Apollo Group, Inc. (NASDAQ: APOL) (“Apollo Group,” “Apollo” or
the “Company”) today reported financial results for the three
months ended November 30, 2010.
“During the first quarter of fiscal 2011, we began the important
process of implementing several of the key strategic initiatives
that we’ve been developing in recent quarters and that are designed
to enhance the student experience, expand student protections and
ensure that we enroll students who we believe have a greater
likelihood to succeed in our programs,” said Apollo Group Co-Chief
Executive Officer and Apollo Global Chairman Greg Cappelli. “While
we do not yet have enough data from these new initiatives to draw
firm conclusions, we are pleased with the early results.”
Apollo Group Co-Chief Executive Officer Chas Edelstein added,
“While these initiatives are resulting in a period of transition,
we expect to prudently manage our cost structure to appropriately
align it with both the size of the business and the needs of our
students. We believe these actions are the right things to do for
our students, and importantly, we are confident that over time they
will solidify our leadership role within the industry and put our
organization on a path of more consistently delivering high quality
growth.”
Unaudited First Quarter of Fiscal 2011
Results of Operations
Consolidated net revenue for the first quarter of fiscal 2011
totaled $1,326.4 million, which represents a 5.4% increase over the
first quarter of fiscal 2010. Consolidated net revenue growth in
the first quarter was primarily driven by selective tuition price
increases at University of Phoenix. Although University of Phoenix
Degreed Enrollment declined 3.8% year-over-year to 438,100, average
enrollment during the quarter increased slightly, resulting in a
modest increase in revenue. A $9.0 million decrease in net revenue
from BPP, due to lower student enrollment and the unfavorable
impact of foreign exchange rates, also offset some of the increase.
Lower Degreed Enrollment at University of Phoenix is in part the
result of a 42.4% decrease in New Degreed Enrollment. The Company
believes this decline is principally due to the adverse impact on
the admissions process arising from changes in the manner in which
admissions and other employees are evaluated and compensated, the
full implementation of University Orientation as well as continued
refinement of the Company’s marketing approaches.
The Company reported income from continuing operations
attributable to Apollo Group for the three months ended November
30, 2010, of $236.0 million, or $1.61 per share (146.7 million
weighted average diluted shares outstanding), compared to income
from continuing operations attributable to Apollo Group of $240.4
million, or $1.54 per share (156.0 million weighted average diluted
shares outstanding) for the three months ended November 30, 2009.
Results for the first quarter of fiscal 2011 contain special items
totaling $4.7 million pre-tax ($2.9 million after tax) consisting
of a $3.8 million restructuring charge associated with a strategic
reduction in force, primarily at University of Phoenix, and a $0.9
million charge for accrued incremental post-judgment interest
related to a securities class action lawsuit. The fiscal 2010 first
quarter results included a tax benefit of $11.4 million resulting
from the settlement of disputed tax issues with the Internal
Revenue Service.
Excluding these special items, income from continuing operations
attributable to Apollo Group for the three months ended November
30, 2010, was $238.9 million, or $1.63 per share, compared to
income from continuing operations attributable to Apollo Group of
$229.0 million, or $1.47 per share for the three months ended
November 30, 2009. (See the reconciliation of GAAP financial
information to non-GAAP financial information in the tables section
of this press release.)
Operating Expenses
Effective during the first quarter of fiscal year 2011, the
Company elected to revise its presentation of operating expenses
and reclassified prior periods to conform to the revised
presentation. There were no changes to total operating expenses or
operating income as a result of these reclassifications. (Please
refer to the Form 10-Q for the period ended November 30, 2010,
filed concurrently with this release for the presentation of
operating expenses as previously reported and as reclassified for
prior periods of fiscal 2009 and 2010.)
Instructional and student advisory expenses increased by $25.2
million, or 5.8%, to $455.8 million for the three months ended
November 30, 2010, compared to the three months ended November 30,
2009. As a percentage of revenue, instructional and student
advisory expenses increased 10 basis points to 34.3% versus 34.2%
in the prior year’s first quarter. The increase, as a percentage of
revenue, was primarily due to various strategic initiatives
implemented to more effectively support students and improve their
educational outcomes, which has resulted in increased compensation
related to certain student advisory and infrastructure support
functions.
Marketing expenses increased by $14.5 million, or 9.6%, to
$166.1 million for the three months ended November 30, 2010,
compared to the three months ended November 30, 2009. As a
percentage of revenue, marketing expenses increased 50 basis points
to 12.5% versus 12.0% in the prior year’s first quarter. The
increase, as a percentage of revenue, was primarily a result of
higher advertising expenditures, driven by the increased costs
associated with the Company's transition in marketing approaches to
more effectively identify students who have a greater likelihood to
succeed in its educational programs and increases in advertising
rates for traditional and online media. This increase was partially
offset by lower employee compensation costs as a percentage of
revenue.
Admissions advisory expenses decreased by $1.5 million, or 1.3%,
to $113.8 million for the three months ended November 30, 2010,
compared to the three months ended November 30, 2009. As a
percentage of revenue, admissions advisory expenses decreased 60
basis points to 8.6% versus 9.2% in the prior year’s first quarter.
The decrease, as a percentage of revenue, was a result of lower
admissions advisory headcount during the first quarter of fiscal
2011 as compared to the prior-year period. This decrease was
partially offset by higher average employee compensation costs, as
the Company elevates the educational profile for admissions
personnel. The above-mentioned strategic reduction in force that
eliminated approximately 700 full-time positions, principally among
admissions personnel, will favorably impact expenses beginning in
the second quarter of fiscal 2011.
General and administrative (“G&A”) expenses increased by
$14.2 million, or 20.1%, to $84.9 million for the three months
ended November 30, 2010, compared to the three months ended
November 30, 2009. As a percentage of revenue, G&A expenses
increased 80 basis points to 6.4% versus 5.6% in the prior year’s
first quarter. The increase, as a percentage of revenue, is
primarily attributable to expenses associated with the Company’s
investments in its information technology resources and
capabilities, as well as various expenses related to regulatory and
external affairs activities, partially offset by lower legal
expenses.
The provision for uncollectible accounts receivable (“bad debt
expense”) decreased by $5.8 million, or 9.3%, to $56.9 million for
the three months ended November 30, 2010, compared to the three
months ended November 30, 2009. As a percentage of revenue, bad
debt expense decreased 70 basis points to 4.3% versus 5.0% in the
prior year’s first quarter. The decrease, as a percentage of
revenue, is primarily attributable to reductions in gross accounts
receivable as a result of the full implementation of University
Orientation and other recent operational changes and initiatives to
more effectively support students and improve their educational
outcomes. Improved collection rates at University of Phoenix also
contributed to the decrease as a result of improved effectiveness
of the Company’s collection efforts for aged receivables.
Depreciation and amortization increased by $2.4 million, or
6.9%, to $37.1 million for the three months ended November 30,
2010, compared to the three months ended November 30, 2009. The
increase was primarily due to increased depreciation related to
computer equipment and software, partially offset by a decrease in
amortization of BPP intangible assets. As a percentage of revenue,
depreciation and amortization expenses were unchanged at 2.8% when
compared with the prior year’s first quarter. The Company expects
an increase in capital expenditures in fiscal 2011 resulting from
investments in core information technology and network
infrastructure to adversely impact depreciation and amortization
beginning in the second quarter of fiscal 2011.
Financial and Operating
Metrics
Below are Apollo Group’s unaudited financial data and operating
metrics for the first quarter of fiscal 2011 versus the prior-year
period.
Enrollment Operating Metrics
Q1 2011 Q1 2010 Revenues (in
thousands) Degree Seeking Gross Revenues (1) $ 1,251,810 $
1,173,452 Less: Discounts and other (64,154 ) (62,154
) Degree Seeking Net Revenues (1) 1,187,656 1,111,298 Non-degree
Seeking Revenues (2) 9,493 9,881 Other, net of discounts (3)
129,286 137,480 $ 1,326,435 $ 1,258,659
Revenue by Degree Type (in
thousands) (1) Associates $ 432,894 $ 447,226 Bachelors
582,371 487,266 Masters 212,316 216,943 Doctoral 24,229 22,017
Less: Discounts and other (64,154 ) (62,154 ) $
1,187,656 $ 1,111,298
Degreed Enrollment
(rounded to hundreds) (4)
Associates 177,200 205,400 Bachelors 187,300 171,000 Masters 66,000
71,900 Doctoral 7,600 7,300
438,100 455,600
Degree
Seeking Gross Revenues per Degreed Enrollment (1) (4)
Associates $ 2,443 $ 2,177 Bachelors 3,109 2,850 Masters 3,217
3,017 Doctoral 3,188 3,016 All degrees (after discounts) $ 2,711 $
2,439
New Degreed Enrollment (rounded to
hundreds) (5) Associates 24,000 52,200 Bachelors 22,800
32,100 Masters 8,900 13,100 Doctoral 800 700
56,500 98,100
(1)
Represents revenue from tuition and other fees for students
enrolled in University of Phoenix degree programs. Also includes
revenue from tuition and other fees for students participating in
University of Phoenix certificate programs of at least 18 credits
in length with some course applicability into a related degree
program.
(2)
Represents revenue from tuition and other fees for students
participating in University of Phoenix certificate programs less
than 18 credits in length, certificate programs with no
applicability into a related degree program, single course and
continuing education courses.
(3)
Represents revenues from IPD, CFFP, Apollo Global - BPP, Apollo
Global - Other and other.
(4)
Represents:
• students enrolled in a University of
Phoenix degree program who attended a course during the quarter and
had not graduated as of the end of the quarter;
• students who previously graduated from
one degree program and started a new degree program in the quarter
(for example, a graduate of the associate’s degree program returns
for a bachelor’s degree or a bachelor’s degree graduate returns for
a master’s degree); and
• students participating in certain
certificate programs of at least 18 credits with some course
applicability into a related degree program.
(5)
Represents:
• new students and students who have been
out of attendance for more than 12 months who enroll in a
University of Phoenix degree program and start a course in the
quarter;
• students who have previously graduated
from a degree program and start a new degree program in the
quarter; and
• students who commence participation in
certain certificate programs of at least 18 credits with some
course applicability into a related degree program.
Unaudited Balance Sheet
As of November 30, 2010, the Company’s cash and cash
equivalents, excluding restricted cash, totaled $1,040.5 million as
compared to $1,284.8 million as of August 31, 2010. The decrease is
attributable to repayments on borrowings, share repurchases,
capital expenditures and an increase in restricted cash, partially
offset by cash generated from operations. Restricted cash and cash
equivalents (including long-term) increased by $28.3 million
compared to August 31, 2010, primarily due to increased student
deposits associated with students receiving financial aid.
At November 30, 2010, accounts receivable decreased to $256.9
million from $264.4 million at August 31, 2010. Excluding accounts
receivable and the associated net revenue for Apollo Global, the
Company’s days sales outstanding (“DSO”) was 26 days at November
30, 2010, compared to 30 days at August 31, 2010, and compared to
32 days at November 30, 2009. The decrease in DSO versus a year ago
is primarily attributable to reductions in gross accounts
receivable as a result of the full implementation of University
Orientation and other recent operational changes and initiatives to
more effectively support students and improve their educational
outcomes. Improved collection rates at University of Phoenix also
contributed to the decrease as a result of improved effectiveness
of the Company’s collection efforts for aged receivables.
Total debt outstanding (including short-term borrowings and the
current portion of long-term debt) decreased by $403.0 million to
$181.4 million at November 30, 2010, from $584.4 million at August
31, 2010. The decrease is due to the repayment of U.S. denominated
borrowings on the Company’s $500 million credit facility.
Share Repurchases
During the first quarter of fiscal 2011, the Company repurchased
approximately 4.7 million shares of its common stock at a weighted
average purchase price of $37.58 per share for a total expenditure
of $176.5 million. Subsequent to quarter end, the Board of
Directors increased the authorization of management to repurchase
Class A common shares to the current total amount of $600
million.
Conference Call
Information
The Company will hold a conference call to discuss these
earnings results at 5:00 p.m. Eastern, 3:00 p.m. Phoenix time,
today, Monday, January 10, 2011. The call may be accessed by
dialing (877) 292-6888 (domestic) or (973) 200-3381 (international)
and entering the conference ID number 29367436. A live webcast of
this event may be accessed by visiting the Company’s website at
www.apollogrp.edu. A replay of the call will be available on the
website or by dialing (800) 642-1687 (domestic) or (706) 645-9291
(international) and entering the conference ID number 29367436
until January 17, 2011.
About Apollo Group, Inc.
Apollo Group, Inc. is one of the world's largest private
education providers and has been in the education business for more
than 35 years. The Company offers innovative and distinctive
educational programs and services both online and on-campus at the
high school, undergraduate, master’s and doctoral levels through
its subsidiaries: University of Phoenix, Apollo Global, Institute
for Professional Development, College for Financial Planning and
Meritus University. The Company's programs and services are
provided in 40 states and the District of Columbia; Puerto Rico;
Canada; Latin America; and Europe, as well as online throughout the
world (data as of November 30, 2010).
For more information about Apollo Group, Inc. and its
subsidiaries, call (800) 990-APOL or visit the Company’s website at
www.apollogrp.edu.
Forward-Looking Statements Safe
Harbor
Statements about Apollo Group and its business in this release
which are not statements of historical fact, including statements
regarding Apollo Group's future strategy and plans and commentary
regarding future results of operations and prospects, are
forward-looking statements, and are subject to the Safe Harbor
provisions created by the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are based on current
information and expectations and involve a number of risks and
uncertainties. Actual plans implemented and actual results achieved
may differ materially from those set forth in such statements due
to various factors, including without limitation (i) changes in the
overall U.S. or global economy, (ii) changes in enrollment or
student mix, including as a result of the roll-out of the Company's
University Orientation program to all eligible students, (iii) the
impact of recent changes in the manner in which the Company
evaluates and compensates its counselors that advise and enroll
students, (iv) changes in law or regulation affecting the Company's
eligibility to participate in or the manner in which it
participates in U.S. federal student financial aid programs,
including the final program integrity regulations published by the
U.S. Department of Education on October 29, 2010, and the proposed
regulations relating to "gainful employment" initially published
for comment by the Department on July 26, 2010 and which are
expected to be published in final form in early 2011, (v) changes
in the Company's business necessary to remain in compliance with
U.S. federal student financial aid program regulations, including
the so-called 90/10 Rule and the limitations on cohort default
rates, and to remain in compliance with the accrediting criteria of
the relevant accrediting bodies, and (vi) other regulatory
developments. For a discussion of the various factors that may
cause actual plans implemented and actual results achieved to
differ materially from those set forth in the forward-looking
statements, please refer to the risk factors and other disclosures
contained in Apollo Group's Form 10-K for fiscal year 2010 and
subsequent Forms 10-Q, and other filings with the Securities and
Exchange Commission, all of which are available on the Company's
website at http://www.apollogrp.edu.
Use of Non-GAAP Financial
Information
This press release and the related conference call contain
non-GAAP financial measures, which are intended to supplement, but
not substitute for, the most directly comparable GAAP measures.
Management uses, and chooses to disclose to investors, these
non-GAAP financial measures because (i) such measures provide an
additional analytical tool to clarify the Company’s results from
operations and help to identify underlying trends in its results of
operations; (ii) as to the non-GAAP earnings measures, such
measures help compare the Company’s performance on a consistent
basis across time periods; and (iii) these non-GAAP measures are
employed by the Company’s management in its own evaluation of
performance and are utilized in financial and operational
decision-making processes, such as budgeting and forecasting.
Exclusion of items in our non-GAAP presentation should not be
construed as an inference that these items are unusual, infrequent
or non-recurring. Other companies, including other companies in the
education industry, may calculate non-GAAP financial measures
differently than we do, limiting their usefulness as a comparative
measure across companies.
Apollo Group, Inc. and Subsidiaries Condensed
Consolidated Balance Sheets (Unaudited)
As
of November 30, August 31, ($ in
thousands)
2010 2010 ASSETS: Current
assets Cash and cash equivalents $ 1,040,490 $ 1,284,769
Restricted cash and cash equivalents 472,462 444,132 Accounts
receivable, net 256,931 264,377 Deferred tax assets, current
portion 153,830 166,549 Prepaid taxes - 39,409 Other current assets
43,619 38,031 Assets held for sale from discontinued operations
24,777 15,945
Total current
assets 1,992,109 2,253,212 Property and equipment, net 643,023
619,537 Long-term restricted cash and cash equivalents 126,560
126,615 Marketable securities 15,174 15,174 Goodwill 324,889
322,159 Intangible assets, net 146,927 150,593 Deferred tax assets,
less current portion 113,058 99,071 Other assets 15,923
15,090
Total assets $ 3,377,663
$ 3,601,451
LIABILITIES AND SHAREHOLDERS'
EQUITY: Current liabilities Short-term borrowings and
current portion of long-term debt $ 26,618 $ 416,361 Accounts
payable 94,035 90,830 Accrued liabilities 354,057 375,461 Income
taxes payable 103,721 - Student deposits 487,433 493,245 Deferred
revenue 365,450 359,724 Other current liabilities 52,257 53,416
Liabilities held for sale from discontinued operations 6,150
4,474
Total current liabilities
1,489,721 1,793,511 Long-term debt 154,821 168,039 Deferred tax
liabilities 38,171 38,875 Other long-term liabilities
228,756 212,286
Total liabilities
1,911,469 2,212,711 Commitments
and contingencies
Shareholders' equity Preferred
stock, no par value - - Apollo Group Class A nonvoting common
stock, no par value 103 103 Apollo Group Class B voting common
stock, no par value 1 1 Additional paid-in capital 58,104 46,865
Apollo Group Class A treasury stock, at cost (2,580,131 )
(2,407,788 ) Retained earnings 3,983,458 3,748,045 Accumulated
other comprehensive loss (28,697 ) (31,176 )
Total
Apollo shareholders' equity 1,432,838
1,356,050
Noncontrolling interests 33,356
32,690
Total equity 1,466,194
1,388,740
Total liabilities and
shareholders' equity $ 3,377,663 $ 3,601,451
Apollo Group, Inc. and Subsidiaries Condensed
Consolidated Statements of Income (Unaudited)
Three Months Ended November 30, 2010
2009 (in thousands, except per share data)
Net
revenue $ 1,326,435 $ 1,258,659
Costs and
expenses: Instructional and student advisory 455,812 430,675
Marketing 166,143 151,617 Admissions advisory 113,752 115,271
General and administrative 84,874 70,659 Provision for
uncollectible accounts receivable 56,909 62,698 Depreciation and
amortization 37,102 34,680 Restructuring 3,846 - Estimated
litigation loss 881 -
Total costs
and expenses 919,319 865,600
Operating income 407,116 393,059 Interest income 983 932
Interest expense (2,170 ) (2,908 ) Other, net (54 )
(670 )
Income from continuing operations before income taxes
405,875 390,413 Provision for income taxes (169,579 )
(149,981 )
Income from continuing operations 236,296 240,432
Loss from discontinued operations, net of tax (628 )
(300 )
Net income 235,668 240,132
Net (income) loss
attributable to noncontrolling interests (255 )
10
Net income attributable to Apollo $ 235,413
$ 240,142
Earnings (loss) per share - Basic:
Continuing operations attributable to Apollo $ 1.61 $ 1.55
Discontinued operations attributable to Apollo -
-
Basic income per share attributable to
Apollo $ 1.61 $ 1.55
Earnings (loss)
per share - Diluted: Continuing operations attributable to
Apollo $ 1.61 $ 1.54 Discontinued operations attributable to Apollo
- -
Diluted income per share
attributable to Apollo $ 1.61 $ 1.54
Basic weighted average shares outstanding 146,352
154,824
Diluted weighted average shares
outstanding 146,663 156,045
Apollo Group, Inc. and Subsidiaries Condensed
Consolidated Statements of Cash Flows From Continuing and
Discontinued Operations (Unaudited)
Three Months Ended November 30, 2010 2009 ($
in thousands)
Cash flows provided by (used in) operating
activities: Net income $ 235,668 $ 240,132 Adjustments to
reconcile net income to net cash provided by operating activities:
Share-based compensation 15,032 14,154 Excess tax benefits from
share-based compensation (69 ) (238 ) Depreciation and amortization
37,102 35,575 Amortization of lease incentives (3,531 ) (3,272 )
Amortization of deferred gain on sale-leasebacks (411 ) (450 )
Non-cash foreign currency (gain) loss, net (5 ) 357 Provision for
uncollectible accounts receivable 56,909 62,698 Estimated
litigation loss 881 - Deferred income taxes (2,379 ) (15,899 )
Changes in assets and liabilities: Accounts receivable (40,333 )
(104,798 ) Other assets (12,788 ) (4,105 ) Accounts payable and
accrued liabilities (20,654 ) (16,806 ) Income taxes payable
142,219 170,230 Student deposits (6,301 ) (11,627 ) Deferred
revenue (3,116 ) 43,163 Other liabilities 15,727
(3,884 )
Net cash provided by operating activities
413,951 405,230
Cash flows provided
by (used in) investing activities: Additions to property and
equipment (50,640 ) (37,574 ) Increase in restricted cash and cash
equivalents (28,275 ) (37,825 )
Net cash used in
investing activities (78,915 ) (75,399 )
Cash
flows provided by (used in) financing activities: Payments on
borrowings (406,283 ) (410,126 ) Proceeds from borrowings 1,799
12,251 Issuance of Apollo Group Class A common stock 1,847 5,771
Apollo Group Class A common stock purchased for treasury (176,931 )
(1,025 ) Excess tax benefits from share-based compensation
69 238
Net cash used in financing
activities (579,499 ) (392,891 ) Exchange rate
effect on cash and cash equivalents 184 76
Net decrease in cash and cash equivalents (244,279 )
(62,984 )
Cash and cash equivalents, beginning of period
1,284,769 968,246
Cash and cash
equivalents, end of period $ 1,040,490 $ 905,262
Supplemental disclosure of cash flow information Cash paid
for income taxes, net of refunds $ 17,080 $ 2,535 Cash paid for
interest $ 3,179 $ 1,536
Supplemental disclosure of non-cash
investing and financing activities Accrued purchases of
property and equipment $ 11,686 $ 6,132 Credits received for tenant
improvements $ 5,012 $ 3,786 Restricted stock units vested and
released $ 1,409 $ 2,594
Apollo Group, Inc. and Subsidiaries
Reconciliation of GAAP financial information to non-GAAP
financial information (Unaudited)
Three
Months Ended November 30, 2010 2009
(in thousands, except per share data) Net income attributable to
Apollo, as reported $ 235,413 $ 240,142 Loss from discontinued
operations, net of tax (628) (300) Income from continuing
operations attributable to Apollo 236,041 240,442
Reconciling items: Restructuring (1) 3,846 - Estimated litigation
loss (2) 881 - 4,727 - Less: tax effects (1,871) - Tax benefit from
IRS settlement (3) - (11,400) Income from continuing operations
attributable to Apollo, adjusted to exclude special items $ 238,897
$ 229,042 Diluted income per share from continuing
operations attributable to Apollo, as reported $ 1.61 $ 1.54
Diluted income per share from continuing operations attributable to
Apollo, adjusted to exclude special
items
$ 1.63 $ 1.47 Diluted weighted average shares outstanding
146,663 156,045
(1)
The $3.8 million charge for the three
months ended November 30, 2010 represents a charge associated with
a strategic reduction in force at University of Phoenix.
(2)
The $0.9 million charge for the three
months ended November 30, 2010 represents an estimated loss related
to a securities litigation matter (Policeman's Annuity and Benefit
Fund of Chicago).
(3)
The $11.4 million tax benefit during the
three months ended November 30, 2009 resulted from our settlement
of disputed tax issues with the Internal Revenue Service.
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