APOL Apollo Education Grp., Inc.

Apollo Group Inc. (APOL), one of the world’s largest private education providers, reported earnings of $1.02 per share excluding one-time items for fourth-quarter 2011, down 22.1% from the prior-period earnings of $1.31. However, earnings surpassed the Zacks Consensus Estimate of 93 cents a share.

On a reported basis, including one-time items, earnings came in at $1.37 a share compared with earnings per share of 32 cents in the prior-year quarter.

Apollo delivered total revenue of $1,122.1 million during the quarter, down 10.9% from the year-ago quarter attributable to lower enrollments at University of Phoenix, partially offset by selective tuition price increases and better student retention rates.

Degreed Enrolment at University of Phoenix dropped 19.1% to 380,800 primarily due to a drop of 33.5% in New Degreed Enrollment. However, total revenue surpassed the Zacks Consensus Estimate of $1,098.0 million.

The company believes that operational initiatives implemented to support students and improve educational outcome will result in a decline in New Degreed Enrolment.

Instructional and student advisory cost decreased to $438.5 million during the quarter from $445.3 million in the year-ago quarter, primarily due to reduction in faculty costs driven by lower enrolments at University of Phoenix and Apollo Global.

However, the benefits were partially offset by the company’s continuous effort to invest so as to improve students’ educational outcome. This, however, resulted in higher compensation.

A reduction in interest expenses led to a decline in marketing expenses by 4.6% to $171.0 million from the prior period. Admission advisory expenses declined by 14.7% to $99.4 million compared with the prior-period figure, primarily due to lower admissions advisory headcounts, partially offset by increased employee compensation costs.

Apollo’s bad debt expenses for University of Phoenix decreased by $34.4 million during the quarter to $39.6 million. As a percentage of revenue, it came in at 3.5%, representing a decrease of 240 basis points from 5.9% 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 a decline in bad debt expense.

Operating income for the quarter came in at $230.7 million compared with an operating income of $142.4 million a year ago. Operating margin expanded 930 basis points to 20.6%.

Financial Position

Apollo ended the quarter with cash and cash equivalents of $1,571.7 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 increased capital expenditure, and share buybacks made by the company.

Apollo repurchased $357.0 million worth of shares and ended the quarter with shareholders’ equity of $1,240.4 million. At the end of the quarter, the company was left with approximately $0.7 million under its current share repurchase authorization.

Currently, the board of directors of the company increased the current share repurchase authorization to $500.0 million. Long-term debt stood at $179.7 million compared with $168.0 million in the prior-year period.

Guidance

The company expects net revenue in the range of $4.10–$4.20 billion in fiscal 2012 instead of $4.00 - $4.25 billion forecasted earlier. However, Apollo has lowered and narrowed its fiscal 2012 operating income expectation to $655.0 - $780.0 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 retains 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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