. Our preliminary valuation of this obligation is $1.5 million. Subsequent changes to this obligation will be reflected in our earnings.

In closing we are managing all aspects of our portfolio, have been demonstrated important positive results with our learner success efforts, our prudently managing our costs and delivered strong performance during the second quarter. Our goal is to position Capella for long-term sustainable growth. 2016 will be a year of investing to position us for the job-ready skills 21st Century skills space. We have a strong financial foundation to support these investments, differentiated abilities and the talent to achieve these goals.

We would now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. We'll take our first question from Trace Urdan with Credit Suisse. Please go ahead. Your line is now open.

Trace Urdan

Kevin, I wanted to ask a question about RightSkill. So I heard you describe sort of the steps that you're working on right now to really develop that product and it wasn't entirely clear to me sort of how active you are in the market right now versus sort of laying the groundwork. So I'm wondering -- I just hoping to get a little bit of color on what you're seeing in terms of additional demand and maybe what you have learned so far in the process that will strengthen the program going forward?

Kevin Gilligan

Yes. I would be happy to take that question. So I would say the headline here is you're right we're in the very early stages of developing this category but there's a lot to like based on what we have seen so far. You know, our goal for 2016 was to prove the concept, and demonstrate the potential of the business model and hopefully build a pipeline of programs and learners and placements that can contribute to growth in 2017. And so I think so far what we're seeing is validating the opportunity.

We have had about 200 people go through the program and complete and they're now in the placement cycle, so we got a lot of great feedback on the learning product itself and now that they're in the placement cycle we're working through our operating processes with career builders to make sure those people get placed with employers and we have had about a dozen people placed initially. So I would say there's a number of early indicators of success and so that's one of the reasons we decided to make the investment and add more products in 2016 beyond the initial product because we were getting strong endorsement and demand indicators from the employers.

Trace Urdan

And do you anticipate that this could lead you into some content areas that you aren't in currently or do you feel like you ever the right set of content for where the demand is?

Kevin Gilligan

No. I think it could lead us into content areas for sure and we built the business model with that in mind and basically it's taking let's say if the content area outside of our current domain. It's really taking that content and applying our content [ph] based model and our assessment capabilities to that contents using subject matter experts.

Trace Urdan

Okay. And then there's sort of some recently high profile boot camp news with General Assembly in the journal kind of talking about laying off workers, and also moving into the employer direct, you know, sort of direct to employer space and I'm wondering if sort of what you're thoughts are on that. Are you seeing any kind of a slowdown relative to what you expected when you made those acquisitions and have you looked at the corporate market yourself?

Kevin Gilligan

Yes. So I would say from all indications through both DevMountain and Hackbright the demand patterns look strong and the addressable market look large. So I can't say we have seen anything different in the short time that we have owned them. I would also say that keep in mind that Hackbright, we think of Hackbright as more than just software, engineering and coding, it's really about changing the ratio of women in technology and that could take you into lots of diversified areas beyond coding if that market were to slowdown, but we're not seeing any indications of that.

With respect to the employers, you know, Hackbright in particular already has an important employer component through their model where they place people and get paid for placements kind of like the RightSkill model. So that's already an important part of what they're doing. We would expect over time to deepen that capability and that's also an area of great synergy with our whole portfolio because we want to be able to say to the employer we can meet all of your 21st Century skills whether it's a degree or non-degree, a traditional degree, flexible degree, a stackable credential, an individual program. So it's a big part of our vision.

Operator

And next we will move to David Chu with Bank of America. Please go ahead. Your line is now open.

David Chu

So I'm sorry if I missed this buzz what level of start growth is embedding in your 2016 guidance?

Steve Polacek

David, this is Steve. Related to the 2016 guidance so it's obviously what we have reported here for the first couple of quarters, our expectation for slightly up for the third quarter. So that's when you look at our expectation for the full year, we would expect to get that you would have to have a little bit of an uptick here in the fourth quarter.

David Chu

Sorry. So you're saying -- what are your expectation for the full year up slightly in terms of--?

Steve Polacek

No. Low single digit we talked about.

David Chu

Low single, okay, got it. And then can you just quantify how the starts look for the three segments? It sounded like Bachelor's and Doctorate were up but how did Master's look?

Kevin Gilligan

From a start growth perspective the first time in several quarters Bachelor's actually led our enrollment growth, so it was closer into the sort of upper single digit sort of range. Doctoral was good performance, this is the third quarter that we've had positive growth so that was slightly positive and as you know Master's over the last several year has been really been the degree level that we really had significant growth and it was modestly sort of negative here in the last quarter.

David Chu

So can I ask -- is there anything that you saw through Master's that after it's been up for several quarters but now it was down slightly, is it just tougher comps you would say or are you seeing anything different in the macro environment?

David Chu

No we’re not seeing really anything different in the macro-environment. I think that just again speaks to the sort of volatility that you see in total [indiscernible] into new enrollment growth but particularly at the degree level. So it's pretty rare where you get all degree levels are outperforming and all degrees being down. So I think that's just the volatility that you’ve, but there's nothing overall in the market that we see from a Master's perspective that is any different than what we have seen over the last several quarters.

David Chu

And just lastly in terms of the two acquisitions, like how should we think about the purchase accounting? Is this just the impact -- does the impact essentially lower revenue?

Kevin Gilligan

Yes, David. So when you look at the purchase accounting, part of it is related to reduced revenues that you can recognize when you acquire these businesses. That has been largely reflected already in the second quarter results for the partial quarter that we had them. So the impacts in the second quarter it was about a $0.5 million relating to purchase accounting, transaction costs would be separate from that. Probably about half of that or so is related to the revenue impact. The rest of it would be related to amortization of intangibles. So as we go forward for the balance of the year it was a $0.5 million in the second quarter, we expect in our preliminary purchase price allocations the third quarter will be about $350,000, fourth quarter about $300,000.

David Chu

So in 3Q and fourth quarter it's primarily for amortization versus the deferred revenue recognition?

Steve Polacek

Yes. It will be related to that and then I think if you have a chance to look at our sort of second quarter, what you are going see is in our footnote in our Q if you go to that you will see the purchase price allocation, part of it too will be related to the accretion related to this earn-out obligation. So some of that will run through as well, but I think when you get a chance to look at the 10-Q, it will more fully explain the allocation, amortization periods, things of that sort.

Operator

Next we will move to Peter Appert with Piper Jaffray. Please go ahead. Your line is now open.

Peter Appert

So, Steve or Kevin, I was hope understanding might talk a little bit about how you see the long-term model developing for the skills business broadly, sort of scale of revenue opportunity what the margin potential in that business might be?

Kevin Gilligan

So we haven't put any specific targets out there for these businesses. You know, I would say what all three have in common Hackbright, DevMountain and RightSkill is that they are directed at very large addressable markets that are unserved in important ways and conditions are right really favorable for innovation.

And so the investments we're making with an eye towards they can make a meaningful contribution to growth over the long-term. And in particular in the acquisitions, the investments we made, we look carefully at the internal rates of return and discounted cash flows, what they would need to be to support [indiscernible] investment and we moved forward with a degree of confidence that we can develop that.

So we'll have more to say about what these businesses can contribute in 2017 as we move towards our 2017 operating plan, but the whole objective here is to move Capella beyond the low single digit growth. I think we have done a really great job with our [indiscernible] business getting it back into positive growth and keeping it there, but we think we're capable of growing more in low single digit and these investments are intended in part to help us get there.

Peter Appert

Okay. Let me try one more angle here. I would assume the business continues to operate at at least a modest loss I'm sure in investment mode in 2017. Is that fair?

Steve Polacek

Yes. I would say that what we expect in 2017 from the job-ready skills category all three initiatives is that they will contribute to revenue growth, continue to be dilutive to earnings but not as dilutive in 2017 as they are in 2016.

Peter Appert

And switching to Capella University. So the margin performance is quite extraordinary in the context of the relatively modest revenue growth. I think Steve cited maybe some timing issues possibly with regard to cost hike -- can you talk about how big a deal that was and just how your make this the sustainability of current margins or even the trajectory of margins going forward?

Kevin Gilligan

Yes, Peter. So we had a great quarter for Capella University from an operating performance perspective and part of it was related to some timing of expenses that will flow maybe here into the third and fourth quarter, but the real driver I would say is just overall more related to cost management but more importantly is really the learner success initiatives.

The early cohort persistence bumping up to being at 4%, the contribution margin of those particular learners, the support that our team is being provided to support those learners particularly earlier in their academic endeavors really has been paying off for us over the last several years, but it's been really critical and really important to our operating performance here in the second quarter.

So we're really, really encouraged by that I would say that has been the biggest driver of it. So it's prudent cost management, focus on learner success and I would say the third piece, which would be less impactful would be the timing aspect of it.

Peter Appert

Okay. And so in that regard, Steve, for the third and fourth quarters is there anything you could call out in terms of any lumpiness in margins related to this timing issue?

Steve Polacek

Well, I think when you come to CU, when we look at our third quarter expectations what's built-in there is a relatively sort of flat, a little bit down year-over-year sort of performance, but that's just related to some of the investments that we're making. Overall for Capella, as we laid out in our guidance the decline from year-over-year that's primarily related to our job-ready skills segment.

Last year when you look at the segment reporting that we're now putting out and showing that for all of 2015 and 2016 through the second quarter, what you will see is we had about an operating loss of about $700,000 last year in that segment. We're expecting about 2 to 2.35 this quarter, third quarter, so that's really going to be the driver of the overall margin decline. It's more on the job-ready skills than it has anything to do with Capella University.

Peter Appert

And, Steve, any update on the Arden sale?

Steve Polacek

No. Arden sale continues to progress and nothing has really changed from the last quarter. We still expect that to occur here in 2016. For the second quarter you see a little bit of elevation relating to our loss from discontinued operations, that is not related to ongoing operations. It's really related to costs of the transaction, so legal professional fees, things of that sort. So that's really the only uptick. The only update I would have related to Arden.

Peter Appert

And one last thing, so the Arden [indiscernible] teams like that could be a particularly large opportunity in terms of the skill -- and people interested in those types of programs. How are you thinking about the skill of that opportunity? Is that something that by itself could move the needle for total enrollment?

Kevin Gilligan

Yes, so we look at that as a growth platform. There's a strong push in the nursing profession for nurses to have a Bachelor's degree and employers are participating in supporting that and so we're really well-positioned there and to me what was interesting to note in the second quarter is FlexPath BSN which we could not offer federal financial aid in the second quarter was our second largest new enrollment contributor in our FlexPath portfolio and I think that's because we're seeing that, A, there's a big market but B, the concept of a flexible degree for working nurses is really appealing to both the consumer and the employer. So now the ability to offer federal financial aid we continue to look to that to be an outperformer for us.

Operator

And next we'll move to Jeff Silber with BMO Capital Markets. Please go ahead. Your line is open.

Jeff Silber

Thank you so much for providing the segment data but of course it leads to more questions. In terms of your revenue guidance for the current fiscal year, can you tell us what you expect the revenue contributions from the job-ready skills segment to be?

Steve Polacek

So it will primarily relate to the acquisitions because we don't expect a lot necessarily from the RightSkill program, that's sort of that a sort of pilot phase as Kevin laid out. So in our guidance for the acquisitions we said that each would contribute about a point of revenue growth. So that would be $4 million each, that's around $8 million. You know, that's sort of the zipco [ph] that we're having in our 2016 sort of expectations when we lay out the 424 to 428.

Jeff Silber

And as we kind of ramp-up that business over the next few years, how long do you think it will take to get that unit to become profitable?

Steve Polacek

Well, I think as Kevin said we're really only talking sort of near-term, you know, balance of 2016 and then into 2017 that it will be less dilutive but what it's going to depends upon is how much we go ahead and make investments for growth and so we want to balance that with having that be a contributor to our bottom like sooner than obviously later. I think when it comes to sort of the noise related to purchase accounting, a lot of that will be behind us over the next year and a half, two years. So I would say right now 2017 is going to be dilutive, obviously it's going to be less than what we saw in 2016.

I think overall in 2016, consistent with what we have had in the past two to three points of our impact will be on margins in 2016. We think that's going to be less in 2017, all things being equal.

Jeff Silber

And the disclosure you give on the number of learners, I'm assuming that just applies to Capella University. Are you thinking of giving any kind of data like that for the job-ready skills segment?

Kevin Gilligan

Right now we're going to just consistently stay with Capella University on the enrollment growth perspective. The other ones are relatively sort of small from an enrollment perspective, but anything we're disclosing right now is just related to Capella University.

Steve Polacek

Yes. I think the other thing if I can jump in, Jeff, is that revenue models are really different, right? So in the case of Capella University it's a tuition model so number of tuition, times number of learners. In the case of both the coding schools and RightSkill there's multiple sources of revenue and so, you know, if we think it will be helpful to disclose it we will, but we don't want to be confusing either or cause people to make inaccurate or incomplete assumptions on data we provide.

Jeff Silber

Okay. I do appreciate that. And then from a regulatory perspective, I think over the past week or so the Department of Education clarified some of the state authorization rules regarding online education. Does that impact you in any way? Is there anything you're going to have to do to meet those proposed regs? Thanks.

Kevin Gilligan

So we're still reviewing the proposed rule and we're going to take the opportunity to offer our comments in a constructive manner as we always do as part of the process. What I can tell you is that we are part of [indiscernible], which is a vehicle which allows for reciprocity across states and I would say our first reading is that that is supported in the proposed rule.

So, you know, as with all these regulations Capella always find a way to navigate them because of our strong compliance culture and track record. I expect that to be the case here as well but we need to finish completely reviewing the rule before I make any definitive statements. And we need to see where it comes out too, it could change again based on public comments.

Operator

[Operator Instructions]. Meanwhile we'll move to Corey Greendale with First Analysis. Please go ahead. Your line is open.

Ken Wang

This is Ken Wang on for Corey. So I'm just wondering could you speak a little bit about how you plan to manage the brands of the recent acquisitions, specifically are you planning to maintain each one as is and market each one separately or do you envision consolidating all the brands under the Capella name at some point in the future.

Kevin Gilligan

So I would say when you start to make brand considerations, one of the things you need to ask yourself while you just are you serving distinct segments or is it a common customer base. So the two acquisitions and one of the reasons we did both of them is we saw them serving very distinct parts of the market. So I think in the case of the coding schools at least for their foreseeable future, we're going to continue to build out those brands. Now where there are points of leverage for example perhaps at the employer, we're going to want to find ways to leverage the new brands with the Capella brand.

So I would say all of that is work in process. It's a really good and important strategic question that we're thinking a lot about and it's one of the key things that our integration team is developing recommendations on, but for now we're going to continue to build those brands.

Ken Wang

And then just talking a little bit about acquisitions any thoughts on future acquisitions? You know, would you be open to acquiring additional non-title learning companies?

Kevin Gilligan

Well, I would say right now I think we have our hands full executing what we have with RightSkill and DevMountain, and Hackbright and I think we have got plenty to work with. Now, having said that, if we're going to be a growth company in a changing market we always need to be open to new possibilities and we have balance sheet to support that if we want to go in that direction, but historically we have not been an acquisitive company. If we were to do an acquisition in the future, it would not be a transformational acquisition. It would probably be more along the lines of what we have done, but I think right now what we need to do is to demonstrate that we can create value out of the investments that we're making. And in the meantime we are staying committed to our capital allocation policy which includes both share repurchase and a dividend as a way to drive shareholder value.

Ken Wang

And just one last one for me, any thoughts on taking the existing boot camp programs online at some point?

Kevin Gilligan

You know, I think that there's a role for online in some part of the model and that's one of the things the integration team is working on is where does that best work, is it in a hybrid situation, do we use it for orientation. So I think ultimately there will be an on like component, but there is the nature of the what students are doing in the immersive environment -- portions of that are challenging to replicate online. That doesn't mean you couldn't do some other thing online. And so the way I look at it is we now have more versatility in ways that we can serve learners.

Operator

Thank you. And it appears we have no further questions. At this time I would like to turn the call back to Kevin Gilligan for closing comments. Please go ahead, sir.

Kevin Gilligan

Yes. Well, I just want to thank everyone for attending this morning's calling and thank you for the questions, those were really good questions and we appreciate the opportunity to address them. If you have further questions, please be sure to follow up either with Heide Erickson or Steve Polacek. Again, thanks for coming and hope everyone has a great day. Thank you.

Operator

Thank you. This does conclude today's conference. You may disconnect at any time and have a great day.

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