Apollo Education Beats on Earnings, Revs Weak - Analyst Blog

Apollo Education Group, Inc.'s APOL adjusted earnings of 28 cents per share for the second quarter of fiscal 2014 beat the Zacks Consensus Estimate of 18 cents by 55.6%.

We believe that a narrower decline in starts helped the company to beat earnings expectations. However, Apollo Education's earnings declined 17.6% year over year due to weak revenues.

Adjusted earnings exclude special items such as restructuring and other charges, acquisition costs and contingent consideration charges, charges related to legal matters, and benefit from a tax settlement.
 
Net revenue of $679.1 million missed the Zacks Consensus Estimate of $688 million by 1.3%. Revenues declined 18.6% from the prior-year quarter due to decline in enrollments at the University of Phoenix.

Revenue Discussion

Revenues declined 21.2% at Apollo Education's flagship University, The University of Phoenix (UOP) to $594.08 million due to a 16.8% decline in total enrollment to 250,300 students. New enrollment at the University declined 16.5% to 32,500 in the quarter. However, the rate of starts decline was narrower than the preceding quarter's decline  of 22.9%. The rate of decline was also lower than the prior-year quarter.   

Apollo's enrollments have been sluggish for several quarters due to regulatory challenges, changes and competition in the higher education industry. Enrollment trends throughout the education industry have been affected by changing regulatory requirements, sluggish demand due to students' aversion to debt, robust competition and a volatile economy. A couple of other education companies, which witnessed weak enrollment trends in the past few quarters were Universal Technical Institute, Inc. UTI and Lincoln Educational Services Corp. LINC.

Revenue per student decreased 5.6% year over year due to pricing initiatives implemented by the company in the first quarter to improve affordability and value for students. The company simplified pricing at the UOP, decreasing lower division tuition rates. The company also increased targeted discounts and scholarships. Discounts accounted for 9% of the company's revenues during the quarter.

Student persistence trends were strong; improving 90 basis points (bps) year over year in the second quarter. Retention rates were better with the company's student retention initiatives gaining traction.

Costs and Margins

All the cost items declined in the quarter (excluding special items) driven by savings from restructuring efforts and lower variable costs associated with low enrollments.

Instructional and student advisory cost was $319.6 million in second-quarter fiscal 2014, down 16.7% year over year, due to lower variable costs associated with low enrollments. However, as a percentage of net revenue, it increased 110 bps to 47.1%.

The company incurred marketing expenses of $143.4 million in second-quarter fiscal 2014, down 17.3% year over year, due to lower headcount. However, as a percentage of revenues, marketing expenses increased 30 bps to 21.1%.

Adjusted operating income declined 34.4% to $44.3 million. Operating margin declined 170 bps in the quarter to 6.4% from 8.1% from prior year quarter.

Balance Sheet

Apollo ended the quarter with unrestricted cash and cash equivalents of $0.8 billion, compared to $916.9 million at the end of the first quarter of fiscal 2014, primarily due to $619.3 million spent on payments towards borrowings.

Share Repurchases

In the quarter, the company repurchased approximately 1.7 million shares worth $54.7 million. The company has $180 million worth of shares remaining under its current share repurchase authorization.

Fiscal 2014 Outlook

Apollo Education maintained its guidance for fiscal 2014. The company continues to expect fiscal 2014 revenues in the range of $3.0 billion–$3.1 billion. The top-line guidance represents a decline from fiscal 2013 levels. Apollo Education continues to expect total enrollments to decline from 2013 levels to 230,000 students in fiscal 2014.

The company expects revenue per student to decline at the upper end of the range of 2% to 4% for fiscal 2014 due to management's initiatives to improve affordability like offering higher discounts. Discounts are expected to account for 9% of revenues in fiscal 2014, slightly higher than 8% in fiscal 2013.

The company expects adjusted operating income in a range of $400 million to $450 million.

Apollo Education has a Zacks Rank #2 (Buy).

Investors interested in the education sector can also consider Strayer Education Inc. STRA, sporting a Zacks Rank #1 (Strong Buy).