Havoc In The For-Profit University Sector

For-profit educational institutions are under tighter scrutiny with Senate and House committees examining their admission process, which seems to mislead applicants, targets veterans and registers student default rates at least double those of traditional universities. According to a Congressional report released earlier this month, for-profit colleges have high dropout rates, poor results, and high loan default rates. At four of the five for-profit colleges studied by the report, 24% of students defaulted on their loans, compared with the national rate of 7% of students defaulting on government loans in 2008. Another equally disturbing report was released by the Education Trust, which cites statistics detailing poor education scores of for-profit institutions. According to the report, a mere 22% of students earn their degrees in six years in a for-profit college compared with 55% of students in public and 65% in private nonprofit colleges and universities. Apollo Group’s University of Phoenix fared the worst with a mere 9% six-year graduation rate.

Apollo Group’s Financials
Amid such information, for the fourth quarter, Apollo Group (NASDAQ:APOL) reported revenues of $1.26 billion, meeting analyst expectations and growing 17% over the year. EPS of $1.31 was a cent higher than the market’s projections. Fiscal 2010 revenues of $4.9 billion were significantly higher than the previous year’s $3.9 billion.

During the quarter, the company enrolled 92,000 new students at the University of Phoenix, a 10% decline over the year. New bachelor’s degree enrollments in the quarter rose to 36,200, from 31,700 a year ago. However, new enrollment in two-year associate’s degree programs fell to 42,200 in the quarter, down from 55,400 a year ago. For the year, the company recorded 6% growth in total degree enrollment, ending it with 470,800 students.

For-Profit Colleges and Government Regulations
Early next year, the industry expects the Senate to sign off on new rules governing the for-profit colleges, of which gainful employment is one of the most controversial clauses. According to the proposal, for-profit colleges would need to demonstrate how they prepare their students for employment to ensure students are capable of repaying loans. Schools would need to show that 45% of their alumni are paying off their loans. For schools at which 65% of alumni fail to pay loans, federal funding for the school would be stopped.

The Apollo Group is understandably concerned about the regulation because the University of Phoenix had reported 88% of their revenues as federal student aid in fiscal year 2010. They have implemented steps to reduce this percentage whereby promoting employer-paid and other direct pay education programs and focusing on improving education programs.

Earlier this year, to help ensure students followed through with their choice of graduation program, Apollo launched the “University Orientation” initiative, a three-week free orientation course for the new student. Over the past few quarters, they have already seen 20% of students going through the orientation decide to opt out of college courses. They are hopeful that the orientation program will help improve student retention and, ultimately, graduation rates.

Apollo’s Learning Management Platform
Apollo has been investing in a learning management platform. They recently introduced Phoenix Connect, a platform that brings together students from across the world and introduces academic social interaction as part of their learning model. They plan to connect all their students, faculty, and eventually alumni through the solution. Phoenix Connect has currently been launched only in the School of Business and has seen a 95% adoption rate within the first week of its launch.

Apollo’s Enrollment Forecast
But the stricter regulations and tighter funding norms have already sent Apollo’s enrollment projections for the coming year spiraling downward. For the current quarter, they are projecting a 40% reduction in enrollment numbers, compared with the previous quarter’s 10% reduction in new enrollments. They expect the biggest impact in the associate’s and bachelor’s degree programs.

In view of declining enrollment, Apollo has initiated cost control measures and recently announced their intention to fire over 700 employees in their admissions division.

The stock is trading at $38.40 with a market capitalization of nearly $5.7 billion. It touched a 52-week of $66.69 in April of this year.

DeVry’s Financials
Another for-profit university, DeVry University (NYSE:DV), is also projecting slowing down of enrollment figures. However, they managed to report first quarter revenue growth of 21% over the year to $521 million with EPS growing from $0.76 to $1.03 for the quarter. The market was expecting revenues of $520.4 million with EPS of $0.96.

For the quarter, DeVry University saw enrollment growth of 14.1% over the year to over 23,000. However, at the medical and healthcare focused Ross University, new student enrollment fell 26.4% over the year to 490 students compared with 666 a year ago.

DeVry’s Strategy
DeVry is following a three-pronged strategy of growth. They are focusing on achieving better student outcome through improving the quality of education by investing in new technologies and models. For instance, during the previous year, they invested over $9 million and hired over 260 student career and finance counselors as part of their Student Central program. The Student Central program connects all of their student campus locations and provides students with a single-stop destination for curriculum, career, and financial services.

Second, they are focusing on growth through diversification of courses offered and by evaluating expansion in other regions, such as India and China. In the previous quarter, their Brazil campus saw 9% growth in new student enrollment and now boasts more than 11,500 students. Finally, they are working on building higher quality infrastructure to support their growth.

DeVry’s Enrollment Slows
However, like other players, DeVry is expecting a decline in new undergraduate enrollment for DeVry University. They recently released their fall enrollment figures, and new student enrollment in the university was down 4.7% for the session. Enrollment at their Carrington colleges also fell 19% over the year.

DeVry’s stock is trading at $44.97 with a market capitalization of $3.15 billion. It is significantly below the 52-week high of $74.36 reached in April of this year.