APOL Apollo Education Grp., Inc.

Apollo Group Inc. (APOL), one of the world’s largest private education providers, reported earnings of $1.28 per share for first-quarter 2012, which beat the Zacks Consensus Estimate of $1.18. However, quarterly earnings were down 21.5% from the prior-period earnings of $1.63 primarily due to fall in Degreed Enrollments.

On a reported basis, including one-time items, earnings came in at $1.14 a share compared with earnings per share of $1.61 in the prior-year quarter.

Apollo delivered total revenue of $1,178.7 million during the quarter, down 11.1% from the year-ago quarter. The decline was due to lower enrollments at the University of Phoenix, partially offset by selective tuition price increases and better student retention rates. However, total revenue came ahead of the Zacks Consensus Estimate of $1,159 million.

Degreed Enrolment at University of Phoenix dropped 14.8% to 373,100 primarily due to a slump in New Degreed Enrollment during fiscal 2011. As per the company, operational initiatives implemented to support students and improve educational outcome resulted in a decline in New Degreed Enrolment during the previous fiscal. However, during first-quarter 2012, New Degreed Enrollment registered a growth of 12.7% from the prior-year period.

Further Analysis

Instructional and student advisory cost inched up 0.2% to $456.8 million during the quarter. As a percentage of net revenue, cost grew 450 basis points to 38.8%, primarily due to the company’s continuous effort to invest for improvising students’ educational outcome.

Marketing expenses inched down 0.2% to $165.8 million. However, a reduction in interest net revenue led to a decline in marketing expenses as a percentage of net revenue by 160 basis points to 14.1% from the prior period.

Admission advisory expenses declined 10.9% to $101.4 million compared with the prior-period figure, but remained consistent as a percentage of net revenue. Benefits from lower admissions advisory headcounts were offset by increased employee compensation costs.

Apollo’s general and administrative expenses plunged 5.8% to $79.9 million. However, it increased by 40 basis points to 6.8% as a percentage of net revenue, primarily due to increased compensation expenses.

Apollo’s bad debt expenses for University of Phoenix decreased by 26.9% during the quarter to $41.6 million. As a percentage of revenue, it came in at 3.5%, representing a decrease of 80 basis points from 4.3% reported in the prior-year quarter. A decrease in gross accounts receivable attributable to the implementation of university orientation coupled with a fall in Degreed Enrollment at University of Phoenix and shift in mix of student from Associates to Bachelors degree program led to the decline in bad debt expense.

On a reported basis, operating income for the quarter came in at $264.5 million compared with an operating income of $407.1 million a year ago. Operating margin contracted 830 basis points to 22.4% due to a fall in revenue.

Excluding one-time items, i.e. goodwill and other intangibles impairment charges, restructuring and other charges and litigation charges, operating income declined to $286.8 million from $411.8 million in the prior-year quarter. Operating margin contracted 670 basis points to 24.3%.

Financial Position

Apollo ended the quarter with cash and cash equivalents of $1.20 billion compared with $1.57 billion as of August 31, 2011. The decrease in cash was primarily impacted by increased capital expenditure including Carnegie acquisition, debt repayments and share buyback, which were partially offset by cash generated from operations. At the end of quarter, the company’s total outstanding debt stood at $114.3 million compared with $599 million as of August 31, 2011. During the quarter, Apollo repaid $500 million of its borrowings.

During the reported quarter, Apollo repurchased shares worth $78.2 million, representing 1.7 million shares at an average price of $45.84 per share. Moreover, subsequent to the first-quarter end to December 31, the company made an additional expenditure of $128.3 million toward repurchasing 2.6 million shares at an average price of $49.71 per share. At the end of the quarter, the company was left with approximately $293.5 million under its current $500 million share repurchase authorization. Apollo ended the quarter with shareholders’ equity of $1,323.7 million.

Guidance

Apollo provided a positive outlook as the company registered an encouraging growth in New Degreed Enrollment in the quarter after a dull fiscal 2011.Besides, trends showed an improvement in admission advisor effectiveness. Hence, the company now expects net revenue in the range of $4.10–$4.30 billion in fiscal 2012 instead of $4.10 - $4.20 billion forecasted earlier. However, Apollo has lowered its upper end operating income expectation for fiscal 2012 to $655 - $750 million from $655 – 780 million.

Our Take

Apollo Group is the industry leader in the U.S. private education services sector. The company has an experience of more than 35 years in the education industry and possesses one of the most powerful brands, University of Phoenix, in the sector. This provides a hard-to-replicate competitive advantage to the company and bolsters its leading position in the market.

Moreover, in a drive to boost students’ retention, Apollo Group has recently acquired the Downtown based math curricula publisher, Carnegie Learning. The acquisition is expected to add 7 cents to 9 cents per share to Apollo’s earnings in fiscal 2012.

However, intense competition from other companies offering postsecondary education, such as DeVry Inc. (DV), Strayer Education Inc. (STRA) and Career Education Corp. (CECO) and stringent regulation by federal authorities remain matters of concern.

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

 
APOLLO GROUP (APOL): Free Stock Analysis Report
 
CAREER EDU CORP (CECO): Free Stock Analysis Report
 
DEVRY INC (DV): Free Stock Analysis Report
 
STRAYER EDUC (STRA): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research