Online University Sector Booming

A recent study by the Lumina Foundation projects that the United States needs to add a million graduate students a year for the next 16 years if it wishes to remain a competitive nation. And the Bureau of Labor Statistics projects that in the coming 10 years, jobs requiring higher education will be among the fastest growing jobs in the country. The need for higher education is also being supported by the Obama administration, which talks about three important education goals: first, to have every American receive at least one full year of a college education; second, to have the highest graduation rate among developed countries by 2020; and third, to encourage lifelong learning. Many Americans are in fact going back to school. Further, as 73% of the present student population is now “non-traditional,” according to the Department of Education, these students are juggling other responsibilities, suggesting that the demand for online education will continue to grow.

The leading private university player, Apollo Group (NASDAQ:APOL), is also witnessing improved enrollment owing to some of these factors. The company’s Q3 revenues rose 28% over the year to 1.3 billion amid enrollment growth of 13%. Apollo ended the quarter with over 476,500 students. EPS increased 34% to $1.74 from $1.30 a year ago. The market was expecting revenues of $1.30 billion with EPS of $1.55.

Apollo is investing more in its “University Orientation” initiative, which over 25,000 students have participated in. As part of the initiative, the company has made it mandatory for all students with fewer than 24 credits to complete the free three-week orientation. While the initiative comes with the short-term additional costs of running the course free, Apollo is hoping to see longer term benefits in the form of improved student outcomes, improved retention rates, better graduation rates, lower bad debt and default rates, and ultimately, improved university brand and reputation. But, despite this additional charge, Apollo claims that its student enrollment costs are “only modestly higher than the $2,400 per student average for traditional schools.”

The company projects Q4 revenues of $1.25 billion with EPS of $1.30. Analysts were expecting EPS of $1.20 on revenues of $1.26 billion.

Meanwhile, Apollo lost a securities class-action suit and is now expecting a potential loss from the litigation to be $225 million excluding the over $44 million already provided for in the second quarter. The 2003 suit accused the company of withholding a U.S. Department of Education report detailing that the University of Phoenix compensated its enrollment counselors solely based on their success in securing enrollments, thus violating federal regulations.

The stock is trading at $41.86 with a market capitalization of $6.34 billion. Earlier last week, it touched a 52-week low of $41.45.

DeVry University (NYSE:DV) too saw a surge in its enrollment numbers. Q3 revenues grew 29% over the year to $504.4 million with EPS rising 60% to $1.12. The company continued to report strong undergraduate enrollment growth with total student enrollment increasing 26% to nearly 67,000 students. Graduate program takers rose 15% over the year to cross 22,300. The total number of online undergraduate and graduate degree program students grew 22% to 67,744 in the quarter. Medical and healthcare student enrollments also grew 8% to nearly 4,670.

However, DeVry isn’t completely confident of keeping enrollment at a high growth rate, especially for the medical and healthcare sector. It expects a slowdown in the May and September terms owing to delay in the review process of a medical school in the Bahamas that is awaiting approval from the State of California for its international medical programs. Additionally, as the economy improves and jobs become easier to secure, DeVry is concerned that people may return to work instead of going back to school.

DeVry’s stock is trading at $49.94 with a market capitalization of $3.51 billion. Last month it touched a 52-week high of $68.42.

Another online player, Capella Education (NASDAQ:CPLA), also saw earnings rise in the recently announced Q1 results. Revenues grew 32% over the year to $101.2 million driven by growth in enrollment. For the quarter, enrollment grew 32% over the year to 37,178 students. Graduate program enrollment grew 28.9% over the year to nearly 30,000 students. Earnings for the quarter grew to $0.89 compared with $0.49 earned a year ago. The market was looking for revenues of $98.8 million with earnings of $0.79.

Capella boasts of one of the highest enrollment growth rates among the public companies and expects enrollment numbers to continue to grow beyond 25% per quarter in the current year. Going forward, the company projects revenues of $423.3 millon–$430 million for the year compared with the Street’s expectations of $421.8 million.

Capella’s stock is trading at $78.67 with a market capitalization of $1.32 billion. It touched a 52-week high of $98.01 earlier last quarter.

In addition to focusing on the domestic markets, U.S. private education players should also turn their attention abroad. India and China are markets waiting to be explored. A typical Chinese household spends over 10% of its income on education, and as Chinese Internet penetration grows from its present 29% levels, it will become easier for the likes of Apollo and DeVry to capture markets in the region through their online education models.

India too is relaxing investment norms for foreign players to enter the education sector. The Union Government has been pushing for a new regulation that allows foreign universities to hold majority (up to 51%) stake in Indian institutions. Annual government spending on education is approximately $30 billion with annual private spending of $43 billion, and an additional $13 billion is spent by the 150,000 students who go abroad for their education. Analysts believe that both Apollo and DeVry are eyeing the market for suitable acquisitions. It will be interesting to watch how these two players play their international expansion cards.