Zacks_Analysts' Blog : Apollo Group Earnings Surge - Analyst Blog

Apollo Group Inc. (APOL), one of the world’s largest private education providers, reported earnings growth of 34% year-over year at $1.74 in the third quarter of fiscal 2010. The result topped the year-ago earnings of $1.30 per share and also surpassed the Zacks Consensus Estimate of $1.55. Apollo’s BPP operation contributed five cents towards earnings. On a reported basis, including one-time items, earnings came in at $1.18, compared with $1.26 in the prior-year quarter.



The Phoenix-based company earned income of $264.6 million from continuing operations, an increase of $58.2 million from the year-ago quarter. Including a goodwill impairment charge of $8.7 million, a pre-tax charge of approximately $132.6 million related to a securities class action lawsuit and discontinued operations of $2.0 million, net income plummeted $21.8 million to $179.3 million.



Apollo delivered total revenue of $1,337.4 million during the quarter, up 27.7% from the year-ago quarter on the back of 3.3% increase in degree enrollments to 476,500 in the University of Phoenix, coupled with contribution of $75.8 million in net revenue from BPP Holdings.



Instructional costs and services increased to $540.6 million during the quarter from $390.6 million in the year-ago quarter, primarily due to the acquisition of BPP, as its cost structure is more skewed towards instructional costs and services, and higher bad debt expenses.



Apollo’s bad debt expenses for University of Phoenix increased 200 basis points during the quarter to 5.4% (as a percentage of revenues) versus 3.4% in the year-earlier quarter. Lower collection rates at the associates level, a weak economy, and increase in receivables from students enrolled in associate’s degree programs led to the increase in bad debt expense in the quarter. Consequently, Apollo is gradually shifting its focus in student enrollments towards bachelor degree-level students who have a better chance to succeed in programs than the associate degree students.



The improvement in the enrollment counselor effectiveness coupled with a somewhat lower-than-expected advertising cost led to the 260 bps decrease in selling and promotional expenses as a percentage of revenues from 23% in the prior year quarter to 20.4%.



Operating profit for the quarter under review decreased $42.5 million to $302.3 million. However, excluding goodwill impairment and litigation charges, operating profit increased $98.8 million to $443.6 million.



Financial Position



Apollo ended the quarter with cash and cash equivalents of $892.0 million, compared with $968.2 million in the prior-year quarter. The decrease in cash was primarily attributable to the repayment of debt and share buybacks made by the company. Apollo repurchased $139.3 million worth of shares and ended the quarter with shareholders’ equity of $1,444.6 million versus $1,224.6 million. The company is left with $561 million under the share repurchase authorization. Total debt decreased by $422.5 million to $166.6 million during the quarter.



Guidance



Apollo now sees earnings per share for the fourth quarter of fiscal 2010 at $1.30 and revenues at $1.25 billion. For 2011, it expects revenue to grow in high-single digit range.



Management Outlook



Management indicated that the company is continuously endeavoring to strengthen its position in order to provide high quality education to students across the world.
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