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Online Education Catering To Demand In Critical Areas

Posted on Tuesday, Apr 6th 2010

A Reuters report released in October of last year indicates that online education grew 13% over the year, compared with growth of over 20% in earlier years. But while growth may have slowed, it hasn’t stopped. Nearly 25% students take at least some college courses online, compared with 10% in 2002. A significant two million students take all their courses online, and another two million take one or more online courses.

Almost half of the 4,500 brick-and-mortar colleges and universities in the United States now have online programs, and online education is no longer restricted to undergraduate and graduate programs. Nearly 4% of the total elementary and high school population, or one million students, are also enrolled online. School students are registering online to supplement their home schooling curricula or to take remedial or Advanced Placement courses that may not be available at their schools or because they live in isolated rural areas.

Last year, the Obama administration pledged $500 million for online courses and materials as part of its plan to expand access to college education. The Reuters report said that Harvard Business School Professor Clayton Christensen predicted that “half of kindergarten through high school students will attend school online within the next decade.” The National Center for Education Statistics predicts that the number of students enrolled in distance learning courses will reach 18.2 million by 2013.

With such positive statistics, it is no wonder that players such as Apollo Group (NASDAQ:APOL) are performing so well. The company reported net revenues of $1.07 billion for the quarter, compared with $870 million earned a year ago, with enrollments rising 15% over the year. With 87,500 new enrollments in the quarter, the company now has 458,600 students taking degree courses. While revenue was in line with market expectations, EPS of $0.84 exceeded the market’s projected $0.81.

During the quarter Apollo repurchased 3.4 million shares at an average price of just under $60 per share.

Apollo Group realizes that while demand for education is growing, there are “also more students who are under-prepared for the challenges and rigor” of their programs. The company is thus focusing on a strategy called “University Orientation” which, in the short term, will result in lower enrollments but in the long term help improve overall retention, improve graduation rates, and lower bad debts. The program offers a three-week free trial for students to sample and understand the requirements for their selected degree program.

The program is a prerequisite for any student wishing to take a student loan. Apollo’s bad debt has grown to almost 7% from the 4% levels recorded a year ago. The company is hoping that the proposed student retention measures will help to control this bad debts.

Apollo is expanding globally as well. The company has been able to command a first mover advantage in Chile and in under a year has registered 1,400 students in its online program in the country. Apollo hopes to begin to explore the bigger Indian and Chinese markets as well.

The company projects revenues of $1.3 billion with EPS of $1.55. The market was expecting revenues of $1.3 billion with EPS of $1.45.

The stock is trading at $61.76 with a market capitalization of nearly $9.6 billion. In October of last year, it touched a 52-week high of $76.86.

Grand Canyon (NASDAQ:LOPE) is another player pushing online education. It has shown how the online model can be of significant help in turning around a non-profit education institution to a successful public company. The university offers online and campus-based undergraduate and graduate degree programs through its colleges for management, nursing and healthcare, and liberal arts.

In the recent quarter, Grand Canyon reported revenue growth of 53% to $77.5 million. Enrollment figures also reflected the impressive 53% growth, and the company added nearly 37,800 students during the quarter. EPS was $0.26 for the quarter. Grand Canyon ended the year with revenues up 62% to $262 million. EPS for the year was $0.69. With over 92% of students taking classes online, it has low overhead, making it a business model worth watching.

For the current quarter, the company projects additional enrollments of 38,000-39,000 students, translating to revenues of $83.5 million-$85.0 million. EPS is expected to be $0.19-$0.20. For the year, Grand Canyon projects revenues of $390 million -$400 million with EPS of $1.15-$1.23.

The stock is trading at $26.08 with a market capitalization of $1.2 billion. It touched a 52-week high of $27.23 last month.

Within education, no other sector requires more capacity that the medical and healthcare segment. Players such as DeVry University are helping to provide quality education to meet the demand. DeVry Inc. is one of the largest publicly held, international, higher educational organizations with educational programs focusing on technology, business and management, general medical, healthcare, nursing, and veterinary practice. While the company operates brick-and-mortar colleges and universities, it also provides students at this schools with online access to its curriculum.

Of the company’s population of over 110,000 students, nearly 20,000 are at the medical and healthcare group of schools. Of the total student population, almost 25% use a blend of online and in-residence coursework. Nursing industry observers believe that by 2020, the United States will be short of 1 million nurses simply because there aren’t enough seats in nursing schools. DeVry is focusing on increasing capacity, quality, and access for the sector. The company already has over 5,000 nursing students and plans to triple this number over the next five to ten years.

Recently reported quarter Q2 revenues grew 28% over the year to $473 million, exceeding the market’s expected $465.1 million. EPS of $1.00 was also higher than the previous year’s $0.59 and the market’s targeted $0.83.

DeVry’s stock is trading at $64.69 with a market capitalization of $4.6 billion. Last month it touched a 52-week high of $68.42.

It is not only college-level online courses that are doing well. Schools too are reaping the benefits of moving online. K12 is a leading case in point, with 150 students graduating from the school last year and students from 43 countries registered for its classes. K12 (NYSE:LRN) is a technology-based education company that provides proprietary curriculum and educational services to students in kindergarten through twelfth grade.

In the most recent reported quarter, Q2 revenues grew 20% over the year to $93.2 million. Average enrollments for the quarter grew 22% over the year to 67,354. EPS grew significantly to $0.32 compared with $0.12 earned a year ago.

The National Center for Education Statistics estimates that annual spending on the country’s 98,000 public schools will be nearly $550 billion, with 50 million students enrolled in public schools and another 6 million at private schools. The National Home Education Research estimates that almost 2 million students are being home-schooled. Last year, according the the company’s investor presentation, “K12 was less than 3% of home school enrollment[,] less than 0.2% of public school enrollment and operated in only 21 states.” K12 realizes the obvious potential and is looking to expand rapidly by generating enrollment growth at existing virtual public schools, expanding its presence into additional states, and developing its delivery channels.

For the year, the company projects revenues of $380 million-$390 million with EBITDA of $56 million-$60 million.

The stock is trading at $22.18 with a market capitalization of $667 million. It touched a 52-week high of $24.40 a few weeks ago.

While most of the stocks covered above follow hybrid models of both brick-and-mortar campuses and online campuses, companies offering online courses only are also doing well. Online tutoring remains in its infancy, but with leaders such as Sylvan and Walden University, the trend is changing. There is no denying that there are enough opportunities available in even the current market conditions for qualified skilled resources. Unfortunately, the public education system still lacks the resources to cater to the wide gap, and it is up to the private sector to take up part of the task. With online models, not only will these institutions be able to reach a wider population, but they will also manage to keep their costs low and thus remain profitable. The Obama administration is pushing for education sector reform, and it will be interesting to watch how these players perform in the coming years.

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