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Sar Medoff

APOL AT A GLANCE

P/E ► 0   EV/EBITDA ► 1.14 VERY LOW ROA ► 31% VERY HIGH ROE ► 62.8% HIGH Debt to Equity ► 0.927 AVG Current Ratio ► 1.72 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsOperating ExpensesSG&AAmortization & Depreciation

The Apollo Group's (NASDAQ:APOL) University of Phoenix is the largest for-profit university by enrollment. The University of Phoenix offers associate, bachelor's and doctoral degree programs to more than 313,700 enrolled students, at 102 campuses and 157 learning centers in forty states. 93% of Appolo's revenue comes from tuition paid to The University of Phoenix, the group's largest subsidiary.^[1].

In recent years, the company began marketing more aggressively to associate degree students. These students represent a significant revenue opportunity, but are also riskier than Apollo's other students as they are less financially stable and more likely to borrow directly from Apollo to fund their classes. Over the last few years, Apollo's bad debt expense increased as a result of defaults from associate degree students.

In response growing demand for post secondary education services overseas, the Apollo Group partnered with the Carlyle Group in 2007 to start a for profit university overseas. Over the next several years the company plans to offer both U.S. degree and local degree programs to students in multiple countries.

[edit] Business Financials

In FY 2007, Apollo had revenues of $2,723.8 million, a 9.9% increase from $2,447.5 in FY 2006^[2]. Tuition revenue is approximately 94% of Apollo's total revenue. Net income decreased 1.4% for 2007 vs. 2006, but this was an improvement over a 3.1% decrease in net income for 2006 vs. 2005. These decreases are the result of increased expenses - 14.8% increase from 2006 to 2007; higher employee compensation and bad debt expenses related to student loans for Axia College students drove up expenses ^[3].

Approximately 65% of Apollo's annual revenue comes from Federal Education Financial Aid Programs that subsidize many students' tuition^[4].

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[edit] Key Trends and Forces

• Increasing Demand Drives Up Enrollment - More than 93% of Apollo's revenue comes from tuition. The average age of the UPX student is in his early thirties. Apollo focuses on marketing itself to the non-traditional higher education population of students older than 24 years old. The U.S. Department of Education estimates that the post-secondary education market is worth at least $370 billion; the Department of Education estimates that nearly 40% of all students enrolled in post-secondary education programs are older than 24. Over the next six years, the percentage of 18-24 year old students will increase by 16%, and the number of non-traditional students should grow at a similar rate^[8]. Because such a large percentage of Apollo's revenue comes from tuition, the company's continued success will depend on its ability to recruit and enroll ever-increasing numbers of students. Total enrollment has increased by an average of 9% since 2005^[9].

• Increased Focus on Associate Degree Programs - Apollo recently reorganized its subsidiaries by combining Axia College with The University of Phoenix. Axia College offers a multitude of online associate degrees; these programs typically take two years to complete and cost less than The University of Phoenix's bachelor's degree programs. Apollo's expects many Axia associate degree students to enroll in University of Phoenix bachelor's degree programs upon completion of their first degree. The strategy is a shift in strategy for Apollo as Axia College targets younger, non-professional students and competes against community colleges. Unlike University of Phoenix, where many corporate employers pay for their employee's education, it remains to be seen whether a younger, unemployed student demographic will be willing to pay Axia College tuition significantly more expensive than tuition for community colleges^[10]. Apollo expects a higher rate of student loan defaults because the Axia College student demographic is younger and less financially-stable than the University of Phoenix student demographic^[11].

• Government Regulation and Financial Aid Policies Determine APOL's Fiscal Success - The post-secondary education market is very highly regulated for any educational institutions that receive funding from the government; in Apollo's case, government funding is in the form of financial aid programs that subsidize qualified students' education costs. UPX was received accreditation in 1978 and the other three subsidiaries that provide education services (as opposed to one subsidiary's education support services) are accredited and recognized by the U.S. Department of Education. Because 65% of Apollo's annual revenue comes from Federal Education Financial Aid Programs, any significant change in policy for the various financial aid programs will affect Apollo's revenue.

• New Opportunities For International Expansion - In 2007, Apollo jointly formed Apollo Global with The Carlyle Group. The venture will be in charge of all global expansion initiatives and education activities outside of the U.S. Apollo already operates campuses in Canada, Mexico, and The Netherlands, in addition to their online offerings ^[12]. Apollo's international strategy calls for continuing to offer US accredited degrees to international students and gradually expanding to offer more local education services for each country. By 2035, The World Bank predicts that there will be more than 175 million international post-secondary students^[13]. International students can utilize the University of Phoenix's online degree programs (more than 50 degrees are offered), and currently students from more than 130 countries have enrolled in online courses^[14].

[edit] Competition

The post-secondary education market is extremely competitive and not dominated by any single player. The United States has approximately 6,440 post-secondary education institutions^[15]:

• 2,570 private, for-profit schools
• 2,010 public, non-profit schools
• 1,860 private, non-profit schools

In addition to this extreme market fragmentation, the extensive accreditation process acts as a significant barrier preventing new companies from entering the market.

Of the other private, for-profit schools that target non-traditional students, Career Education Corporation (CECO) , DeVry University (DV), and ITT Educational Services (ESI) pose the greatest competition to the Apollo Group.

Career Education Corporation (CECO) operates 80 campuses in the United States, Canada, France, and the United Kingdom, and two online academic programs. Approximately 90,000 students^[16] are enrolled in their programs and their FY 2007 total revenue was $1,675 million^[17].

DeVry (DV) served approximately 108,800 students in 2007 through its four subsidiary institutions - DeVry University, Ross University, Chamberlain College of Nursing, and Becker Professional Review. DeVry University is an undergraduate institution with more than 80 locations and the Keller Graduate School of Management; enrollment in 2007 was approximately 57,000. Ross University operates the Ross University School of Medicine and the Ross University School of Veterinary Medicine in Dominica. Enrollment in 2007 was 3,700. The Chamberlain College of Nursing enrolled nearly 1,100 students in 2007. Becker Professional Review operates CPA and CFA review courses that enrolled more than 47,000 students in 2007^[18]. DeVry's total revenue for FY 2007 was $933.5 million^[19].

ITT Educational Services (ESI) operates 93 institutes in 34 states serving approximately 49,000 students^[20]. In FY 2007, ITT's total revenue was $869.5 million^[21].

[edit] Notes

1. ↑ APOL 2007 10-K Item 1: Business, page 4
2. ↑ APOL 2007 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 51
3. ↑ APOL 2007 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 53
4. ↑ APOL 2007 10-K Item 1: Business, page 20
5. ↑ APOL 2007 10-K Item 1: Business, page 14
6. ↑ APOL 2007 10-K Item 6: Selected Consolidated Financial Data, page 43
7. ↑ APOL 2007 10-K Item 6: Selected Consolidated Financial Data, page 44
8. ↑ APOL 2007 10-K Item 1: Business, page 6
9. ↑ APOL 2007 10-K Item 1: Business, page 14
10. ↑ University of Phoenix Targets Young Students Online at Lower Cost [1]
11. ↑ APOL 2007 10-K Item 1: Business, page 22
12. ↑ APOL 2007 10-K Item 1: Business, page 5
13. ↑ APOL 2007 10-K Item 1: Business, page 5
14. ↑ University of Phoenix International [2]
15. ↑ DV 2007 10-K, Item 1: Description of Business, page 12
16. ↑ Career Education Corporation [3]
17. ↑ CECO 2007 10-K, Item 6: Selected Financial Data, page 41
18. ↑ DV 2007 10-K, Item 1: Description of Business, pages 7-11
19. ↑ DV 2007 10-K, Consolidated Statements of Income, page 79
20. ↑ ITT Educational Services Overview [4]
21. ↑ ESI 2007 10-K, Item 6: Selected Financial Data, page 34
22. ↑ APOL 2007 10-K Item 1: Business, page 4
23. ↑ Career Education Corporation [5]
24. ↑ DV 2007 10-K, Item 1: Description of Business, pages 7-11
25. ↑ ITT Educational Services Overview [6]