Apollo Group, Inc. (APOL) reported strong fourth-quarter fiscal 2013 results, beating the Zacks Consensus Estimate for both revenues and earnings, even though enrollment continued to decline. However, the fiscal 2014 revenue outlook fell short of Zacks’ expectations.
Adjusted earnings (excluding special items) of 55 cents per share in the fourth quarter of fiscal 2013 handily beat the Zacks Consensus Estimate of 25 cents by 120%. In fact, Apollo Group’s earnings grew almost 6% year over year — the first quarterly year-over-year increase for this for-profit education company in more than two years. Strong cost cutting and the timing of scholarship programs helped the company exceed profit expectations in the fourth quarter.
Net revenue of $845 million also beat the Zacks Consensus Estimate of $823 million by 2.7%. Revenues, however, declined 15.2% from the prior-year quarter due to decline in enrollments at the University of Phoenix.
Apollo Group is consistently enhancing and expanding its services/programs and investing in academic quality to improve student experience and outcomes. Apollo’s initiatives include investments in adaptive learning and curriculum development as well as introducing a new learning and service platform. The company is also working to develop new programs and learning systems and is continuously enhancing and expanding student support service offerings. All these initiatives improve retention rates. In addition, the company is offering more discounts and scholarships to improve affordability and student value proposition.
Moreover, the company’s accelerated efforts to right-size its business through significant layoffs and campus closings have resulted in significant cost savings. Fixed costs declined $350 million in fiscal 2013, higher than the prior expectation of $300 million. The company expects further fixed cost savings of at least $300 million in 2014.
We believe that Apollo’s strategic and cost saving initiatives helped it to deliver a surprisingly strong performance this quarter.
Enrollment Details and Margins
The University of Phoenix, Apollo’s Flagship University, reported an 18.1% decline in total enrollment to 269,000 students. New enrollment at the University declined 22.3% to 41,000 in the quarter.
Apollo’s enrollments have been sluggish for many quarters. 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.
Revenue per student increased 2% year over year, better than company expectations of a decline of 1%–2%. Higher attendance among students during the period and the timing of student graduations increased the figure.
All the cost items declined in the quarter driven by savings from the restructuring efforts and lower variable costs associated with low enrollments.
Adjusted operating margin improved 190 bps in the quarter to 11.9% due to solid cost control efforts.
Annual Results
In fiscal 2013, the company witnessed a 23% decline in revenues to $3.68 billion, slightly beating the Zacks Consensus Estimate of $3.66 billion. Revenues were within management’s guidance range of $3.65 billion–$3.70 billion.
Adjusted earnings (excluding non-core items) were $3.16 per share, which beat the Zacks Consensus Estimate of $2.86 by 10.5%. Earnings declined 11.3% from the prior year.
Adjusted operating income was $601.4 million, beating the guidance range of $525 million–$550 million.
Fiscal 2014 Guidance below Expectations
The company issued fiscal 2014 net revenue guidance of a range of $2.95 billion–$3.05 billion. The top-line guidance represents a decline from fiscal 2013 levels and also falls short of the Zacks Consensus Estimate of $3.21 billion. Total enrollments are expected to decline from 2013 levels to 230,000 students in fiscal 2014. In fact, in the first quarter of fiscal 2014, new enrollments are expected to decline at the same or higher rate than the fourth quarter of 2013.
Revenue per student is expected to range from negative 2% to 4% for fiscal 2014 due to higher discounts. Discounts are expected to account for 9% of revenues in 2014, slightly higher than 8% in fiscal 2013.
Adjusted operating income is expected in the range of $375 million–$450 million. All cost items are expected to decline from the 2013 levels in 2014.
Other Stocks to Consider
Apollo carries a Zacks Rank #3 (Hold). Some other schools that are doing well and can be considered include DeVry, Inc. (DV), New Oriental Education & Technology Group Inc. (EDU) and TAL Education Group (XRS). All these companies carry a Zacks Rank #1 (Strong Buy).
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