Apollo's Earnings Surge

| About: Apollo Education (APOL)

Apollo Group Inc. (NASDAQ:APOL), one of the world’s largest private education providers, reported an earnings growth of 10.9% year over year to reach $1.63 in the first quarter of fiscal 2011. The result topped the year-ago earnings of $1.47 per share and also surpassed the Zacks Consensus Estimate of $1.35. On a reported basis, including one-time items, earnings came in at $1.61 compared with $1.54 in the prior-year quarter.

The Phoenix based company earned an income of $238.9 million from continuing operations, an increase of $9.9 million from the year-ago quarter. Including a pre-tax restructuring charge of approximately $3.8 million related to the reduction in force at the University of Phoenix and $0.9 million of incremental post judgment interest related to a securities class action lawsuit, net income dropped $4 million to $236 million.

Apollo delivered total revenue of $1,326.4 million during the quarter, up 5.4% from the year-ago quarter on the back of selective tuition price increases as well as a higher average enrollment at the University of Phoenix. University of Phoenix Degreed Enrolment however dropped 3.8% to 438,100. Additionally, somewhat lower student enrolment coupled with a negative impact of foreign exchange rate led to the fall of $9.0 million in net revenue from BPP Holdings. BPP Holdings is a U.K. based provider of education and training to legal and finance professionals, which was acquired by Apollo Global in July 2009. Total revenue also beat the Zacks Consensus Estimate of $1,260 million.

Instructional and student advisory cost increased to $455.8 million during the quarter from $430.6 million in the year-ago quarter, primarily due to the company’s continuous effort to invest so as to improve students’ educational outcome, which resulted in higher compensation.

Apollo’s bad debt expenses for University of Phoenix decreased by $5.8 million during the quarter to $56.9 million. As a percentage of revenue it came in at 4.3%, representing a decrease of 70 basis points from 5.0% reported in the prior-year quarter. A decrease in gross accounts receivable attributable to implementation of university orientation led to the fall in bad debt expense.

Operating profit for the quarter under review decreased 4.0% to $407.0 million. Excluding special charges, operating profit decreased 5.0% to $412.0 million. Operating margin declined 20 basis points to 31.1%

Financial Position
Apollo ended the quarter with cash and cash equivalents of $1,040.5 million compared with $1,284.8 million at the end of August 21, 2010. The decrease in cash was primarily attributable to the repayment of debt, increased capital expenditure, and an increase in restricted cash and share buyback made by the company partially offset by an increase in cash from operation. Apollo repurchased $176.5 million worth of shares and ended the quarter with shareholders’ equity of $1,466.2 million versus $1,388.7 million in the prior-year quarter. At the end of the quarter, the board of directors increased management’s authorization to buy back Class A common shares to the current total amount of $600 million. Total debt decreased by $403.0 million to $181.4 million during the quarter.

Apollo Group faces intense competition from other companies offering postsecondary education, such as DeVry Inc. (NYSE:DV), Strayer Education Inc. (NASDAQ:STRA) and Career Education Corp. (NASDAQ:CECO).

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