APOL Apollo Education Grp., Inc.

Apollo Group Inc. (APOL), one of the world's largest private education providers, reported earnings of $1.45 per share for third-quarter 2011, declining 16.7% from the prior-period earnings of $1.74. However, earnings surpassed the Zacks Consensus Estimate of $1.34 a share.

On a reported basis, including one-time items, earnings came in at $1.51 a share compared with earnings per share of $1.18 in the prior-year quarter.

The Phoenix based company earned a profit of $203.5 million from continuing operations, a decline of $61.1 million from the year-ago quarter. Including special items, net income raised $33.1 million to $212.4 million.

Apollo delivered total revenue of $1,235.8 million during the quarter, down 7.6% 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 16.4% to 398,400 primarily due to a fall of 40.5% in New Degreed Enrollment. Total revenue also surpassed the Zacks Consensus Estimate of $1,200.0 million.

Instructional and student advisory cost increased to $458.1 million during the quarter from $441.7 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 $38.2 million during the quarter to $39.2 million. As a percentage of revenue, it came in at 3.2%, representing a decrease of 260 basis points from 5.8% 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 a decline in bad debt expense.

Operating income for the quarter came in at $346.5 million compared with an operating income of $302.3 million a year ago. Operating margin expanded 540 basis points to 28.0%.

Financial Position

Apollo ended the quarter with cash and cash equivalents of $1,426.3 million compared with $1,284.8 million as of August 31, 2010. The increase in cash was primarily attributable to the cash generated from operations, proceeds from sale of office building in Phoenix and decline in restricted cash, partially offset by repayment of debt, increased capital expenditure, and share buyback made by the company. Apollo repurchased $167.3 million worth of shares and ended the quarter with shareholders' equity of $1,384.9 million. At the end of the quarter, the company was left with $357.7 million under its current share repurchase authorization. Total debt decreased by $389.1 million to $195.3 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 $4.0 billion to $4.25 billion and operating income between $675.0 million and $800.0 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 #4 Rank, which translates into a short-term 'Sell' rating. Our long-term recommendation on the stock remains 'Neutral'.

 
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