Capella Education Company’s (CPLA) fourth quarter 2012 earnings of 73 cents a share missed the Zacks Consensus Estimate by a penny as well as were down 16.4% from the year-ago quarter due to year-over-year decline in revenues and margins. Better-than-anticipated new enrollment growth could not offset the downward drift in earnings.

Revenues and Enrollments in Detail

Quarterly revenues of $107.0 million went past the Zacks Consensus Estimate of $106.0 million by 0.9%. However, revenues slipped 2.7% from the year-ago levels. The top-line decline was much narrower than management’s expectation of a 3.5% to 4.5% decline. Revenues benefited from positive new enrollment growth.

Total active enrollment dropped 3.6% from the prior-year quarter to 36,329 students, lower than management’s guidance of a drop in the range of 4.0% and 5.0% due to new enrollment growth. New enrollment grew 0.6% year over year despite tough market conditions, driven by improving demand for Bachelor’s and Master’s. However, new enrollment growth was slightly better than management's expectation of flattish growth.

Total enrollments declined 5.1% for Ph.D./doctoral degrees and 8.5% for the Master's programs. Total enrollments for the Bachelor’s programs grew 3.7% resulting in the third consecutive quarter of increase. However, the Other segment jumped 66.4% year over year.

Costs and Margins

Instructional cost of services increased to $49.4 million in the fourth quarter of 2012, up 7.2% year over year primarily due to increased bad debt expense and increased investment in technology and depreciation. Marketing and promotional costs decreased 5.1% year over year to $24.3 million due to alignment of the cost structures with the marketing strategies.

Operating income came down 20.1% to $15.1 million, whereas operating margin contracted 310 basis points to 14.1% due to higher bad debt expenses. Operating margin was in line with management's expected range of 13.5% to 14.5%.

Fiscal 2012

Capella Education Company reported full year 2012 earnings of $2.76 a share, lagging the Zacks Consensus Estimate of $2.81. Earnings were also down 18.8% from the year-ago earnings of $3.40 due to year-over-year decline in revenues and margins.

Revenues of $421.9 million slipped 1.9% from the year-ago levels due to a 4.1% decline in average quarterly total enrollment.

First Quarter 2013 Outlook

The company expects new enrollment for Capella University to rise 5%. Masters and Bachelors new enrollment is expected to perform well, whereas new enrollment of doctoral programs is expected to remain weak in the first quarter of 2013. Total enrollment is expected to decline 3% to 4% from the prior-year quarter, which is expected to result in 4.5% to 5.5% decline in total revenue. Revenue per student is expected to decline 2% due to grants and change in mix.

Operating margin is expected to be in the range of 12.0% to 13.0%, down from 16.4% in the prior-year quarter due to decline in total enrollments.

Sluggish macroeconomic conditions and low employment levels have been taking a toll on private education companies by adversely effecting enrollment. In order to improve overall enrollment growth and increase efficiencies, Capella Education is moving away from a direct marketing aggregator channel to a brand-driven marketing strategy to build greater awareness and preference for Capella. The company is also working to build brand awareness for its university through mass media, social media and strategic relationships with employers.

Most companies are working toward increasing the value of the programs and thus increasing employability of the students. For instance, Universal Technical Institute (UTI), a leading provider of post secondary education in the fields of professional automotive, diesel, collision repair, motorcycle and marine, recently announced Chapparal Honda L&Mc Racing as part of its 2013 MMI Supercross Intern Program, under its Motorcycle Mechanics Institute.

Capella Education Company carries a Zacks Rank #4 (Sell). However, some other companies in the sector that warrant a look include DeVry Inc. (DV) and Grand Canyon Education, Inc. (LOPE), both of which carry a Zacks Rank #2 (Buy).