Apollo Education Beats on Q3 Earnings & Revenues, Ups Outlook - Analyst Blog

Apollo Education Group, Inc.'s APOL adjusted earnings of 76 cents per share for the third quarter of fiscal 2014 beat the Zacks Consensus Estimate of 65 cents by 16.9 %.  We believe cost reduction and improved efficiency helped Apollo beat the Zacks Consensus Estimate for earnings. However, earnings declined 27.6% 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 $799.9 million beat the Zacks Consensus Estimate of $794 million by 0.7%. However, revenues declined 15.5% from the prior-year quarter due to a decline in enrollments at the University of Phoenix (UOP).

Quarter Details

University of Phoenix – Revenues declined 19.2% year over year to $681.7 million at the UOP due to a 15.9% decline in total enrollment to 241,900 students. New enrollment at the UOP declined 12.9% to 33,900 in the quarter.

Apollo's enrollments have been sluggish for many quarters due to regulatory challenges, changes and competition in the higher education industry. Enrollment trends throughout the industry have been affected by changing regulatory requirements, sluggish demand due to students' aversion to debt, robust competition and a volatile economy.

However, the rate of starts decline was narrower than the preceding quarter's decline of 16.5%. The rate of decline was also lower than the prior-year quarter, indicating that the company's branding, program diversification and student retention initiatives are gradually yielding results.

Apollo Global reported net revenue of $100.5 million in the third quarter of fiscal 2014, up 22.4% year over year. The segment has been benefitting from its Open Colleges revenues. The newly acquired Open Colleges did well in the previous quarter and exceeded management's expectations. The company has expanded its footprint to South Africa.

The Other Schools segment reported revenues of $17.8 million in the third quarter of fiscal 2014, down 16.0% year over year. The segment has been witnessing a decline in Institute of Professional Development IPD and Western International University (WIU) revenues.

Instructional and student advisory cost was $327.8 million in third-quarter fiscal 2014, down 16.7% year over year due to lower variable costs associated with lower enrollments and reduced costs due to restructuring actions. As a percentage of net revenue, it decreased 50 basis points (bps) to 41.0%.

The company incurred marketing expenses of $139.9 million in third-quarter fiscal 2014, down 10.8% year over year due to lower advertising costs and lower headcount. However, as a percentage of revenues, marketing expenses increased 90 bps to 17.5%.

Despite the cost savings, adjusted operating income declined 29.7% to $137.1 million due to dilution from Open Colleges.

Share Repurchases

In the quarter, the company repurchased approximately 1.5 million shares worth $45.0 million. The company currently has approximately $135.3 million available under its share repurchase authorization.

Fiscal 2014 Outlook

Apollo Education upped its guidance for fiscal 2014. The company now expects fiscal 2014 revenues in the range of $3.04 billion to $3.06 billion, up from the prior expectation of $3.0–$3.1 billion. However, the top-line guidance represents a decline from fiscal 2013 levels of $3.7 billion.

The company expects adjusted operating income in a range of $420 million to $435 million, compared to prior expectations of $400 million to $450 million.

Apollo carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks in the education sector worth considering include Lincoln Educational Services Corp. LINC, TAL Education Group XRS and DeVry Education Group Inc. DV. All the three education companies sport a Zacks Rank #1.