APOL Beats Earnings, Revs Weak - Analyst Blog

Apollo Education Group, Inc. 's ( APOL ) adjusted earnings (excluding restructuring and other charges) of $1.04 per share in the first quarter of fiscal 2014 beat the Zacks Consensus Estimate of 90 cents by 15.6%. We believe that significantly lower cost and taxes in the quarter helped the company beat earnings expectations. However, Apollo Group's earnings declined 14.8% year over year due to weak revenues.

Net revenue of $856.3 million missed the Zacks Consensus Estimate of $861 million by 0.6%. Revenues declined 18.8% from the prior-year quarter due to a decline in enrollments at the University of Phoenix.

Revenue per student decreased 3% year over year due to pricing initiatives declared by the company during the quarter in order to improve affordability and value for the students. The company has simplified pricing at University of Phoenix, decreasing lower division tuition rates. The company is also increasing the use of targeted discounts and scholarships.

Adjusted operating margin improved 100 basis points (bps) in the quarter to 23.6% due to solid cost control efforts.

University of Phoenix - The University of Phoenix reported a17.7% decline in total enrollment to 263,000 students. In line with expectations, new enrollment at the University declined 23.0% to 41,700 in the quarter.

The decline was due to changing regulatory requirements, stiff competition and a volatile economy. Apollo Group has been witnessing persistent decline in enrollment due to a weak macroeconomic environment and a subsequent decline in demand for educational courses (due to the hesitancy over taking a loan) in the U.S.

During fiscal first quarter 2014, the company's Associates Degree revenues were $179.0 million (down 28.9% year over year), Bachelor's Degree revenues were $462.1 million (down 17.6%), Master's Degree revenues were $140.1 million (down 11.8%) and Doctoral Degree revenues were $16.6 million (down 19.8%).

Acquisition of Open Colleges

In Dec 2013, Apollo Education agreed to acquire 70% of the outstanding stock of Open Colleges Australia Pty Ltd, known as Open Colleges. Open Colleges is one of Australia's oldest and largest providers of distance learning and the acquisition is in line with APOL's long term strategy of global expansion. The acquisition is expected to be completed by the second quarter of fiscal 2014.

According to the agreement, Apollo Global will purchase 70% of the outstanding stock of Open Colleges in cash for about $98.5 million, along with a contingent payment of about $47 million, which will be based on fiscal 2014 operating results. The agreement allows Apollo Global to purchase the rest of the 30% stock in the future.

Though Apollo Group has a dominant market position and focuses on offering relevant career oriented educational programs, the company had been witnessing weak enrollment in the U.S., which resulted in a decline in revenues. The acquisition will thus allow Apollo Global to access the growing education market in Australia and focus its resources internationally, where better results are expected.

Fiscal 2014 Outlook

Apollo Education increased its top line guidance for fiscal 2014 to incorporate revenues from the Open Colleges acquisition. The company raised its fiscal 2014 net revenue guidance to a range of $3.0 billion to $3.1 billion from prior expectation of $2.95 billion-$3.05 billion. The top-line guidance, however, represents a decline from fiscal 2013 levels. Apollo Education continues to expect total enrollments to decline from 2013 levels to 230,000 students in fiscal 2014.

The company continues to expect revenue per student to increase in the range of 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.

The company also tightened its operating income expectations. Adjusted operating income is expected in the range of $400 million to $450 million compared to prior expectations of $375 million-$450 million. All cost items are expected to decline in 2014 from 2013 levels. The company also increased its savings target by $25 million for fiscal 2014.

Apollo carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the education sector include American Public Education, Inc. ( APEI ), TAL Education Group ( XRS ) and Xueda Education Group ( XUE ). All three stocks carry a Zacks Rank #2 (Buy).

AMER PUB EDUCAT (APEI): Free Stock Analysis Report

APOLLO GROUP (APOL): Free Stock Analysis Report

TAL EDUCATN-ADR (XRS): Free Stock Analysis Report

XUEDA EDUC-ADR (XUE): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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