Capella Education Company Reports Fourth Quarter and Full Year 2007 Results

MINNEAPOLIS - (Business Wire) Capella Education Company (NASDAQ: CPLA), a provider of exclusively online post-secondary education through its wholly owned subsidiary Capella University, today announced financial results for the three months and year ended Dec. 31, 2007.

“We achieved strong enrollment and revenue growth, as well as operating leverage in 2007, demonstrating effective execution on sound strategies and continued momentum,” said Stephen Shank, chairman and chief executive officer of Capella Education Company. “These results reflect the excellent performance of our talented team of Capella faculty and staff, and a solid alignment with the needs of our learners.”

For the fiscal year ended Dec. 31, 2007:

• Revenues for the year increased 25.8 percent to $226.2 million, compared to $179.9 million in 2006.
• Total active enrollment increased by 24.1 percent to 22,316 learners.
• New enrollment grew 22.0 percent in 2007.
• Operating income in fiscal year 2007 was $30.0 million, compared to $17.8 million in 2006. The operating margin in 2007 was 13.2 percent, compared to 9.9 percent in 2006.
• The tax rate for 2007 was 34.6 percent compared to 39.9 percent in 2006.
• Net income for fiscal 2007 was $22.8 million, an increase of 69.9 percent, compared to $13.4 million in 2006.
• Diluted net income per share was $1.33, compared to $1.06 in 2006.

“The growth in revenue, the leverage of our infrastructure, and our continued focus on process improvement drove the significant increase in our operating margin,” said Lois Martin, the company’s chief financial officer. “At the same time, we made significant investments in our infrastructure, new product development and brand differentiation.”

For the three months ended Dec. 31, 2007:

• Revenues increased 26.4 percent to $64.0 million, compared to $50.6 million in the fourth quarter of 2006.
• Operating income in the fourth quarter of 2007 was $12.7 million, compared to $7.7 million for the same period in 2006. The operating margin in the fourth quarter 2007 was 19.8 percent, compared to 15.2 percent for the same period in 2006.
• Net income for the fourth quarter of 2007 was $9.1 million, compared to $5.7 million for the same period in 2006, an increase of 60.3 percent.
• Diluted net income per share was $0.51, compared to $0.39 for the same period in 2006.

Balance Sheet and Cash Flow

As of Dec. 31, 2007, the Company had cash and marketable securities of $143.8 million and no debt, compared to $87.7 million in cash and marketable securities and $12.0 thousand in debt at the end of 2006. The Company generated $37.2 million in cash from operating activities in fiscal year 2007 compared to $28.9 million in 2006. Capital expenditures on a cash basis were $16.1 million in 2007 compared to $15.4 million in 2006. The increase in capital expenditures is primarily related to the Company’s investment in a new ERP system, which is scheduled for completion in 2008. Depreciation and amortization was $9.8 million for fiscal year 2007, compared to $8.2 million for fiscal year 2006.

For the fourth quarter 2007 capital expenditures on a cash basis were $2.0 million and $4.2 million during the same period of 2006. Depreciation and amortization was $2.5 million for the fourth quarter of 2007, compared to $2.1 million for the fourth quarter 2006.

First Quarter 2008 Outlook

For the first quarter ending March 31, 2008, enrollment is expected to grow by 21 to 22 percent and revenue by 22 to 23 percent compared to the first quarter of 2007. The operating margin is anticipated to be approximately 10.0 to 11.0 percent of total revenue for the first quarter of 2008.

2008 Annual Outlook

For fiscal year 2008 we expect revenue and average quarterly enrollment growth of 20 to 22 percent from fiscal 2007. Operating margins are expected to be approximately 14 to 15 percent of revenue. The annual tax rate is anticipated to be approximately 36 percent. Capital expenditures are projected to be 6 to 7 percent of revenue.

“We are undergoing significant process re-engineering resulting from the implementation of our two largest ERP modules in October 2007 and January 2008. As with previous implementations, we anticipate and plan for initial inefficiencies, including the inevitable employee learning curve associated with major systems implementations such as this,” said Shank.

“Even with these short-term inefficiencies and investments in risk mitigation strategies, our financial expectations for 2008 are at the high end of our three- to five-year financial goals,” said Shank. “Capella has a fundamentally differentiated business, a clear vision, and strong strategies in place, which have delivered excellent results in 2007 and provide a strong platform for future growth.”

Forward-Looking Statements

Certain information in this news release does not relate to historical financial information, including statements relating to our future prospects and our expectations regarding our revenues, enrollment, and operating performance, and may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company cautions investors not to place undue reliance on any such forward-looking statements, which are based on information available at the time those statements are made or management’s good faith belief as of that time with regard to future events, and should not be read as a guarantee of future performance or results. Such statements are subject to certain risks and uncertainties that could cause the company's actual results in the future to differ materially from its historical results and those presently anticipated or projected. The company undertakes no obligation to update its forward-looking statements to reflect events or circumstances arising after such date.

Among these risks and uncertainties are any failure to materially comply with the extensive regulatory framework applicable to us, including compliance with Title IV of the Higher Education Act and the regulations thereunder; regional accreditation standards and state and regional regulatory requirements; changes in funding for Title IV programs; responding to any additional governmental inquiries into our financial aid practices; attracting and retaining learners; updating and expanding the content of existing programs and developing new programs; the review of our business and financial aid practices by governmental authorities, including issuance of the final audit report of the Office of Inspector General of the U.S. Department of Education arising out of its ongoing compliance audit of Capella University; changes in applicable federal and state laws and regulations and accrediting agency policies; maintaining and expanding existing commercial relationships with employers and developing new such relationships; our failure to keep up with advances in technology important to the online learner experience; our ability to manage growth effectively; the continued successful implementation of our Enterprise Resource Planning system; unforeseen changes in student enrollment or our expenses; and risks associated with the overall competitive environment and general economic conditions.

Other factors that could cause the company's results to differ materially from those contained in its forward-looking statements are included under, among others, the heading “Risk Factors” in our Form 10-K and our subsequent Form 10-Qs on file with the Securities and Exchange Commission and other documents filed by the company with the Securities and Exchange Commission.

Conference Call

Capella will discuss its fourth quarter and full year 2007 results and 2008 outlook during a conference call scheduled today, Feb. 14, at 9:00 a.m. Eastern time (ET). To participate in the live call, investors should dial 866-288-0543 (domestic) or 913-312-0376 (international) at 8:50 a.m. (ET). The Webcast will be available on the Capella Education Company Web site at www.capellaeducation.com.

A replay of the call will be available starting on Feb. 14, 2008, through Feb. 20, 2008, at 888-203-1112 (domestic) or 719-457-0820 (international), passcode 1522443. It will also be archived at www.capellaeducation.com in the investor relations section for 60 days.

About Capella Education Company

Founded in 1991, Capella Education Company (NASDAQ: CPLA) is a national leader in online education and parent company of Capella University, a regionally accredited(a), online university. Capella University offers graduate degree programs in business, information technology, education, human services, psychology, public health, and public safety, and bachelor's degree programs in business, information technology, and public safety. These academic programs are designed to meet the needs of working adults, combining high quality, competency-based curricula with the convenience and flexibility of an online learning format. Currently, Capella University offers 19 graduate and undergraduate degree programs with 104 specializations and more than 950 courses. More than 22,000 learners were enrolled as of Dec. 31, 2007. For more information about Capella Education Company, please visit http://www.capellaeducation.com. For more information about Capella University, please visit http://www.capella.edu or call 1.888.CAPELLA (227.3552).

(a)Capella University is accredited by The Higher Learning Commission and is a member of the North Central Association of Colleges and Schools (NCA), http://www.ncahlc.org. Capella University, 225 South Sixth Street, Ninth Floor, Minneapolis, MN 55402, 1-888-CAPELLA (227-3552), www.capella.edu.

CAPELLA EDUCATION COMPANY
Unaudited Consolidated Balance Sheets
		As of December 31,
		2007				2006
		(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents		$	40,939			$	22,491
Marketable securities			102,828				65,170
Accounts receivable, net of allowance of $951 in 2007 and $1,119 in 2006			7,557				7,401
Prepaid expenses and other current assets			12,593				3,703
Deferred income taxes			1,896				1,800
Total current assets			165,813				100,565
Property and equipment, net			34,462				28,749
Total assets		$	200,275			$	129,314
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	6,089			$	5,113
Accrued liabilities			23,826				18,598
Income taxes payable			—				214
Deferred revenue			6,476				7,488
Current portion of capital lease obligations			—				5
Total current liabilities			36,391				31,418
Deferred rent			1,167				1,813
Capital lease obligations			—				7
Other liabilities			335				—
Deferred income taxes			5,508				2,331
Total liabilities			43,401				35,569
Shareholders’ equity:
Common stock, $0.01 par value:
Authorized shares — 100,000
Issued and outstanding shares — 17,363 in 2007 and 16,002 in 2006			173				160
Additional paid-in capital			196,643				156,513
Accumulated other comprehensive income (loss)			195				(7	)
Retained earnings (accumulated deficit)			(40,137	)			(62,921	)
Total shareholders’ equity			156,874				93,745
Total liabilities and shareholders’ equity		$	200,275			$	129,314

CAPELLA EDUCATION COMPANY
Unaudited Consolidated Statements of Income
		Three Months Ended December 31,						Year Ended December 31,
		2007			2006			2007			2006
		(In thousands, except per share amounts)
Revenues		$	63,964		$	50,603		$	226,236		$	179,881
Costs and expenses:
Instructional costs and services			27,260			22,154			100,129			83,627
Marketing and promotional			17,026			14,106			69,779			56,646
General and administrative			7,014			6,650			26,378			21,765
Total costs and expenses			51,300			42,910			196,286			162,038
Operating income			12,664			7,693			29,950			17,843
Other income, net			1,426			1,378			4,903			4,472
Income before income taxes			14,090			9,071			34,853			22,315
Income tax expense			4,995			3,398			12,069			8,904
Net income		$	9,095		$	5,673		$	22,784		$	13,411
Net income per common share:
Basic		$	0.53		$	0.40		$	1.39		$	1.09
Diluted		$	0.51		$	0.39		$	1.33		$	1.06
Weighted average number of common shares outstanding:
Basic			17,297			14,118			16,396			12,271
Diluted			17,976			14,556			17,141			12,629

CAPELLA EDUCATION COMPANY
Unaudited Other Information
(In thousands, except enrollment amounts)
		Three Months Ended December 31,						Year Ended December 31,
		2007			2006			2007			2006
Depreciation and amortization		$	2,495		$	2,149		$	9,772		$	8,195
Net cash flow provided by operating activities			9,434			10,441			37,179			28,901
Capital expenditures			1,991			4,222			16,061			15,354

Enrollment by Degree(a):		December 31,
		2007		2006		% Change
Doctoral		8,542		7,473		14.3	%
Master’s		10,032		7,685		30.5	%
Bachelor’s		3,595		2,729		31.7	%
Other		147		89		65.2	%
Total		22,316		17,976		24.1	%

(a) Enrollment as of December 31, 2007 and 2006 is the enrollment as of the last day of classes for the quarter ended December 31, 2007 and 2006, respectively.

Capella Education Company
Investor Contact:
Heide Erickson, 612-977-5172
Heide.Erickson@capella.edu
or
Media Contact:
Irene Silber, 612-977-4132
Irene.Silber@capella.edu