Capella Education Q4 2007 Earnings Call Transcript

Feb.18.08 | About: Capella Education (CPLA)

Capella Education Co. (NASDAQ:CPLA)

Q4 2007 Earnings Call

February 14, 2008 9:00 am ET

Executives

Heide Erickson - Director of Investor Relations

Steve Shank - Chairman and CEO

Ken Sobaski - President and COO

Lois Martin - SVP and CFO

Analysts

Edward Yruma - J.P. Morgan

Marc Marostica - Piper Jaffray

Amy Junker - Robert Baird

Trace Urdan - Signal Hill

Jeff Silber - BMO Capital Markets

Kevin Doherty - Banc of America Securities

Operator

Good morning, and welcome to the Capella fourth quarter Earnings Call.(Operator Instructions).

At this time, I would like to turn your call over to Miss. Heide Erickson, Director of Investor Relations for Capella University. Please go ahead.

Heide Erickson

Thank you, Diana. Good morning, everyone, and welcome to the Capella Education Company's fourth quarter and year end 2007 earnings results conference call. 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 10-K and subsequent 10-Qs filed with the SEC. Other unchanged factors may also be discussed in future 10-K and 10-Q filings. All filings are and will be available for viewing on our website at capellaeducation.com.

And now, I would like to turn the call over to Steve Shank, Chairman and CEO of Capella Education Company. Steve?

Steve Shank

Thanks Heide and thanks to each of you for joining us this morning. With me today are Ken Sobaski, President and Chief Operating Officer, Lois Martin, our Chief Financial Officer.

For those of you who may not know Capella very well, I would like to start by providing some context to help you understand our operating strategy and educational philosophy I will also update you on our view of the current economic environment including student loan funding and any implications for Capella. Lois, will then discuss our financial progress and Ken will focus on operating performance and an update on the ERP implementation. At the end of the presentation Lois will discuss our 2008 outlook.

Reflecting a solid fourth quarter finish to the year, I am pleased to report strong performance for 2007. Enrollment grew a healthy 24.1% year-over-year to 22,300 learners. Revenue, grew year-over-year by 25.8% to $226 million and operating margins improved 330 basis point to 13.2% for 2007. This results demonstrates sound strategies, strong execution and continued moment. And they reflect excellent performance by our talented team of Capella faculty and staff, as well, as our solid alignment with the needs of the Capella learners.

Capella is highly differentiated in the post secondary educations market offering online post secondary degree program specifically designed to server adult learners in targeted profession. This is a profile that serves us well in the current time of economic uncertainty. Our, point of differentiation are we are exclusively online with 84% of our learners enrolled in graduate programs. We focus on serving targeted professions across three markets, education, health and human services and business management and technology. We are committed to providing our learners with a high quality educational experience and educational outcomes.

Finally, we are executing five strategies to drive growth and differentiation. Ken, will discuss those strategies in more detail in a few minutes. Our strategies are designed to realize business success and create shareholder results by providing unique and differentiated value to Capella learners.

We are now in our second year of delivering upon the three to five objectives we laid out when we became public in 2006. We are attracting well against those objectives which are, annual enrollment and revenue growth of 18% to 22% and year-over-year operating earnings growth of 25% to 30%, driven by a combination of revenue growth and margin expansion. As we grow and continue to increase efficiencies, we would expect operating margins to progressively increase into the 20% range.

A little later in the call Lois, will provide you with our outlook for the full year and the first quarter of 2008. To frame that discussion, here is how we see the potential impact on Capella from the current economic uncertainty and from the recent changes in the student loan funding environment. Based on both our historical experience and on our current enrollment patterns, we do not expect that in the aggregate cyclical swings in the US economy will markedly impact Capella either positively or negatively.

We are positioned in three attractive markets, education, health and human services, and business management and technology. And we are focused on professions that generally have stable employment patterns where our learners have an identifiable benefit from achieving their academic credentials. This market positioning, combined with our focus on graduate adult learners, positions us well for the future.

Moreover, we are seeing no indications that changes in student loan funding patterns will threaten achievement of our operating objectives, or significantly restrict learner's access to a Capella university education.

We have strong Title IV lending relationships with a number of solid Title IV lenders. And we consistently hear that Capella learners offer an attractive profile for lenders. This is because we are serving working adults with 84% of our learners pursuing a graduate degree.

We have a learner population with average household incomes of $50,000 to $80,000. The vast majority of our learners take between one and two courses per quarter, and therefore can finance virtually all of their education with Title IV financing if required rather than private loans. And finally, our learners loan default rate is very low at an estimated 1.5% for 2006, which is a decline from the previously reported year 2005 when the rate was 2.3%.

Most of the current concerns surrounding availability is student loan funding relates to private loans. Our reliance of private loans is minimal, with only a very small percentage of Capella learners using private loans to help fund any of their tuition. Let me illustrate. In 2007, 74% of our revenue was through Title IV funds. The availability of which is solid for Capella learners.

At least 17% of our learners we see some tuition reimbursement from their employer. This number does not include our large number of military affiliated learners, who have access to government funding. Finally, and a key differentiator for Capella, graduate learners are eligible for up to $20500 a federally guaranteed financial aid on an annual basis. This amount is significantly above our average annual tuition and fees for masters and PhD learners.

I would also like to highlight that even for our bachelors learners the annual Title IV financial aid available is greater than our bachelors’ average annual tuition, with the exception of a first year bachelors’ learner whose average tuition exceeds the available title for funding amounts by only a few hundred dollars. Keep in mind that almost all of our bachelor learners are 24 years or older and therefore qualify for the independent Title IV loan limits which are almost double that of dependent students.

We estimate that private loans in 2007 constituted less than 1% of our revenue and were periodically used by less than 3% of our learners. Our commitment is to provide our learners with an exceptional leaning experience, this includes period mentioned financial aid counseling to help learners understand and access the best options for financing their education and to understand their financial responsibilities after graduation. We proactively educate learners about making good financial choices. We believe in fact that the current lending environment creates a opportunity for Capella University to further differentiate ourselves through superior service to our learners in the financial aid area.

Of course, we will continue to carefully monitor to evaluate the impact of any changes in private student loan accessibility. In addition, we will use our real time data rich online tools to monitor Capella learners behavior, for any indication of any changes related to their financing of tuition or related to enrollment trends, but to say it again we have not seen an impact to date on our enrolment from the changes that are currently happening in the student lending environment. Most importantly, we believe that the resilience of our business models during periods of economics uncertainty validates the long-term value we are building.

With that introduction, I will now hand the call over to our Chief Financial Officer Lois Martin. Lois?

Lois Martin

Thank you, Steve. As you heard from Steve and read in our press release this morning we had a very good fourth quarter and full year 2007. We executed our operating strategies, exceeded our three to five year financial goals and delivered quarter slightly above our previously provided guidance for fourth quarter 2007.

I will first provide you with perspective on our fourth quarter performance, before I talk about the full year. Revenue for the three month ended December 31, 2007 was $64 million an increase of 26.4% from the previous year. To provide color on fourth quarter 2006 the fourth quarter revenue growth, approximately 22.8 percentage points of the growth was related to enrollment, including solid new enrollment and improved persistence. And about 4.6 percentage points were due to the impact of pricing. These positive response were slightly offset by a 1.5 percentage point mix shift due to a larger proportion of Masters and Bachelors learners.

Total enrollment at the end of the fourth quarter 2007, was up 24.1% year-over-year. As Steve mentioned, 84% of our enrollment is in Graduate program. Learners and Doctoral programs made up 38% of our total enrollment at the end of the year, Masters 45% and Bachelors 16%.

Enrollment in all of our Degree programs increased in a double-digit percentage range. The Masters program increased by 2300 learners, a growth of 31% year-over-year, based on the strength of our differentiated program, particularly those with special state licensors, the accreditations, and affiliations which are very attractive to our learners.

Bachelor's enrollment increased by 900 learners or 32% year-over-year, bringing Bachelors up to 16% of total enrollment at the end of 2007 versus 15% in 2006. The Bachelors growth rate in the fourth quarter was above prior quarters, primarily due to the introduction of our Public Safety program, which occurred in mid-2007. In fact, we have been very pleased with the early success of all of our Public Safety programs launched in 2007, including the PhD and Masters public safety matriculations.

We also are very pleased with our fourth quarter PhD enrollment growth, which increased by 14.3% year-over-year, despite a 25% increase in graduations. Enrollment in all of our markets also increased in a double-digit percentage range with health and human services remaining exceptionally strong. Enrollment mix by market at the end of 2007 remained relatively consistent, with approximately 20% in the education market, 35% in the business management and technology market, and the remainder in the health and human services market.

The growth in revenue, the leverage of our infrastructure and our continued focus on process improvement, drove the significant increase in our operating margin. Operating income improved by 64.6% to $12.7 million for the quarter. Operating margins improved year-over-year by 460 basis points to 19.8% of revenue for the fourth quarter 2007.

Instructional cost and services as a percent of revenue declined by 120 basis points from quarter four 2006 to 42.6% of revenue. With the traditionally strong increase in fourth quarter enrollment, we have realized the leverage inherent in our infrastructure.

In addition, we continue to realize benefits from our process improvement, including more efficient course scheduling and use of faculty. As expected, marketing and promotional expenses decreased by 130 basis points to 26.6% of revenue for the fourth quarter 2007. As we've previously mentioned, we are aligning marketing investments for the natural rhythm of our of our business and consistent with the prior year, had lower marketing spend in the fourth quarter.

In addition, we scheduled fewer market and learner test during the fourth quarter in order to keep resources focused on the implementation of the customer relationship module of our ERP system.

Finally, we leveraged our learnings from the test we conducted earlier in the year to drive higher quality inquires, which resulted in lower marketing and promotional cost as a percent of revenue.

General and administrative expenses decreased by 210 basis points to a 11% of revenue in the fourth quarter of 2007 versus 2006 due to lower incentive compensation expense and recognition of contingency expenses in 2006, which were partially offset by increased public company and legal expenses in 2007.

Earnings before interest, taxes, depreciation and amortization were $15.2 million during the fourth quarter 2007, up $5.3 million from last year. That’s an increase of 54%. Other income for the quarter was $1.4 million. We currently invest all of our funds in tax exempts municipal debt and tax exempt money market funds. Considering the current credit market turmoil, I would like to share that we have been and remained prudent in managing our investments to ensure we meet our objectives of principal preservation and liquid high quality investments.

I am also happy to report that we conducted two independent investment reviews during 2007 and concluded that our current investments in tax exempt municipal debt and tax exempt money markets are not exposed to the current sub prime market crisis or current liquidity problems with auction rate securities. Or primary objective is to continue investing in low risk, high quality securities while remaining competitive from an after-tax return perspective.

The tax rate for the fourth quarter 2007 was 35.5%. This is down from an tax rate of 37.5% for the fourth quarter of 2006, as a result of our tax planning strategy, which included an even greater use of tax exempt investments, use on non-qualified instead of incentive stock options and the reduction of our non-deductible meals and entertainment expenses.

Net income for the quarter was $9.1 million, a 60.3% increase over fourth quarter 2006. Diluted earnings per share for the fourth quarter were $0.51, up $0.12 per share from last year. The actual number of shares outstanding at the end of 2007 was 17,353,017, up from the prior year's outstanding shares of 16,002,371. By all measures this has been a very good quarter for Capella and from an annual perspective this has been a great first year as a public company.

Let me briefly review our annual financial performance. Year-over-year revenue for 2007 was up 25.8% to $226.2 million. Of this revenue increase 22.7% points were due to increased enrollment and 3.7% points were due to tuition increases, which were partially offset by a 1.1% point decrease due to continuing makeshift.

For the year we had strong new enrollment growth of 22% year-over-year, slightly above the prior year new enrollment growth rate. Operating income was $30 million, up 67.9% from 2006. Year-over-year operating margins improved by 330 basis points to 13.2%. Expenses as a percent of revenue in each of our P&L line item showed impressive leverage with instructional costs and services declining by 220 basis points primarily related to fixed cost leverage, process improvement and increased efficiency.

Marketing and promotional expenses, as a percent of sales declined by 70 basis points, even though 2007 was the year with significant investments in furthering our brand differentiation, new product development activity, and new program introductions. Hospital enrollment also remained flat, reflecting the higher quality and higher converting enquiry stores mix along with continuing improvements in our sales processes.

General and administration expenses declined by 40 basis points. Even though, in 2007 we had our first full year of public company expenses, we experienced higher legal expenses, and accrued higher incentive compensation amounts. Included in the $30 million of operating income for 2007 is FAS 123R related to stock-based compensation expense of $3.4 million before tax. This compares to $4.2 million in 2006. Net income for 2007 was $22.8 million and diluted earnings per share were $1.33 up $0.27 from 2006.

Shifting our attention to the balance sheet as of December 31, 2007, we had cash, cash equivalents and marketable securities of $143.8 million. For the year the company generated $37.2 million in cash from operating activities, a 28.6% increase year-over-year. Capital expenditures were $16.1 million for the full year, up $700,000 from 2006. For the fourth quarter capital expenditures were $2 million compared to $4.2 million in the fourth quarter of 2006, reflecting the timing of our ERP expenditures.

For both year and the fourth quarter of 2007, bad debt expense as a percent of revenue was 1.6%, no change from the same period in 2006.

Day sales outstanding were 12.1 in 2007 an improvement of 3.2 days from last year. As we continue to tighten and improve our billing and collection processes. In fact, in the fourth quarter of 2007, day sales outstanding were only 10.5, the lowest in the company's history.

With that, let me hand the call over to our President and Chief Operating Officer Ken Sobaski. Ken?

Ken Sobaski

Thank you, Lois. Good morning, everyone, and thank you for joining on this call. There are four key reasons for our success in 2007 and our continued optimism for 2008 and beyond.

One, Capella is a fundamentally differentiated business, focused on three vertical markets with 84% of our learners in graduate programs. Two, we have a clear vision to be the university that leads the definition of high quality, adult online education. Three, to achieve that vision, we have five core clearly defined strategies that drive further differentiations and four, in 2007 we made significant progress in pursuit of these strategies, which in turn has helped us deliver exceptional business result.

2007 was also the year we successfully implemented several external facing ERP modules. This ERP system will provide Capella a single platform and a best-in-class operating and data infrastructure to build upon with reengineering and process improvement.

We believe we are executing with excellence against each of our five core strategies.

I would like to walk through some of our key accomplishments in 2007 that demonstrate the progress we're making against these strategies. These accomplishments give me confidence in our ability to continue to execute going forward. Our first strategy is focused on markets and learners. In 2007 we launched six new degree programs and 31 new specializations, across our three vertical markets, including 9 PhD specializations. As we've previously discussed, our pace in 2007 was higher than the last three years, because we had a built a pipeline over the prior 18 months when we limited new product offerings in order to focus on an extensive existing course redesigned,

Beyond these launches, we also further advanced the knowledge of our markets and learners by conducting sophisticated consumer market research to build an understanding of both the purchase decision making process of perspective learners and the drivers of persistence among our current learners. These studies provide a wealth of information that will inform many our decisions going forward.

Our second strategy is to build Capella brand differentiation. Our focus here is on driving greater differentiation through specialized accreditations, endorsements and state approvals. These differentiators provide our learners with the confidence that their Capella course work strongly relate to the competency needed in their profession and that their degree can lead to better career outcomes upon graduation. In 2007 for example we received state approval by the state of Minnesota for our masters level reading and literacy specialization. We also received state approval by the State of Arizona for our leadership and educational administration and school psychology specializations. In addition, the National Security Agency and the US department of Homeland Security designated Capella University a national center of academic excellence in information assured education. Capella is also one of the few schools to have an educational alliance with the FBI. This helps us differentiate our new public safety degree programs and specializations.

Our third strategy is to increase total enrollment effectiveness. One of our accomplishments in this area was increasing the percentage of inquiries that come from higher converting sources such as our website, referral and direct advertising.

In addition, we now have integrated plans in place that reach out to our learners at key times to drive their re-registration behavior. Continuous enrollment is a very important driver of persistence, especially for a busy adult learner. Anyway, we can help facilitate and motivate enrollment in that next course or next quarter is good for us and good for our learners.

This is an area where we also have applied the marketing principals of plan, test, measure and expand to their fullest. In 2007 we conducted more than 100 tests spanning the entire learner lifecycle to drive greater effectiveness and greater efficiency in the total enrollment process. The test areas that had positive results are scheduled for expansion in 2008 where we continue to conduct additional tests.

Our fourth strategy is delivering quality through superior learning outcomes and a superior learner experience. We are leading the transparency by design initiative on a national level, which we believe will give learners better tools to compare the quality of education by individual program across adult serving institutions.

In addition, we committed additional resources in 2007 to put in place the infrastructure and reporting that supports outcome transparency, allowing our factuality and our learners to see course-by-course the expected learning outcomes and to tie this to their ultimate goal of developing the competencies required by their profession and to receive their degree.

Finally, we've been measuring learner's satisfaction monthly, satisfaction defined as our learners willingness to recommend Capella to there family and friends. Improvements in this measure are tied to incentive compensation of our management. Over the course of 2007, we've seen solid improvements in this measure.

Our fifth and final strategy is to drive successful new business developments. In 2007 we began the process of identifying our four vertical markets, which is targeted for launch in the next two to three years. Some of the criteria for the next market include, the size of the market, its growth potential, graduate emphasis, professional need, and of course the fit with Capella's current capabilities and assets.

We are going through a very discipline and diligent process to identify this future opportunity and expect to decide on the market in 2008. Additionally, we have established a formal new business development team that owns and drives this process and long-term will focus on developing and identifying additional growth opportunities for Capella. That gives you an overview of our accomplishments and the progress we made against our five core strategies.

The other significant accomplishment I'd like to highlight, once again, is our ERP module implementations in 2007. The new ERP system is critical to our future scalability. We cannot begin reengineering and fundamental process improvement without this. And in 2007, we successfully launched several learner facing modules, each had appropriate risk mitigation strategies in place to limit the impact to the business. The accomplishments against our five core strategies and our ERP implementation, translated into the annual revenue and enrollment growth that we have reported today, a very successful 2007 all around.

We are optimistic about 2008, but we're also realistic about the degree of change. We are currently undertaking with the recent implementations of the customer relationship and student administration modules of our ERP system, and their impact on the business.

For example, the student administration model interfaces with the most employees of any of our ERP modules and impacts all of our learners. For example, additional time was required for training, reducing the time available for enrollment counselors to engage and enroll perspective learners.

Everyone, including our learners, is going through a natural learning curve with the new tools. Our continuing learners re-registration period for the first quarter was also condensed by few days, as a result of the schedule transition to the new student administration module of the ERP system.

Finally, visibility of information is temporarily reduced for many of our employees using the system which requires that additional time for them to understand and analyze, thereby causing normal task like re-enrollment to take longer. As you've heard us talk before, this was expected and planned for and each of these interruptions had robust risk litigation strategies in place.

So let me summarize why we're optimistic about Capella’s prospects for 2008 and beyond. Capella is a fundamentally differentiated business. Our vision and our core strategies are clear and drive further differentiation. Our 2007 accomplishments demonstrate strong progress against these strategies, as well as our ability to execute. Our progress has delivered exceptional business results. We're half way through the most significant period of disruption caused by our extensive and company wide reengineering effort, related to the ERP implementation, an implementation that will give us best-in-class operating and data infrastructure.

Finally, we have exceptional employees, faculty and university staff committed to providing our learners with an exceptional learning outcome and an exceptional learner experience. With that, let me hand the call over to Lois who will provide you with some guidance on our financial expectations for 2008.

Lois Martin

Thank you, Ken. We expect 2008 to be another strong year for Capella. Our current expectations after revenue and quarterly enrollment growth of 20% to 22%, including solid new enrollments and an operating margin of 14% to 15% of revenue. Our financial expectations for 2008 are at the high end of our three to five year financial goal. Included in our first half of the year assumptions are the estimated enrollment revenue and productivity impacts from the ERP implementation Ken has previously discussed.

In addition, consistent with our long-term guidance, we anticipate a continued mix shift to masters and bachelors learners. Also we anticipate modest tuition increases in the upcoming academic year, as we pay close attention to the affordability of education.

In terms of our operating performance, we expect to continue to gain efficiency in instructional costs and services, partially offset by investments in learner experience, faculty development and persistence. Marketing and promotional expenses as a percent of revenue are projected to again see some modest leverage for the year, as we continue to invest in strengthening our brand differentiation, improving persistence and expanding our data minding abilities. We are especially excited about the latter, as once the ERP system implementation is complete virtually all of our data will be on one system.

General and administrative expenses expected to have the most leverage of the percent of revenue year-over-year as we lap our first full year as a public company. Other income on an annual basis is expected to increase only modestly due to the recent and significant rate cuts announced by the Feds. Due to the complete deployment of our ERP system by mid-2008 we expect depreciation and amortization to increase 27% to 29% from 2007 expense.

We expect 2008 capital expenditures to be in the range of 6% to 7% of revenue, as we end our heavy capital investment stage of our ERP deployment mid 2008. Post ERP implementation we believe capital expenditures as a percent of revenue will be in the range of 5% to 6%. Cash flow from operation should increase by 30% to 35% up from 28% in 2007 based on our operating performance expectations.

Turning now to the first quarter of 2008, we are expecting total enrollment to grow 21% to 22% and revenue to increase by 22% to 23% compared to the first quarter of 2007. Quarter ones revenue growth reflects the following assumptions. First, impacts from our ERP implementations, including a reduced selling cycle, contemporary registration period, and a natural productivity impact. Second, we moved February starts back one week in anticipation of the student admin ERP implementations, which occurred at the end of January, and which we knew would have a significant impact on our staff and learner's.

Delaying February starts by one week with part of our risk mitigation strategies to ensure systems stability and minimize the disruption to our learner's. And third, we expect continuing mix shift from PhD to Masters and Bachelor Degree learners.

Quarter one 2008 operating margins is expected to be approximately 10% to 11% of sales compared to 9.5% in the first quarter of 2007, demonstrating continuing improvements in our leverage inherent in our business model. Capital expenditures are expected to be about $6.5 million to $7 million during the first quarter of 2008.

In the first quarter of 2008, while we are focused on executing a successful ERP implementations to benefits the long-term success of Capella, we still expect to deliver significant margin expansion and growth in cash flow compared to the first quarter of 2007.

With that, I'd like to hand the call over to Steve for final comments.

Steve Shank

Thanks, Lois. Our strategies are based on balancing short-term and long-term investments in growth with a commitment to creating value for our shareholders. Capella is highly differentiated in the post-secondary education market with a profile that serves us well in the current time of economic uncertainty.

We demonstrated sound strategies, strong execution and continued momentum with our 2007 financial results. Capella's incredibly talented group of faculty and staff is the reason for our success in 2007 and for our positive outlook for 2008.

That concludes our prepared remarks. We'll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We'll go first to Edward Yruma with J.P. Morgan.

Edward Yruma - J.P. Morgan

Just to draw up battle a bit on the impact of ERP in the first quarter. If you were remove the impact ERP, would you have shown underlying margin improvement?

Lois Martin

Ed, good morning. This is [Lois]. Actually I'm not sure I'm following the entire question even with the impact of ERP, we are showing margin improvement in the first quarter?

Edward Yruma - J.P. Morgan

I'm just trying to understand, maybe the difference how much greater would the margin improvement have been without ERP?

Lois Martin

I'm not going to disclose that number. I would say you can see it again across all of the lines as Ken has detailed the impact, clearly there is some on the top line along with just productivity issues each of the other lines but even with that the margins that we're delivering in the first quarter are within and actually exceeding our three to five year guidance.

Edward Yruma - J.P. Morgan

Got you. And Steve, I think you have previously articulated that would step down towards the end of 2008, can you give us an update on your timing? Thank you

Steve Shank

Yes Ed. I would just reiterate that that is my objective and would reiterate that our Board continues to be engaged in an orderly process of planning for a CEO succession and we're very optimistic about the strength of our team and how that’s going

Edward Yruma - J.P. Morgan

Great, thank you

Operator

We'll go next to Marc Marostica with Piper Jaffray

Marc Marostica - Piper Jaffray

Thank you. A nice job in the quarter. My first question relates to the ERP implementation also and I am wondering want modules are left to implement and what the timing is on those implementations? And then lastly tied to that, do you anticipate any further changes to the start schedule versus last year as you look ahead to this year?

Lois Martin

Good morning Mark, this is Lois. And yes, actually the remaining modules will be essay which we're in right in the middle of that deployment and started at the end of January. And then the financial aid module is the last module that remains and that will go live in the second quarter of 08.

Marc Marostica - Piper Jaffray

Any anticipated changes -- while going ahead?

Ken Sobaski

No we don’t – we do not anticipate – Marc this Ken Sobaski. Thanks for your question. We do not anticipate any quick changes in our start schedules with the implementations

Marc Marostica - Piper Jaffray

Okay great. And then in regards to the program expansion Ken you obviously had a banner year for programs expansion last year with due to re-programs and also specializations. As you look to '08 do you have a sense for the number of new degrees and number of specializations that you have rolled out?

Ken Sobaski

Thank you, that’s a good question. Let me give you a range. In the 3 years prior to '07 we launched 3 to 4 a year. At the end of '07 we launched 31 so you know its going to be somewhere in between those two numbers. I would suggest 31 as inordinately high, as you know we don’t announce what we're launching until we're ready and can tell our learners but I think something in the high single-digits is not unrealistic.

Marc Marostica - Piper Jaffray

Great. And then I think you mentioned you had rolled out 9 PhD specializations of the 31 specializations rolled out last year. And I thought you also mentioned public safety did quite well. Can you give us a sense of how the 9 fared relative to your internal expectations and if any others outperformed or underperformed on the PhD side?

Ken Sobaski

Yes in general we're very pleased with the performance all 31. There are none that are really below our expectations in terms where we wanted to be at this point in time. You will recall Marc that we talk about anywhere from 4 to up to 8 quarters of ramping up and gaining leverages we get enrollments in each of those programs, the public safety program in particular we're pleased with is lowest described yet it accounts for a significant portion of the growth we talked about an undergrad and we're very pleased with that. And then you look at the fact that we also have public safety programs in PhD and MS. We think that was a good move on our part.

Marc Marostica - Piper Jaffray

Okay.Last question just to housekeeping items, stock base comp for Q4, Lois I dint catch that if you mentioned it.

Lois Martin

Let me grab that I had given it was 3.4 for the year and I'm just grabbing the actual quarterly amount.

Steve Shank

Maybe we could go on to another question some where.

Lois Martin

It's about 800,000 about 900,000.

Marc Marostica - Piper Jaffray

Okay, great. Thank you.

Operator

We'll go next to Bob Craig with Stifel Nicholas. And next we'll go to Amy Junker with Robert Baird.

Amy Junker - Robert Baird

Good morning everyone. Just I guess a quick follow-up on Marc's line of questions with the number of programs in specialization. Can you just update if you have it in front of you the number of total programs or specializations that you have in each of the there three verticals at this point how that breaks out? And if you don't.

Ken Sobaski

We have that in front of us we're digging as we speak, Amy.

Amy Junker - Robert Baird

Okay. And I guess as you're looking up there, just with the ERP I want to make sure I am clear that, you have experienced at this point some disruptions I understand the slow they will just be on the push back in starts for February. But I guess I'm trying to understand, how much of your guidance you're just trying to be conservative and planned for potential disruptions and how much have you actually experienced at this point?

Lois Martin

Actually Amy, we'll come back to you I've got the detail of all of that that we've introduced in programs over the last few years. I do not have the current total account in each of those degrees. So we can follow-up with you after the call if you like.

Amy Junker - Robert Baird

That's fine.

Ken Sobaski

Amy, would you restate your question, that the other second question?

Amy Junker - Robert Baird

Yeah. So with the ERP implementation, I guess ultimately what I'm trying to get to is, what level of disruption have you really experienced at this point, because I'm trying to understand for your guidance for the first quarter how much is in anticipation of disruption that you think you might have going forward and how much is you had actually occurred with the exception of course start being pushed back by a week?

Lois Martin

Yes. Let me try to give some context to that. We have already experienced whatever disruption we would have on the -- I would say bulk of the enrollments that start at the beginning of the quarter, the reenrollment, and those that at start at the beginning of the quarter which usually the largest in peak period.

We are right close to finishing off enrollment for the February starts, so that's pretty well-done, but again not completely. March is obviously still in the works, so that helps provide some context. I would say in total from the disruption within first quarter, we're probably at least three quarters away through that.

Amy Junker - Robert Baird

Now that is helpful.

Ken Sobaski

Amy, let me add to that if I can, this Ken, but I'm going to pick on the word anticipated. One of the ways for you to think about it is, we actually feel like we've anticipated all of this. We are not being surprised by any of the disruptions that we are seeing. We actually are seeing exactly what we thought we would see. We're applying the risk mitigation strategies that we put in place to deal with them, but the impacts are there, and we've told you about them ahead of time and the good news is we are seeing what we thought we would see.

Amy Junker - Robert Baird

Great. And then last question from me and I know you're not going to disclose what the fourth vertical will ultimately be, but Steve can you maybe talk through the process you are going through to narrow that down or what, I know you kind of mentioned a little bit what you are looking for, but there is a lot of it seems like different areas and opportunities out there, and could you name maybe a couple that you see at this point is being particularly attractive?

Steve Shank

I would say one. Yes, we do see a number of opportunities and I would, I think it's best for us not to foreshadow where we are going, because we do see a lot of competitive watching of Capella’s moves now. But in terms of our process we are looking at employment trends, we're looking at those markets where we are building a set of credentials that’s going to make a difference in delivering high value to learners and where the value proposition that we can bring to the market is going to let us establish the kind of differentiation we've established in our existing markets. We're quite encouraged by our disciplined process and well along in our planning, but we just wouldn’t foreshadow anything beyond that.

Amy Junker - Robert Baird

Okay. Thank you

Operator

We'll go next to Trace Urdan with Signal Hill

Trace Urdan - Signal Hill

Hey good morning. First off, I wondered if you – you described the public safety growth as a driver of the mix shift towards the bachelors, I wonder if you sort of anticipate that will continue to be the driver of the shift or whether you're seeing shift in some of the other verticals?

Ken Sobaski

Hi Trace this is Ken, how are you? Thank you for your question. Let me try and put that in perspective. This isn’t about changing a trend in the undergraduate performance this is about entering an area of undergraduate we were never in before and I think of it as in the retail perspective opening a new store compared to same store sales kind of notion, overall we continue to believe that undergraduate will grow at the overall rate of the total company that masters’ will grow at a faster rate than that and PhD will grow slightly slower than that.

And what you're seeing in terms of the impact of public safety is what’s natural when enter a completely new segment that you haven’t been in before. As I had said earlier I think with Amy's question, what we're seeing in public safety is slightly above what we expected and we're very pleased with our results so far and yes it does for the back half of '07 drives some additional growth in undergrad.

Lois Martin

I think another, just to clarify that trait. Anytime we introduce a completely new program within any of our degrees we would expect to see disproportionate bump in that growth rate for the short-term.

Trace Urdan - Signal Hill

Fair enough Lois, but you described quite pointedly in your prepared remarks that you expect to see a continued mix shift and I guess what I am asking is, is it being driven by these new product introductions or is there something happening in the more mature products as well that points in that direction.

Lois Martin

I think, thank you for asking up to clarify, because our context is really we continue we would expect to see continuing makeshift at the rates of about what we've had in the past year or two, but periodically in certain quarters you may get a higher growth in one or the other degree depending upon how much of that program introduction we've done within that degree and how different its been from anything we've been in. So again, the overall mix shift would continue in the same trajectory, but at no point do we see its not being a graduate focus institution.

Trace Urdan - Signal Hill

Okay. And then one more follow up if I could. You described the growth in PhD as being strong and the context of it, the much higher graduation rate in this quarter and I know you don’t disclose the new students starts, but I wondered if you could just tell us as a directionally whether the PhD starts in the quarter were in line with what they've been in previous quarters or whether you saw a softening in that, in the starts in that degree area?

Lois Martin

Not a problem. I think, it adds great color. Actually the intake we have on PhD is significantly, exponentially higher then what the number of graduates is, in any one quarter. And in fact, we've not seen softness in total in that PhD intake. In fact again back to the new programs in specializations that we've introduced this year, its just continued to offer us new avenues within even our most mature piece of the business.

Trace Urdan - Signal Hill

That's very helpful, Lois. Thank you.

Operator

We'll go next to Jeff Silber with BMO Capital Markets.

Jeff Silber - BMO Capital Markets

Thanks so much. I appreciate the color you gave on the private lending side. I just was wondering maybe if you can drill down a little bit. I know it's relatively immaterial part of your business. But can you give us a little bit more insight into who the typical lenders are to your students, do you have Sallie Mae exposure, for example? And also all there any recourse or discounts arrangements with those lenders, and quantify what the impact on that is? Thanks.

Lois Martin

Good morning, Jeff. Yes, we have no recourse discount loans at all, never have, just not part of our offerings or what we have used. And again, part of it is with the loan limits available to our learners through traditional staffer entitled for loans, there just hasn't been the need. As far as back to other usage, we actually -- if we go out to our website, we do provide on a rotating basis a list of potential lenders that people can use, again learners can use any lender we've always had that policy and we work with 100s and 100s of lenders.

But if our learner is looking for some directions, there is actually a rotating list of lenders who are very strong and continue to be very good partners from availability, and funding, etcetera to our type of learner. Sallie Mae is clearly one of them, and again there are seven others of them also?

Jeff Silber - BMO Capital Markets

Okay, and one more lending related question. In terms of any sub prime exposure, again like most of your students are working adults, but if you can quantify that as well?

Lois Martin

Again, we don't see it less than 1% of our revenue, and again periodically on total less than 3% of our learners have ever periodically used private loans in the past year, so from that standpoint it would be very interim funding.

If you look at it actually on a very specific basis, the only year and degree were our Title VI for our learners, because of their age and their independent status, wouldn't potentially cover all of the cost of attending is in that first year bachelor. And again, that's only a few hundred dollars worth of difference.

Jeff Silber - BMO Capital Markets

Okay. I appreciate that. And actually a balance sheet question. It look towards the end of the quarter you are at least relative to last year your prepaid expenses burnt up significantly, was it a timing issue, can you give us a little bit more color and should that be coming down in the current quarter?

Lois Martin

Yes, it's truly is just a timing difference on one of our vendors where we do some -- we have a prepaid arrangement. In addition there is an increase in our tax receivable, so with that again you should see those both as timing and temporary.

Jeff Silber - BMO Capital Markets

Alright. Fantastic, thanks again.

Operator

We'll go next to Kevin Doherty with Banc of America Securities.

Kevin Doherty - Banc of America Securities

Great, thank you. I know in the past your doctoral programs have accounted for much of your overall profitability, maybe you can just give us an update on how the current profitability would be split between your degreed types and kind of what to expect going forward particularly as we see some changes with your mix shift?

Lois Martin

Absolutely we're very pleased when we look at our overall contribution margins by degree improvement in each of our degree program year-over-year and again to be clear, all of them are, including bachelors’ are contribution positive. When we look at fully allocated year-over-year again we've seen some nice improvement across the Board in all of the degree programs. So from that standpoint we're on our long-term plan and goals of profitability and again even on the masters program that program along with PhD is profitable on a fully allocated basis.

Kevin Doherty - Banc of America Securities

And then maybe you know how would you think about volume versus pricing drivers going forward and you mentioned that your bachelors programs are below title for the loan limits you maybe just talk about how you think about pricing as profitable in the ramp over the time?

Lois Martin

We've talked about our long-term our three to five year targets that we've expected that price would need to modulate a bit and then in total we're expecting or thinking around 3%. I would say continue to use that. Clearly for some of our specific areas and with our mixed system of our specialized accreditation we're able to do more in pricing in the last academic year.

We're right actually in the middle of determining what price increases will be for the academic year that begins in July of '08, so it’s premature for me to say what exactly will be, but we're keeping our eye really very clearly on the affordability of the education. So again I would expect at this point in what we're projecting in more modest price increase in the latter half of the year

Kevin Doherty - Banc of America Securities

Thank you.

Lois Martin

And I think we are out of time. Could you please wrap up the call then.

Ken Sobaski

I just wanted to make the comment that we know there are some, some people didn't get to answer to their questions, so please call Heide Erickson. And again, I'd like to pass on our thanks for participating in the fourth quarter year end earnings release call. We are pleased with Capella's financial performance in 2007. We look forward to continued success in 2008. And if there are further questions, Heide Erickson will be happy to take them.

Operator

That does conclude today's presentation. We thank you for your participation and you may now disconnect.

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