Capella Education Company Reports Second Quarter 2008 Results

Revenue Increased 22.5 Percent; Enrollment Up 19.0 Percent;

Operating Income Up 45.3 Percent;

$60 million Share Repurchase Program Authorization Announced
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 ended June 30, 2008.

-- Revenues for the three months ended June 30, 2008 increased by
22.5 percent to $66.0 million, compared to $53.9 million in
the second quarter of 2007.

-- Total active enrollment increased by 19.0 percent to 23,733
learners from the same period in 2007.

-- Operating income in the three months ended June 30, 2008
increased by 45.3 percent to $8.7 million, compared to $6.0
million during the same period in 2007. The operating margin
in the second quarter was 13.1 percent of revenue, compared to
11.1 percent of revenue during second quarter 2007, an
increase of 200 basis points.

-- The tax rate for the second quarter of 2008 was 34.3 percent,
compared to 32.6 percent for second quarter 2007.

-- Net income for the second quarter of 2008 was $6.4 million,
compared to $4.8 million in the second quarter of 2007.

-- Diluted net income per share was $0.37 in the second quarter
of 2008, compared to $0.28 in the second quarter of 2007.

-- The Company completed the $50 million share repurchase program
authorized on March 3, 2008, repurchasing a total of 465,000
shares during the second quarter, for total consideration of
$28.2 million.

For the six months ended June 30, 2008, the Company reported:

-- Revenues increased by 23.0 percent to $131.3 million, compared
to $106.7 million for the same period in 2007.

-- Operating income for the six months ended in June 30, 2008,
was $15.8 million or 12.0 percent of revenue, compared to
$11.0 million or 10.3 percent of revenue during the same
period in 2007.

-- Net income year-to-date in 2008 was $11.8 million or $0.67 per
weighted average number of diluted shares outstanding compared
to $8.6 million or $0.51 for the same period in 2007.

"We reported solid revenue and earnings results for the second
quarter," said Stephen Shank, chairman and chief executive officer of
Capella Education Company. "We also completed the implementation of
our Enterprise Resource and Planning (ERP) system this month. As we
have continued to operationalize the system over the past several
months, we've identified that a subset of our prospective learners
have experienced challenges with our new highly automated application
and enrollment process. We are working to resolve the issues and are
continuing to improve our understanding and use of the system. We
estimate that our third quarter enrollment will be impacted by 600 to
800 learners," said Shank. "However, even with this third quarter
enrollment impact, our outlook for full year 2008 revenue and
operating performance remains unchanged. Overall demand dynamics in
the marketplace remain very positive. We see continued strong interest
in our programs, demonstrated by record inquiry levels, along with
strong applications for enrollment," added Shank.

"From a strategic perspective, the completion of the ERP
implementation is a major milestone for our learners and employees. We
now have a single, integrated technology platform in place,
representing a "best in class" infrastructure, that will support our
future growth and efficiency gains for many years to come," concluded
Shank.

Balance Sheet and Cash Flow

As of June 30, 2008, the Company had cash, cash equivalents and
marketable securities of $107.3 million, compared to $143.8 million in
cash, cash equivalents and marketable securities at year-end. The
change from year-end 2007 to second quarter 2008 reflects payments
related to the repurchase of $50 million of common stock, offset by
increased cash flow from operations. The Company had no debt during
the second quarter 2008 or at year-end 2007. Cash flow from operations
was $19.2 million during the first six months of 2008 compared to
$14.0 million in the same period of 2007. Capital expenditures were
$7.1 million for the six months ended June 30, 2008, which compares to
$10.3 million in capital expenditures in the first six months of 2007,
a decrease of $3.2 million related to lower capitalized spending on
the ERP. Depreciation and amortization for the first half increased to
$5.9 million from $4.8 million for the same period in 2007 primarily
due to depreciation of the ERP system.

Outlook

For the third quarter ending September 30, 2008, total enrollment
and revenue are expected to grow by 15.5 to 17.0 percent compared to
the third quarter of 2007. The operating margin is anticipated to be
approximately 11.0 to 11.5 percent of total revenue, including an
estimated $800,000 severance expense.

"Revenue growth expectations for third quarter 2008 reflect a
comparison against an exceptionally strong third quarter in 2007 and
lower year-over-year tuition increases. In addition, we expect a
residual impact from the identified ERP related issues, primarily
associated with the new learner application to enrollment process and
our understanding of other operational processes," said Lois Martin,
senior vice president and chief financial officer. "We have identified
the primary sources of the operational disruption and have moved
quickly to solve or implement plans to address the issues.

"We continue to expect we will achieve our original 2008 annual
guidance of 20 to 22 percent revenue growth and 14 to 15 percent
operating margin. Reflecting third quarter expectations, average
annual enrollment growth is now anticipated to be 18 to 20 percent for
2008," said Martin.

Additional Share Repurchase Authorization

Separately, the Board of Directors authorized the repurchase of up
to $60 million of the Company's outstanding common shares.

"The share repurchase authorization reflects the strength of
Capella's business model," said Martin. "We intend to use this
authorization strategically, executing on our ongoing commitment to
meeting the capital needs of our business while maximizing value for
our shareholders."

The share repurchases will be made from time to time, using cash
on hand and cash generated from future operations, in the open market
at prevailing market prices or in privately negotiated transactions.
The Company may also repurchase shares pursuant to a 10b5-1 plan which
allows the Company to purchase shares during corporate black-out
periods. The timing and extent of any repurchases will depend upon
market conditions, the trading price of the Company's shares and other
factors, and subject to the restrictions relating to volume, price and
timing under applicable law. The repurchase program may be modified,
suspended or terminated at any time by the Company without notice.

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 and availability
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 action by Federal
Student Aid on 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 successful
operation and use 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 most
recent Form 10-K and 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 second quarter 2008 results and third
quarter 2008 outlook during a conference call scheduled today, July
31, at 9:00 a.m. Eastern time (ET). To participate in the live call,
investors should dial (888) 205-6705 (domestic) or (913) 312-0386
(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 from July 31 through August 7,
2008, by calling (888) 203-1112 (domestic) or (719) 457-0820
(international), passcode 8204032. 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 21
graduate and undergraduate degree programs with 109 specializations
and more than 970 courses. More than 23,700 learners were enrolled as
of June 30, 2008. 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), www.ncahlc.org.

Capella University, 225 South Sixth Street, Ninth Floor,
Minneapolis, MN 55402, 1-888-CAPELLA (227-3552), www.capella.edu.

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CAPELLA EDUCATION COMPANY
Consolidated Balance Sheets
(In thousands, except par value)

As of June 30, As of December 31,
2008 2007
-------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,342 $ 60,600
Marketable securities 98,932 83,167
Accounts receivable, net of
allowance of $2,011 at June 30,
2008 and $951 at December 31,
2007 8,852 7,557
Prepaid expenses and other
current assets 7,469 12,593
Deferred income taxes 1,889 1,896
-------------- ------------------

Total current assets 125,484 165,813
Property and equipment, net 35,056 34,462
-------------- ------------------

Total assets $160,540 $200,275
============== ==================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,764 $ 6,089
Accrued liabilities 18,072 23,826
Deferred revenue 7,875 6,476
-------------- ------------------

Total current liabilities 30,711 36,391
Deferred rent 1,239 1,167
Other liabilities 335 335
Deferred income taxes 4,436 5,508
-------------- ------------------

Total liabilities 36,721 43,401
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares -- 100,000
Issued and outstanding shares
-- 16,622 at June 30, 2008
and 17,363 at December 31,
2007 166 173
Additional paid-in capital 152,540 196,643
Accumulated other comprehensive
income (loss) (596) 195
Retained earnings (accumulated
deficit) (28,291) (40,137)
-------------- ------------------

Total shareholders' equity 123,819 156,874
-------------- ------------------

Total liabilities and shareholders'
equity $160,540 $200,275
============== ==================
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CAPELLA EDUCATION COMPANY
Consolidated Statements of Income
(In thousands, except per share amounts)

Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2008 2007 2008 2007
--------- -------- -------- --------
(Unaudited)
(In thousands, except per share
amounts)

Revenues $66,049 $53,918 $131,300 $106,742
Costs and expenses:
Instructional costs and services 30,844 24,587 59,860 48,110
Marketing and promotional 19,573 16,850 40,966 35,170
General and administrative 6,968 6,518 14,698 12,499
--------- -------- -------- --------
Total costs and expenses 57,385 47,955 115,524 95,779
--------- -------- -------- --------
Operating income 8,664 5,963 15,776 10,963
Other income, net 1,008 1,132 2,397 2,224
--------- -------- -------- --------
Income before income taxes 9,672 7,095 18,173 13,187
Income tax expense 3,314 2,312 6,327 4,560
--------- -------- -------- --------
Net income $ 6,358 $ 4,783 $ 11,846 $ 8,627
========= ======== ======== ========
Net income per common share:
Basic $ 0.38 $ 0.29 $ 0.70 $ 0.53
========= ======== ======== ========
Diluted $ 0.37 $ 0.28 $ 0.67 $ 0.51
========= ======== ======== ========
Weighted average number of common
shares outstanding:
Basic 16,740 16,401 17,028 16,209
========= ======== ======== ========
Diluted 17,303 17,213 17,599 16,957
========= ======== ======== ========
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CAPELLA EDUCATION COMPANY
Unaudited Other Information
(In thousands, except enrollment amounts)

Six Months Ended
June 30,
----------------------
2008 2007
----------- ----------

Depreciation and amortization $ 5,857 $ 4,750
Net cash flow provided by operating activities 19,174 13,994
Capital expenditures 7,058 10,253
*T

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Enrollment by Degree(a): June 30,
---------------------
2008 2007 % Change
---------- ---------- ------------
PhD/Doctoral 8,991 8,033 11.9%
Master's 10,710 8,668 23.6%
Bachelor's 3,914 3,126 25.2%
Other 118 115 2.6%
---------- ----------
Total 23,733 19,942 19.0%
========== ==========
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(a) Enrollment as of June 30, 2008 and 2007 is the enrollment as
of the last day of classes for the quarter ended June 30, 2008 and
2007, respectively.

The following table provides a reconciliation of net income to
EBITDA:

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Three Months Ended
June 30,
----------------------
2008 2007
----------- ----------

Net income $ 6,358 $ 4,783
Other income, net (1,008) (1,132)
Income tax expense 3,314 2,312
Depreciation and amortization 3,091 2,340
----------- ----------
EBITDA 11,755 8,303
----------- ----------
*T

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

Copyright Business Wire 2008