Apollo Group, Inc. Reports Fiscal 2010 Third Quarter Results

Apollo Group, Inc. (NASDAQ: APOL) ("Apollo Group,” "Apollo” or the "Company”) today reported financial results for the three and nine months ended May 31, 2010.

"We are pleased to have made significant progress on our strategic initiatives designed to enhance the student experience, expand student protections and ensure we enroll students who we believe can succeed in our programs,” said Apollo Group Co-Chief Executive Officer and Apollo Global Chairman Greg Cappelli. "This quarter’s results reflect continued success with our efforts to shift the mix of our enrollments toward bachelor level students. Additionally, based on the favorable results we’ve seen from our University Orientation pilot, we have decided to roll out the program more broadly this fall. We are confident that this is the right thing to do for our students, and believe it will allow us to deliver sustainable, high quality results over the long term.”

Apollo Group Co-Chief Executive Officer Chas Edelstein added, "We are committed to strengthening and capitalizing on Apollo Group’s position as a leading provider of high quality, accessible education for individuals around the world, and for us that means putting the student first. We are focused on delivering quality academic programs that are relevant to today’s working learners, and providing them with high levels of service and support from their first day in class through graduation—all of which should maximize the value of our students’ return on their educational investment.”

Unaudited Third Quarter of Fiscal 2010 Results of Operations

Consolidated net revenue for the three months ended May 31, 2010, totaled $1,337.4 million, which represents a 27.7% increase over the third quarter of fiscal 2009. Contributing to the growth in the third quarter was a 13.3% year-over-year increase in University of Phoenix total Degreed Enrollment to 476,500, as well as $75.8 million in net revenue from BPP Holdings, which was acquired in the fourth quarter of fiscal 2009. The Company reported income from continuing operations attributable to Apollo Group for the three months ended May 31, 2010, of $177.2 million, or $1.16 per share (152.3 million weighted average diluted shares outstanding), compared to income from continuing operations attributable to Apollo Group of $206.4 million, or $1.30 per share (159.3 million weighted average diluted shares outstanding) for the three months ended May 31, 2009.

The third quarter of fiscal 2010 results contain a goodwill impairment charge of $8.7 million ($7.5 million net of the portion attributable to noncontrolling interest) for the Universidad Latinoamericana ("ULA”) subsidiary of Apollo Global (the Company did not record an associated tax benefit because the goodwill is not deductible for tax purposes), as well as a pre-tax charge of $132.6 million ($79.9 million net of tax) representing an accrual related to a securities class action lawsuit. Excluding these special items, income from continuing operations attributable to Apollo Group for the three months ended May 31, 2010, was $264.6 million, or $1.74 per share, compared to income from continuing operations attributable to Apollo Group of $206.4 million, or $1.30 per share for the three months ended May 31, 2009. (See the reconciliation of GAAP financial information to non-GAAP financial information in the tables section of this press release.)

In the third quarter of fiscal 2010, BPP’s operations contributed $75.8 million to net revenue and increased earnings per share from continuing operations attributable to Apollo Group by approximately $0.05. (See the supplemental schedule detailing BPP’s financial results in the tables section of this press release.)

Instructional costs and services increased by $150.0 million, or 38.4% to $540.6 million for the three months ended May 31, 2010, compared to the three months ended May 31, 2009. As a percentage of revenue, instructional costs and services increased 310 basis points to 40.4% versus 37.3% in the prior year’s third quarter. The increase, as a percentage of revenue, was primarily due to the addition of BPP, as its cost structure is more heavily weighted towards instructional costs and services, as well as higher bad debt expense for University of Phoenix. Bad debt expense, as a percentage of revenue, increased 200 basis points to 5.4% in the third quarter of fiscal 2010 versus 3.4% in the prior year’s third quarter. BPP’s operations favorably impacted overall bad debt expense as a percentage of revenue by 30 basis points in the third quarter of fiscal 2010. The higher bad debt expense, as a percentage of revenue, is due to lower collection rates. Collection rates have declined as a result of the economic downturn and increases in receivables from students enrolled in associate’s degree programs. Students in associate’s degree programs generally persist at lower rates than those in higher degree level programs, resulting in higher bad debt expense.

Selling and promotional expenses increased by $32.2 million, or 13.3%, to $273.5 million for the three months ended May 31, 2010, compared to the three months ended May 31, 2009. The increase was due in part to greater investments in the University of Phoenix’s non-internet long-term branding and program-driven initiatives. As a percentage of revenue, selling and promotional expenses declined 260 basis points to 20.4% versus 23.0% in the prior year’s third quarter. The decrease, as a percentage of revenue, was driven by the impact of BPP’s operations in the third quarter of fiscal 2010, as BPP incurs lower selling and promotional costs as a percentage of revenue compared to the Company’s other businesses. The remaining decrease as a percentage of revenue was a result of continued improvement in enrollment counselor effectiveness and lower advertising expenditures at University of Phoenix.

General and administrative ("G&A”) expenses increased by $8.8 million, or 12.4%, to $79.7 million, for the three months ended May 31, 2010, compared to the three months ended May 31, 2009. As a percentage of revenue, G&A expenses declined 80 basis points to 6.0% versus 6.8% in the prior year’s third quarter. The decrease, as a percentage of revenue, is primarily attributable to lower legal costs and lower share-based compensation expense in the third quarter of fiscal 2010 as compared with the prior year period. BPP’s operations had little impact on G&A expenses as a percentage of revenue in the third quarter of fiscal 2010.

Financial and Operating Metrics

Below are Apollo Group’s unaudited financial data and operating metrics for the third quarter of fiscal 2010 versus the prior year period.

Unaudited Nine Months of Fiscal 2010 Results of Operations

Consolidated net revenue for the nine months ended May 31, 2010, was $3.7 billion, a 27.3% increase over the comparable period of fiscal 2009. Contributing to this increase was a 15.6% increase in University of Phoenix’s average Degreed Enrollment during the nine months ended May 31, 2010, as compared to the nine months ended May 31, 2009. The Company reported income from continuing operations attributable to Apollo Group of $520.9 million, or $3.37 per share, (154.5 million weighted average diluted shares outstanding) for the nine months ended May 31, 2010, compared to $517.5 million, or $3.22 per share, (161.0 million weighted average diluted shares outstanding) for the nine months ended May 31, 2009.

Results for the nine months ended May 31, 2010, contain a goodwill impairment charge of $8.7 million ($7.5 million net of the portion attributable to noncontrolling interest) for the Universidad Latinoamericana ("ULA”) subsidiary of Apollo Global (the Company did not record an associated tax benefit because the goodwill is not deductible for tax purposes), a pre-tax charge of $177.1 million ($106.8 million net of tax) representing an accrual related to a securities class action lawsuit, and a previously announced tax benefit of $11.4 million resulting from the settlement for disputed tax issues with the Internal Revenue Service. Excluding these special items, income from continuing operations attributable to Apollo Group for the nine months ended May 31, 2010, was $623.8 million, or $4.04 per share, compared to income from continuing operations attributable to Apollo Group of $517.5 million, or $3.22 per share for the nine months ended May 31, 2009. (See the reconciliation of GAAP financial information to non-GAAP financial information in the tables section of this press release.)

BPP’s operations contributed $218.1 million to net revenue and increased earnings per share from continuing operations attributable to Apollo Group by approximately $0.02 for the nine months ended May 31, 2010. (See the supplemental schedule detailing BPP’s financial results in the tables section of this press release.)

Unaudited Balance Sheet

As of May 31, 2010, the Company’s cash and cash equivalents, excluding restricted cash, totaled $892.0 million as compared to $968.2 million as of August 31, 2009. The decrease is primarily attributable to repayments on the Company’s outstanding debt and share repurchases, largely offset by cash generated from operations. Restricted cash increased by $49.9 million compared to August 31, 2009, primarily due to increased student deposits at University of Phoenix. Subsequent to May 31, 2010, the Company posted a letter of credit in the amount of approximately $126 million in connection with a program review of University of Phoenix by the U.S. Department of Education. The letter of credit is fully cash collateralized, which reduces the Company’s unrestricted cash and cash equivalent balance. In addition, the Company may be required to post a bond in association with a securities class action lawsuit.

At May 31, 2010, accounts receivable decreased to $249.2 million from $298.3 million at August 31, 2009. Excluding accounts receivable and the associated net revenue for Apollo Global, the Company’s days sales outstanding ("DSO”) was 30 days at May 31, 2010, compared to 32 days at August 31, 2009, and to 24 days at May 31, 2009. The increase in DSO versus a year ago is due to increases in gross accounts receivable as a result of lower collection rates at University of Phoenix and the effects of certain operational changes. Collection rates have declined as a result of the economic downturn and increases in receivables from students enrolled in associate’s degree programs.

Total debt outstanding (including short-term borrowings and the current portion of long-term debt) decreased by $422.5 million to $166.6 million at May 31, 2010, from $589.1 million at August 31, 2009. The decrease is primarily due to the repayment of U.S. denominated borrowings on the Company’s $500 million credit facility during the first quarter of fiscal 2010.

Share Repurchases

During the third quarter of fiscal 2010, the Company repurchased approximately 2.5 million shares of its common stock at a weighted average purchase price of $55.50 per share for a total expenditure of $139.3 million. As of May 31, 2010, approximately $660.7 million remained available under the Company’s current share repurchase authorization. Subsequent to May 31, 2010, the Company repurchased an additional 2.0 million shares of its common stock at a weighted average purchase price of $49.76 per share for a total expenditure of approximately $100.0 million. Including these purchases, approximately $561 million remains available under the Company’s current share repurchase authorization.

Business Outlook

The Company offers the following commentary regarding the outlook for the fourth quarter of fiscal 2010 based on current business trends, which could change:

• Consolidated net revenue, including BPP, of approximately $1.25 billion;
• Diluted earnings per share from continuing operations of approximately $1.30, excluding the impact of special items or additional share repurchases beyond the repurchases noted above subsequent to quarter end, but including an adverse seasonal impact from BPP;
• Effective tax rate of approximately 40.0%; and
• Diluted shares outstanding of approximately 148 million.

In addition, the Company has been piloting its University Orientation program, which is a free three-week, non-credit bearing program for new students enrolling at University of Phoenix with fewer than 24 credit hours. The Company currently intends to require all incoming students with fewer than 24 credit hours to participate in the orientation program beginning during the latter half of the first quarter of fiscal 2011, which will adversely impact the Company’s operating metrics and financial results. Based on current business trends, which could change, and the results of the initial pilot orientation program, the Company offers the following commentary regarding its preliminary outlook for the fiscal year 2011:

• High-single digit consolidated net revenue growth; and
• Operating income, excluding the impact of special items, approximately flat with fiscal year 2010.

Conference Call Information

The Company will hold a conference call to discuss these earnings results at 5:00 PM Eastern, 2:00 PM Phoenix time, today, Wednesday, June 30, 2010. The call may be accessed by dialing (877) 292-6888 (domestic) or (973) 200-3381 (international) and entering the conference ID number 78017946. A live webcast of this event may be accessed by visiting the Company’s website at www.apollogrp.edu. A replay of the call will be available on the website or by dialing (800) 642-1687 (domestic) or (706) 645-9291 (international) and entering the conference ID number 78017946 until July 14, 2010.

About Apollo Group, Inc.

Apollo Group, Inc. is one of the world's largest private education providers and has been in the education business for more than 35 years. The Company offers innovative and distinctive educational programs and services both online and on-campus at the high school, undergraduate, master’s and doctoral levels through its subsidiaries: University of Phoenix, Apollo Global, Institute for Professional Development, College for Financial Planning and Meritus University. The Company's programs and services are provided in 40 states and the District of Columbia; Puerto Rico; Canada; Latin America; and Europe, as well as online throughout the world (data as of May 31, 2010).

For more information about Apollo Group, Inc. and its subsidiaries, call (800) 990-APOL or visit the Company’s website at www.apollogrp.edu.

Forward-Looking Statements Safe Harbor

Statements in this press release which are not statements of historical fact, including statements regarding Apollo Group’s business outlook, future financial and operating results, future enrollment, and overall future strategy and plans, are forward-looking statements, and are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current information and expectations and involve a number of risks and uncertainties. Actual results may differ materially from those projected in such statements due to various factors, including changes in the overall U.S. or global economy, changes in enrollment or student mix, including as a result of the roll-out of the Company’s University Orientation program to all eligible students, the impact of changes in the manner in which the Company evaluates and compensates its counselors that advise and enroll students, changes in the rate at which the Company collects receivables, changes in law or regulation affecting the Company’s eligibility to participate in or the manner in which it participates in U.S. federal student financial aid programs, including the proposed program integrity regulations published for comment by the U.S. Department of Education on June 18, 2010 and the proposed regulations relating to "gainful employment” that the Department indicated will be published later this summer, changes in the Company’s business necessary to remain in compliance with existing U.S. federal student financial aid program regulations, other regulatory and litigation developments, and the degree to which the Company effectively integrates its acquired businesses. For a discussion of the various factors that may cause actual results to differ materially from those projected, please refer to the risk factors and other disclosures contained in Apollo Group’s Form 10-K for fiscal year 2009 and subsequent Forms 10-Q, and other filings with the Securities and Exchange Commission, all of which are available on the Company’s website at apollogrp.edu.

Use of Non-GAAP Financial Information

This press release and the related conference call contain non-GAAP financial measures, which are intended to supplement, but not substitute for, the most directly comparable GAAP measures. Management uses, and chooses to disclose to investors, these non-GAAP financial measures because (i) such measures provide an additional analytical tool to clarify the Company’s results from operations and help to identify underlying trends in its results of operations; (ii) as to the non-GAAP earnings measures, such measures help compare the Company’s performance on a consistent basis across time periods; and (iii) these non-GAAP measures are employed by the Company’s management in its own evaluation of performance and are utilized in financial and operational decision-making processes, such as budgeting and forecasting. Exclusion of items in our non-GAAP presentation should not be construed as an inference that these items are unusual, infrequent or non-recurring. Other companies, including other companies in the education industry, may calculate non-GAAP financial measures differently than we do, limiting their usefulness as a comparative measure across companies.