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Apollo's 4Q EPS & Rev Decline Y/Y

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Education provider Apollo Group, Inc reported adjusted earnings (excluding special items) of 52 cents per share in the fourth quarter of fiscal 2012, comfortably surpassing the Zacks Consensus Estimate of 49 cents. However, lower revenues resulted in a 49% downslide from the prior-year earnings of $1.02 per share.

Quarter Details

Apollo reported net revenue of $996.5 billion in fourth quarter 2012, down 11.0% from prior year quarter due to decline in net revenue of University of Phoenix, owing to weak enrollment. The Zacks Consensus Estimate for the quarter was $1.01 billion.

The University of Phoenix reported 13.8% fall in degreed enrollment to 328,400 students in fourth quarter 2012. New enrollment (or new degreed enrollment) at University of Phoenix declined 13.7% from the prior-year quarter to 52,800. The company had anticipated the decline in new enrollment. The decline was due to changing regulatory requirements, an improving job market, robust competition and a volatile economy.

In the fourth quarter of 2012, the company’s Associates Degree revenue was $237.7 million, down 26% y/y; Bachelor’s Degree revenue was $560.4 million, down 3.5% y/y, Master’s Degree revenue declined 13% y/y to $152.2 million and Doctoral Degree revenue was $21.7 million, down 8.1% y/y.

Revenue per student increased 2% in fourth quarter 2012, owing to pricing growth and enrollment mix shift towards higher revenue generating, advanced degree-level programs.

Operating margin declined 1180 basis points to 9.0% in the quarter. Adjusted operating margin (excluding restructuring and other charges) was 10% in the quarter. Instructional and student advisory cost increased to $455.6 million in fourth quarter 2012, up 4.7% y/y. As a percentage of net revenue, costs increased 680 basis points (bps) primarily due to the company’s continuous investment in technology in order to enhance student educational outcomes.

The company incurred marketing expenses of $180.3 million in fourth quarter 2012, up 5.6% y/y. This as a percentage of net revenue represents an increase of 290 basis points. Marketing expenses grew owing to increase in brand building.

Apollo had cash and cash equivalents of $1.28 billion as of August 31, 2012, compared with $602.1 million as of May 31, 2012. The company repurchased 2 million shares – worth $63.5 million – during the quarter.

Fiscal 2012

Apollo reported adjusted earnings of $3.56 for fiscal 2012, missing the Zacks Consensus Estimate of $3.57 by a penny.

The company reported net revenue of $4.3 billion in fiscal 2012, down 9.7% y/y due to 10.2% decline in net revenue of University of Phoenix, owing to weak enrollment.

BPP Holdings Plc., a UK-based subsidiary of Apollo Global, provided education and training to legal and finance professionals. BPP Holdings was acquired by Apollo Global in July 2009. In fourth quarter 2012, Apollo completed the sale of BPP Holdings Ltd for $85.3 million and reported a sales gain of $26.7 million.

On October 12, 2012, the company bought the remaining 14.4% non-controlling ownership in Apollo Group from The Carlyle Group for $42.5 million in cash, in addition of a contingent payment based on performance of BPP till August 31, 2017.

The company intends to design its programs to increase the employability of its students. Also the company is coordinating with 2,000 other companies to educate their workforce. The company is receiving good response from this channel.

2013 Outlook

At the fourth quarter conference call, the company issued the net revenue guidance range of $3.65 to $3.80 billion for fiscal 2013. The company expects new degreed enrollment growth to become positive some time in fiscal 2013. Adjusted operating income is expected to be in the range of $525 to $575 million in fiscal 2013.

A peer of DeVry, Inc. , Apollo Group, Inc carries a Zacks #3 Rank in the near term (Hold rating). We currently have a Neutral recommendation on Apollo Group.

Overall, we like Apollo Group’s dominant market position as well as its continuous efforts to improve services and thereby student experience and outcomes. The company is also undertaking initiatives to improve operating efficiency and rationalize the cost structure. However, choppy enrollment trend and possibility of regulatory changes keep us on the sidelines.

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