Apollo Beats, Enrollment Drops

Zacks

Apollo Group, Inc (APOL) reported adjusted earnings of $1.20 per share in the third quarter of fiscal 2012, comfortably surpassing the Zacks Consensus Estimate of 96 cents. However, lower revenues led to a 17% downslide in earnings from the prior- year earnings of $1.45 per share.

The company reported earnings of $1.13 per share in the third quarter of fiscal 2012, down 25.17% y/y.  

Total Revenue

Apollo delivered total revenue (comprising tuition and fees for educational services) of $1.13 billion during the third quarter of fiscal 2012, down 8.5% from the year ago quarter due to 9.1% decline in net revenues from the University of Phoenix. The net revenue from the University of Phoenix dropped due to lower enrollment, partially offset by favorable changes in tuition price and other fees.

However, total revenue breezed past the Zacks Consensus Estimate of $1.12 billion.

Quarter in Detail

Revenues declined at the University of Phoenix in the third quarter of fiscal 2012 due to a 13.1% decrease in degreed enrollment to 346,300 students from 398,400 in the third quarter of fiscal 2011. New enrollment (also called new degreed enrollment) was 51,500, down 8.0%, or 5.3% adjusting for available start dates, from 56,000 in the third quarter of fiscal 2011.

Instructional and student advisory cost inched up 2.6% to $470.1 million during the third quarter of fiscal 2012. As a percentage of net revenue, cost grew 450 basis points (bps) due to the company’s continuous effort to improve its services (especially technology) in order to enhance students’ educational outcomes.

Marketing expenses (include advertising cost and cost incurred to establish relationships with employers and community colleges) declined 1.3% to $158.9 million in the third quarter of fiscal 2012. Admission advisory expenses declined 4.6% to $95.3 million compared with the prior-year figure, but increased 30 bps as a percentage of net revenue. Benefits from lower admissions advisory headcounts were offset by increased employee compensation costs.

Apollo’s general and administrative (G&A) expenses grew 0.3% to $88.1 million in the third quarter of fiscal 2012, which is a growth of 70 bps as a percentage of net revenue. Bad debt expenses declined 9.7% to $35.4 million in the third quarter of 2012, due to lower enrollments in University of Phoenix.

The company reported operating income of $225.6 million in the third quarter of 2012, down 34.9% y/y. Adjusted operating margin declined 720 basis points to 21% in the quarter.

Balance Sheet

As of May 31, 2012, Apollo had cash and cash equivalents of $602.1 million compared to $1.57 billion as of August 31, 2011. The decline in cash and cash equivalents was due to share repurchases, capital expenses, payments on borrowings and the acquisition of Carnegie Learning during the quarter.

During the reported quarter, Apollo repurchased approximately 9.0 million shares worth $329.0 million. Moreover, subsequent to quarter end, on May 31, 2012 the company made an additional expenditure of $15.0 million toward repurchasing 0.5 million shares. The company is thus left with $48.5 million under its current $500 million share repurchase authorization.

The company substantially reduced its outstanding debt levels from the end of the previous fiscal year. The company’s total outstanding debt (including short and long term) stood at $126.0 million as of May 31, 2012 compared with $599.0 million as of August 31, 2012.

Fiscal 2012 Outlook

At the third quarter conference call, the company maintained the previously provided revenue guidance of $4.2– $4.3 billion and adjusted operating income guidance of $700–$740 million for fiscal 2012. The company expects enrollment to decline in the fourth quarter of fiscal 2012.

Fiscal 2012 share-based compensation is expected to come in a band of $80 million. The tax rate is expected to be 42% for fiscal 2012.

The company believes that G&A expenses will increase in the fourth quarter of fiscal 2012, compared to the third quarter of fiscal 2012.  The advertising cost is expected to be down for fiscal 2012, though the advertising cost is expected to increase seasonally in the fourth quarter of fiscal 2012.The company expects fiscal 2012 bad debt as a percentage of revenue to decline, due to encouraging collection rates.

We are optimistic about Apollo Group’s dominant market position as well as its continuous efforts to improve services, and thereby student experience and outcomes. During the quarter the company initiated Phoenix Career Services, which offers an online career portal to students, in order to support students’ outcome.

However, the declines in enrollment trends in the second and third quarter of fiscal 2012 as well as the expected deterioration in the fourth quarter of 2012 remain matters of concern. We therefore, prefer to remain on the sidelines until we get further clarity on future enrollment trends.

We currently have a Neutral recommendation on Apollo Group. The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating). One of its peers, DeVry Inc. (DV) presently retains a Zacks #4 Rank, which translates into a short term Sell rating.

Based in Phoenix Arizona, Apollo Group Inc. is a leading private education service provider in the U.S. and has been in the education business for more than 35 years. Apollo Group offers innovative and distinctive educational programs and services for the undergraduate, masters and doctoral level, both online and on-campus.
 

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