Apollo Beats Expectations but Pricing Trends and Enrollment Remain Slow

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The Apollo Group beat the Street’s second quarter revenue and adjusted operating profit forecasts and approved a $250 million share repurchase program, which helped send shares up sharply in early trading. Still, analysts highly cautious about the for-profit education sector’s outlook and do not expect a significant change to Apollo’s $22 fair value estimate. Enrollment trends remain weak and have shown few signs of bottoming, so it is highly uncertain how much further revenue and margins will continue to decline.

Fiscal second-quarter revenue fell 13% over the prior-year period to $834 million. Troublingly, after showing signs of stabilization in the first quarter, total degreed and new enrollment declines accelerated during the quarter, falling 15.5% and 20.1% respectively. Revenue per student was flat over the prior-year period, as pricing increases offset lower average nights of attendance, but management expects revenue per student will decline 1% to 2% during the back half of the year. We have already baked this assumption into our base model, but this is a disturbing trend that we would monitor closely for signs of continued deterioration.

As a result, the quarterly adjusted operating margin came in at 8.1%, down roughly 390 basis points from the prior year. On a positive note, management announced that the firm has made progress right-sizing its cost structure, and raised its 2014 cost-saving target by $50 million (to $350 million). Still, we are concerned that continued enrollment declines will offset much of this gain. Adjusted diluted earnings per share came in at $0.34, down 40% year over year, which exceeded consensus estimates. Management maintained its full-year 2013 guidance, which calls for $3.65 billion to $3.75 billion of net revenue, and $500 million to $550 million of adjusted operating income.

 

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