Earnings Cheat Sheet: Apollo Group in Transition, Withdraws All Guidance for 2011

Apollo Group (APOL), is the largest player in the for-profit postsecondary education sector. Its largest subsidiary, University of Phoenix, is the largest regionally accredited private university in the United States with over 450,000 students. The Company’s focus is on serving the needs of the working learner.

Apollo Group reported revenues and EPS that were largely in line with both Company and street expectations. Revenues grew 17.4% to $1.259bn and pro-forma EPS came in at $1.31.

New degreed enrollments at the University of Phoenix were 92,000, down about 10% from last year. New enrollments are under pressure due to a new student orientation program that was piloted (these students don’t “count” for 3 weeks as they test the school) as well as other admissions changes that were implemented. Total students were up 6% to 470,800.

The stock, however, fell more than 15% in the aftermarket, as the Company withdrew its guidance for FY2011 and said it expects “2011 to be a year of continuing transition in its operations as it implements initiatives, primarily at University of Phoenix, aimed at enhancing the student experience . . .” The Company went further to say that new enrollments could fall as much as 40% in the next quarter.

The for-profit education space has been under a lot of scrutiny over the last couple of years as there are proposed new rules that will have varying degrees of impact for different players in the industry. As chart 1 shows, the average stock is down well over 20% (before the carnage that will likely occur tomorrow) over the last year with the S&P500 up 5%. Over the last month the stocks have rallied off their lows as there is a belief that the final rules may not be as onerous. Apollo’s commentary will likely have a ripple effect across the entire sector.

For some background, APOL has undertaken several initiatives over the last several quarters designed to improve the quality of students (moving from a focus on Associate degrees to a focus on Bachelor’s and Master’s degrees), and lower student churn (holding a 3-week orientation for new students). Most of these changes are being implemented in an attempt to meet expected new criteria from the government. While these initiatives have the potential to improve results over time, in the near-term it is leading to increased costs as well as a slow-down in enrollment. The CEO stated that he expected the Company to return to growth in both enrollments and earnings sometime in FY2012.

On the bright side, Apollo is in very strong financial position to deal with its issues. It generates strong cash flow and has approximately $1.3bn in cash with little debt.

Disclosure: Position in APOL.

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