Apollo Group (APOL) reported adjusted earnings (excluding restructuring and other charges) of 58 cents per share for the second quarter of 2012, which nicely beat the Zacks Consensus Estimate of 39 cents. However, quarterly earnings were down approximately 30% from the prior-period earnings of 83 cents primarily due to lower revenues.
Apollo delivered total revenue of $969.6 million during the quarter, down 7.5% from the year-ago quarter due to an 8% decline in revenues from the University of Phoenix, the company's wholly owned subsidiary. However, total revenue breezed past the Zacks Consensus Estimate of $933 million.
Quarter in Detail
Revenues declined at the University of Phoenix in the reported quarter due to a 12.2% decrease in degreed enrollment to 355,800 students. New enrollment growth (also called new degreed enrollment growth) was up only 1% from the prior-year period, a disappointment from management's original expectation of maintaining the sharp 13% rise witnessed in the sequentially preceding quarter. In late February 2012, management had however tempered its growth expectation to the low single digits.
Sluggish new enrollment growth was affected by company specific factors, an improving job market, robust competition and a volatile economy. Higher education sees a countercyclical movement during weaker economic conditions. Post-secondary enrollments tend to rise as both unemployed and employed workers return to school to re-skill themselves and existing students remain in school for a longer duration compelled by the intensely competitive job market. Enrollments are once again taking a beating with an improving job market.
Instructional and student advisory cost inched up 1.9% to $429.5 million during the quarter. As a percentage of net revenue, cost grew 410 basis points (bps) primarily due to the company's continuous effort to improve its services (especially technology) in order to enhance students' educational outcomes. Marketing expenses, incurred to establish relationships with employers and community colleges, rose 1.3% to $159.3 million. Admission advisory expenses declined 0.9% to $101.4 million compared with the prior-year figure, but increased 60 bps as a percentage of net revenue. Benefits from lower admissions advisory headcounts were offset by increased employee compensation costs. Though Apollo's general and administrative (G&A) expenses declined 0.4% to $84.0 million, as a percentage of net revenue G&A shot up by 70 bps. Bad debt expenses  declined 110 bps as a percentage of revenues to 3.2% due to lower enrollments.
Balance Sheet
Apollo ended the quarter with cash and cash equivalents of $800.7 million compared with $1.20 billion at the end of the first quarter of 2012 due to share repurchases in the current quarter. During the reported quarter, Apollo repurchased approximately 6.4 million shares worth $328.8 million. Moreover, subsequent to quarter end, on February 29, the company made an additional expenditure of $92.5 million toward repurchasing 2.2 million shares. The company is thus left with $0.5 million under its current $500 million share repurchase authorization.
At the end of the quarter, the company's total outstanding debt (including short and long term) stood at $127.5 million compared with $114.3 million at the end of the first quarter of 2012.
Fiscal 2012 Outlook
At the second quarter conference call, the company maintained its previously provided revenue guidance of $4.1-$4.3 billion and adjusted operating income guidance of $625-$725 million for fiscal 2012. We would like to remind investors that in late February 2012, the company had reduced its adjusted operating income guidance from $655-$750 million to $625-$725 million. The cut in the guidance was in anticipation of fluctuating new degreed enrollment.
The company expects new degreed enrollment growth to remain volatile through the rest of 2012. If the current trends continue the third quarter could witness double-digit declines in new degreed enrollment.
Long-Term Initiatives
The company is focusing on corporate partnerships as it sees opportunity for growth in this area. It is reallocating marketing and advertising costs to foreground its innovative pipeline. To its credit, Apollo is also working to cut costs and to provide world class affordable education to its students with a focus on building long-term. Management believes these initiatives will have a substantial impact on the cost structure beginning in fiscal 2013 with an even greater impact in fiscal 2014.


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