Apollo Beats in 1Q; Trims Outlook

Apollo Group, Inc (APOL - Analyst Report) reported adjusted earnings (excluding special items) of $1.22 per share in the first quarter of fiscal 2013, surpassing the Zacks Consensus Estimate of 90 cents by 36%. However, lower revenues resulted in a 3.2% downslide from the prior-year earnings of $1.26 per share.

Apollo Group reported net revenue of $1.1 billion in the first quarter of fiscal 2013, down 8.3% from the prior-year quarter due to 14.3% decline in degreed enrollment in University of Phoenix. Revenue, however, beat the Zacks Consensus Estimate of $1.03 billion by 6.8%.

We believe that Apollo beat the top and bottom line estimates on the back of better-than-expected enrollment results achieved by the University of Phoenix during the quarter. The decline in enrollment was narrower than the company guidance. However, revenue per students grew 3% year over year, driven by improved pricing and favorable students mix.

Enrollment Details

University of Phoenix – This segment offers bachelor’s, master’s and doctoral programs in 40 states in the U.S., the District of Columbia and Puerto Rico. It also offers online programs to students across the globe.

The University of Phoenix reported a decline of 14.3% in degreed enrollment to 319,700 students in the first quarter of fiscal 2013. New enrollment (or new degreed enrollment) at University of Phoenix declined 15.1% from the prior-year quarter to 54,100. The company results were better than the company’s expectation of 17% year over year decline.

Compared to the prior year quarter results, the company’s Associates Degree revenue in the first quarter of 2013 was $251.9 million, down 19.7%; Bachelor’s Degree revenue was $560.8 million, down 5.4%, Master’s Degree revenue declined 11% to $158.9 million and Doctoral Degree revenue was $20.7 million, down 12.7%.

Apollo Group has been witnessing persistent decline in enrollment due to the weak macroeconomic environment and subsequent decline in demand for courses (due to the hesitancy over taking a loan) in the U.S.

Other Details

The company incurred adjusted operating expenses of $817 million in the quarter, down 8.0% from the prior-year quarter, driven by decline in expenses. Instructional and student advisory cost decreased to $432.2 million during the quarter, down 4.7% year over year, driven by cost control initiatives taken by the company.

The company is taking several initiatives to drive growth in the upcoming quarters. The company intends to differentiate University of Phoenix as well as to diversify Apollo Group, in order to raise the quality of education offered to students and student outcome. Apollo’s other initiatives include investments in adaptive learning, curriculum development, new learning systems and student service platforms; and initiatives to connect education to careers. Also, the company is coordinating with 2,000 other corporate companies to educate their workforce.

Trimmed Outlook

At the first quarter conference call, the company issued the net revenue guidance range of $3.65 to $3.75 billion, narrower than prior expectations of $3.65 to $3.80 billion for fiscal 2013. The company continues to expect new degreed enrollment growth to become positive some time in fiscal 2013. Adjusted operating income is expected to be in the range of $500.0 to $550.0 million compared with the prior guidance of $525 to $575 million in fiscal 2013.

Revenue per student is expected to range from negative 1% to 2% for the remainder of fiscal 2013. Total marketing cost is expected to increase 15% during the second quarter 2013, driven by increased advertising expenditure.

A peer of DeVry, Inc. (DV - Analyst Report), Apollo carries a Zacks Rank #3 (Hold) for the near term. Currently, we have a Neutral recommendation on the company over the long term.

Overall, we like Apollo Group’s dominant market position as well as its efforts to address its challenges and improve business over the long term. Though encouraged by these initiatives, we still prefer to stay on the sidelines due to the trimmed guidance, choppy enrollment trend and possibility of regulatory changes.