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Apollo Needs Succession Planning

Posted on Tuesday, Nov 13th 2007

The Apollo Group, Inc. (APOL), provides educational programs through its subsidiaries the University of Phoenix, Institute for Professional Development, the College for Financial Planning Institutes, Western International University, and Insight Schools. I previously discussed Apollo under potential LBOs, and later on in the context of Educate’s buyout. Apollo, however, is still public.

Apollo announced Q4 earnings on October 22, 2007 for the period ending August 31, 2007. Apollo announced consolidated revenues for the fourth quarter of $714 million (a 14.2% increase YoY). The downside is expenses were on the rise.

Instructional costs and services increased 9% to $327 million from $302 million YoY, selling and promotional expenses rose 12.6% to $173.8 million from $154.3 million YoY, and general and administrative expenses increased 82.2% to $62.3 million from $28.1 million in 2006. However, Apollo was still able to increase its operating margin to 21.2% from 18.6%, YoY.

The bottom line was a Q4 net income of $103.2 million versus $75.7 million YoY. Annually, however, Apollo’s net income is stagnant and slightly decreasing from $430 million in 2005 to $409 million in 2007.

During Q4, Apollo also purchased $437 million worth of shares in its buyback program. This was approximately 7 million shares at an average price of $61 per share. Apollo also announced it will purchase an additional $500 million dollars of shares, equating to approximately 6.25 million shares.

The company refused to give guidance going forward when asked by analysts, which then begs the question, obviously: where are they going? There is a lot of poor management history with this company, and they often have rather unprofessional situations such as this. The stock gets slaughtered as a result. I know, because I used to own it at one point, and then got fed up!

I have also commented before on Apollo’s International opportunity. In response to global expansion needs, the formation of a joint venture with Carlye was announced in Q4 to pursue the overseas education market. The Apollo subsidiary will be known as Apollo Global with an 80/20 ownership split with Carlye. Apollo has committed $800 million to the project and Caryle’s share is $199 million, with Carlye bringing to the table international education services experience, critical relationships, and strategic assets across the global education sector. This is a key benefit given that Apollo has been primarily US based, and so far their international attempts have been timid at best. I am glad to see that at least the JV is a rather bold advance, although its execution is yet to be proved.

Apollo’s $48 million acquisition of Aptimus, an online marketing service that enables marketers to reach targeted audiences with specific promotional offers, however, seems bizarre. Never thought the acquisition of a non-core function would ever even cross the management’s thought, but it tells you how weird the thought process actually is!

This is a company that IPO’d at $0.72 in 1994 and is now $71/share. It has created tremendous shareholder value at one time. Founder, former CEO, and current Executive Chairman John Sperling is still active, although he is 86. The company is run by Brian Muller, as President, and does not have a CEO. Clearly, there is a major succession planning problem. Brian Muller does not strike me as CEO material at all, yet Apollo cannot find a CEO. I have no clue why!

I have tried to own this stock since I am such an enthusiast for online learning and for-profit education, but at the end of the day, the management is unreliable, and I have given up. I will buy this stock again when I see a convincing succession plan announced.

apol chart

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