Apollo Focusing on Employer-Paid Education, GI Bill

Apollo Group (NASDAQ:APOL) recently announced Q3 results that continued to outshine market expectations. Q3 revenues crossed the billion-dollar mark for the first time to come in at $1.05 billion and represented growth of 26% over the year. EPS of $1.26 grew a significant 48% over the $0.85 earned a year ago. The market was expecting revenues of $1.04 billion with EPS of $1.12.

The primary drivers of the company’s growth were tuition fee increases and higher enrollment. During the quarter, enrollment rose 23%. The growth rate was flat sequentially; however, it fell marginally from the 26% enrollment growth reported a year ago.

Apollo believes in three critical elements for their industry. First, access to high quality education for greater numbers of students. Second, hiring and retention of high caliber faculty and staff and investing in tools necessary for them to deliver the high quality education. And finally, best-in-class systems and processes in which the company will continue to invest to support the delivery of their educational products, compliance, and risk management. To support these elements, they invested in both organic and inorganic opportunities.

For their inorganic, international expansion Apollo recently announced their intention to acquire BPP Holdings for nearly $540 million. BPP is a UK-based private sector institution which provides education and training to legal and finance professionals. Apollo expects the acquisition to help them establish a “significant UK and pan-European platform, and expand the range of advanced degrees and cross-border educational opportunities available to its students.” Hopefully, their next stop will be the Indian or the Chinese market.

On the organic front, they are investing in marketing and brand-building. For instance, they recently launched the “I am Phoenix” program to attract alumni. They are investing at all degree levels, including in doctoral and master’s programs. The company says that they realize the importance of creating a better student experience and are addressing entry-level programs to help improve the experience. However, they don’t seem to be investing much in enhancing the methodology of their online education programs.

External factors continued to trouble the company. The Obama administration is focused on education reforms and has been pushing for community colleges. It has strengthened the regulatory framework and has taken a tough stand on for-profit educational institutions by making funding more difficult to obtain. Now, as per the 90/10 rule, if for any two consecutive fiscal years for-profit educational institutions derive more than 90% of revenue from federal Title IV grants and loans, they become ineligible to participate in such programs. (Title IV is the part of the 1965 Higher Education Act that deals with the administration of US federal student financial aid programs.) Apollo’s current funding rate is approaching the 90% limit, and they are taking action accordingly.

For instance, the company is emphasizing employer-paid and military programs and encouraging students to evaluate the amount of Title IV loans (e.g. Stafford loans) they are taking, and increasing their focus on professional development and continuing education.

Even though Apollo boasts of good execution capabilities coupled with the popularity of going back to school amid the recession, they do face a tough funding battle ahead. The stock, meanwhile, is trading at $65.26 with a market capitalization of nearly $10 billion.