Highlights From APOL's Q3 Conference Call; Record Quarter, Strong Balance Sheet and See Continued Growth

June 30, 2009 12:22 PM EDT

Last night, Apollo Group (Nasdaq: APOL) reported Q3 EPS of $1.26 versus the analyst estimate of $1.12. Revenue for the quarter was $1.05 billion, versus the consensus of $1.04 billion. Shares are up strong today, over 7.7%.

Highlights From The Q3 Conference Call:

• (CEO) We reported another record quarter and are particularly pleased to have surpassed the $1 billion quarterly revenue mark for the first time.
  
• Key academic and operating areas drove 26% revenue growth and a 48% EPS growth in Q3. The primary drivers of the revenue growth were higher enrollment and the benefits of the 2008 increased tuition rates at University of Phoenix.
  
• University of Phoenix was driven by continued strong new degreed enrollment growth of approx. 23%.
  
• (CFO) Our strong results this quarter were driven by an increase in revenue of nearly 26% to just over $1 billion compared to $835 million for the same period a year ago.
  
• Net income for Q3 excluding the securities litigation charge a year ago increased 44% to $201 million, resulting in diluted earnings per share of $1.26.
  
• Operating income excluding the securities litigation charge a year ago increased almost 51% to $336 million, and our operating margin expanded a healthy 520 basis points to 31.9% from 26.7% a year ago.
  
• ICS increased about 15% year over year but declined 350 basis points as a percentage of revenue to 38.1% from 41.6% a year ago.
  
• Bad debt expense increased 100 basis points to 3.4% of revenue compared to 2.4% a year ago.
  
• Selling and promotional expense increased approximately 20% year over year but as a percentage of revenue declined 120 basis points to 23.2% from 24.4%, this is the second quarter in a row we have seen a decline as a result of more effective marketing spend as well as continued improvement in enrollment counselor effectiveness.
  
• G&A expenses increased just over 17% to $71.5 million, yet as a percentage of revenue declined 50 basis points to 6.8%.
  
• On the subject of share-based compensation, during Q3 we recorded approximately $18 million. We now expect to record approximately $70 million for the full year. This is slightly below our prior estimate.
  
• Due to higher state taxes and an increase in certain non-deductible losses, we now expect our tax rate for the full year to be approximately 41%, slightly above what we had previously forecasted.
  
• We continue to maintain a well capitalized balance sheet with cash and marketable securities excluding restricted cash at the end of the quarter totaling $819 million versus $511 million at August 31, 2008. We generated approximately $312 million of adjusted free cash flow during the third quarter, a 34% increase year over year.
  
• During Q3, we repurchased approximately 7.2 million shares of Apollo stock at a weighted average price of approximately $62 per share, for a total expenditure of $444 million out of our prior $500 million authorization.
  
• (Co-Chief Executive Officer, Apollo Group) We have a high degree of confidence in our ability to meet our student's needs in changing regulatory environments going forward.
  
• We've been carefully monitoring the impact of the increased loan limits on the University of Phoenix's 90/10 calculation and continue to take action, including emphasizing employer paid and military programs, encouraging students to carefully evaluate the amount of Title IV loans they are taking, and increasing our focus on professional development and continuing education. We are required to report our 90/10 calculation annually. And while we can't perfectly predict at this point where this calculation will come out, based on our most current information we do expect the rate for the University of Phoenix to approach but not exceed 90% for fiscal 2009.
  
• We've been very responsive to the Department of Education's requests, and we believe they're making progress in finalizing the report. We hope the review will be completed in the next few months.
  
• We believe the strategic marketing initiatives that we're implementing including the continued move to more direct advertising are producing better quality student inquiries and resulting in higher conversion rates. We also continue to see growth in transfers from our Associates program to our Bachelors program while the pool of Associate grads and thus potential transfer students continues to grow.
  
• The rate at the associate degree level increased approximately 6%, and the rates at our bachelors and graduate levels, prior to the discounts I just mentioned, increased about 3 to 5%. Additionally, the increases in military and veteran discounts could lead to higher levels of discounts going forward.
  
• (Q&A) Last quarter, you mentioned that if growth continued at the current rate that you would probably need to increase the hiring of academic counselors, enrollment advisors, and financial aid advisors. I'm wondering if you've begun to do this and what your plans are. (A)We are always looking at the rate at which we need to add ECs, ACs, and financial counselors, and we've been adding them appropriately. As far as increasing them at a greater rate, I don't think that's something that we're doing right now. I think that we feel comfortable at the levels they have been at. And while we do continue to add to them, it's not at an outpaced rate of growth at this point.
  
• Okay, and can you give us any update on your thoughts as far as transitioning to direct lending, any expenses, and what you're putting in place now? (A) Yes, we are on track to certainly comply as necessary if the government goes in that direction in July 2010. We'll be rolling it out here as an option for certain loan programs on July 1, 2009. So we have no concerns about meeting any deadlines the government might put in place.
  
• And what about any costs though associated with that that you expect, how significant do you expect that to be? (A)Not significant based on our current plans. (A) We've been doing, as you can imagine, research in this area making sure the software is in place, looking at costs, checking with other institutions that have already been through it. And that's why we feel comfortable giving you the answers that we have.

Apollo Group, Inc., through its subsidiaries, provides various educational programs and services at high school, college, and graduate levels. Its subsidiaries include The University of Phoenix, Inc. (University of Phoenix), Institute for Professional Development (IPD), The College for Financial Planning Institutes Corporation (CFP), Western International University, Inc. (Western International University), Insight Schools, Inc. (Insight Schools), Apollo Global, Inc. (Apollo Global), and Meritus University (Meritus).

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