APOL Apollo Education Grp., Inc.

Apollo Group Inc. (APOL), one of the world’s largest private education providers, reported earnings of 83 cents per share, down 1.2% year over year, in the second quarter of fiscal 2011. The results fell short of the year-ago earnings of 84 cents a share. However, earnings surpassed the Zacks Consensus Estimate of 69 cents a share.

On a reported basis, including one-time items, loss came in at 45 cents a share compared with earnings per share of 60 cents a share in the prior-year quarter.

The Phoenix based company earned a profit of $118.2 million from continuing operations, an increase of $11.9 million from the year-ago quarter. Including special items, net income dropped $28.6 million to $64.0 million.

Apollo delivered total revenue of $1,048.6 million during the quarter, down 2.0% from the year-ago quarter attributable to lower enrollments partially offset by selective tuition price increases and better student retention rates. University of Phoenix Degreed Enrolment dropped 11.6% to 405,300 primarily due to a fall of 44.9% in New Degreed Enrollment. Additionally, BPP Holdings recorded a $6.4 million drop in net revenue attributable to lower student enrolment coupled with a negative impact of foreign exchange rate. BPP Holdings, a U.K. based provider of education and training to legal and finance professionals, was acquired by Apollo Global in July 2009. Total revenue also surpassed the Zacks Consensus Estimate of $1,027 million.

Instructional and student advisory cost increased to $421.6 million during the quarter from $415.4 million in the year-ago quarter, primarily due to the company’s continuous effort to invest so as to improve students’ educational outcome. This however resulted in higher compensation.

Apollo’s bad debt expenses for University of Phoenix decreased by $28.3 million during the quarter to $45.5 million. As a percentage of revenue it came in at 4.3%, representing a decrease of 260 basis points from 6.9% reported in the prior-year quarter. A decrease in gross accounts receivable attributable to implementation of university orientation coupled with a fall in New Degreed Enrollment and improvement in student retention rates led to the fall in bad debt expense.

Operating loss for the quarter came in at $23.0 million, compared with an operating income of $172.9 million a year ago. Excluding special charges, operating profit increased 12.4% to $244.5 million. Operating margin expanded 30 basis points to 23.3%

Financial Position

Apollo ended the quarter with cash and cash equivalents of $1,033.3 million as compared with $1,284.8 million as of August 31, 2010. The decrease in cash was primarily attributable to the repayment of debt, increased capital expenditure, and an increase in restricted cash and share buyback made by the company, partially offset by an increase in cash from operation. Apollo repurchased $75 million worth of shares and ended the quarter with shareholders’ equity of $1,315.0 million. At the end of the quarter, the company was left with $525 million under its current share repurchase authorization. Total debt decreased by $393.4 million to $191.0 million during the quarter.

Guidance

The company expects net revenue in the range of $4.65–$4.75 billion in fiscal 2011 and operating income in a $1.15–$1.20 billion band. For fiscal 2012, net revenue is expected to be in the range of $4 billion to $4.25 billion and operating income to come in between $675 million and $800 million.

Competition

Apollo Group faces intense competition from other companies offering postsecondary education, such as DeVry Inc. (DV), Strayer Education Inc. (STRA) and Career Education Corp. (CECO).

Apollo’s shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Our long-term recommendation on the stock remains ‘Neutral’.

 
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