Apollo Group Reports Beat Q1 and Bright Future

Apollo Group (APOL), a for-profit education company, reported first quarter 2009 earnings Thursday after the bell, beating analyst estimates by a strong margin. Revenue grew 24% to $971 million, and net income rose 29% to $180.4 million, or $1.12 per share. Analysts had been expecting revenue of $912.4 million and net income of $0.98 per share. The recession has proven to be very beneficial for Apollo Group, as more and more Americans are seeking the job prospect-boosting effects of a college degree. Degree enrollment reached a record 384,900 students during the quarter. CEO Chas Edelstein told investors “While we cannot quantify the significance of the current economy on our growth, we believe we are experiencing a positive impact, and we continue to generate meaningful cash flow.”

Apollo’s flagship, the University of Phoenix, contributed strongly to the company’s results, as enrollment of bachelor degree seeking students rose nearly 20%. Edelstein also said Apollo is “making progress” in other investment areas, such as its online high school, Insight Schools and Apollo Global.

Cost Controls Proving Effective

As a percentage of revenue, instructional costs fell to 38.9% from 42.7% a year ago. Apollo primarily attributes this decline to savings from successfully negotiating lower contract costs from third-party vendors, mostly in financial aid processing. The company is also benefiting from lower classroom lease expenses and depreciation. Bad debt expense declined 60 basis points as a percent of revenue due to a continued focus on front end collection efforts, as well as improved student retention rates. Bad debt expenses increased 60 basis points compared to the fourth quarter of 2008 however, due to the risk of collecting aged receivables given the current economic environment.

Selling and promotional expenses rose to $228.6 million, or 23.5% of revenue, up 90 basis points from last year. This was mainly driven by increases in the company’s corporate marketing functions, including additional employees. Apollo considers marketing a worthwhile investment, and continues to push for greater brand identity. The company sees this as a strong driver for enrollment growth.

General and administrative expenses increased 13.5% to $58.2 million, or 6% of net revenue, versus 6.6% last year. The decline is attributed to a decrease in legal costs and share-based compensation expenses, while being partially offset by higher employee compensation expenses.

Looking Forward

The future looks as bright as the sun for Apollo Group, as the online-education trend seems to be picking up steam. Fueled, rather than extinguished, by the recession, enrollment continues to grow and management continues to offer Wall Street earnings surprises to the upside.

“We remain optimistic about Apollo Group’s future. We have a strong balance sheet as well as solid operational and academic teams, putting us in a good position to further execute on our strategy and generate long-term shareholder value,” stated Mr. Edelstein.

The company’s cash and near-cash items totaled $821.3 million, compared to $511.5 million as of August 31, 2008. Additionally, accounts receivable declined to $200.7 million from $221.9 million. A company pulling in cash hand-over-fist is a nice change of pace for a market used to seeing companies on their knees begging for loans, and Wall Street has most certainly shown its appreciation. Shares of Apollo Group jumped 8.78% after the market closed Thursday, to $84 a share. On Friday shares were trading up over 10%. This follows the already unbelievable performance the common stock has shown over the past six months, relative to both the Consumer Discretionary sector (XLY) and the broader S&P 500 index (SPY).

Will Apollo continue to shine? A major concern for many investors has been students’ ability to obtain financing for the educational programs Apollo offers. Due to the substantial credit crunch, this is an obvious cause for worry. However, with the government pumping cash into every nook and cranny of the economy, and President-Elect Obama showing support for increasing student aid, these fears should subside over time as consumers regain confidence.

It has become clear that the unskilled laborer does not have much hope in America’s economy, recession or not. With both public and private universities becoming more expensive and more selective, Apollo Group is in a tremendous position to benefit from the surging demand for accessible education. The company has shown, quarter after quarter, that it can and will continue to take advantage of this trend. The market has extremely high expectations for Apollo going forward, and rightfully so. One needs to be cautious though, as the first misstep by Edelstein and co. will be not be taken lightly by a market that has become overly wary of disaster.

-Harry Lacheen

Disclosure: The mutual fund the author manages has an interest in APOL.