Bridgepoint’s fourth quarter 2013 earnings were in line with consensus estimates after adjusting for one-time accruals, and a 10.2% increase in starts relative to a third-quarter decline of 39.0% and consensus of 1.7% growth was an impressive result. The gain came as the company lapped significant enrollment counselor headcount reductions and orientation filters put in place in the fourth quarter of 2012.

The company recently secured accreditation approval and has made massive changes to improve the value proposition for students, and this quarter’s result is an important step toward returning to enrollment and earnings growth, which were significantly disrupted by the accreditation transfer process and the new quality initiatives. We believe these changes should set the company up for a sustained turn in enrollment and significant operating leverage into 2015 (with 2014 representing a likely trough for enrollment and earnings).

Reported loss per share was $0.12, well below consensus of a $0.02 loss. The reported number included a $0.10 per share headwind from a $9 million accrual related to a previously disclosed civil investigative demand from the Iowa Attorney General. Excluding the charge, earnings would have been in line with consensus estimates. We believe the significant product quality changes Bridgepoint has made as well as changes to incentive compensation and misrepresentation rules over the past few years should shield the company from future Attorney General investigations.

We also note the company faced a headwind from military tuition assistance disruptions in the fourth quarter, which likely caused a $5 million revenue shortfall. Excluding this disruption and the AG accrual, we believe EPS were $0.03 for the quarter.

We believe the military disruption also led to lower persistence rates as a result of military students delaying enrollment. Persistence declined 130 basis points in the quarter relative to a 150-basis-point increase, but we believe true retention excluding graduations and military disruptions expanded by 300 basis points or more in the quarter and expect significant improvement in this metric in 2014 as quality initiatives take hold (particularly beginning in the second quarter, which laps military disruptions related to sequestration in second quarter 2013).


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