Apol - Zacks Investment Research



|Apollo Group Inc. |(APOL-NASDAQ) |$ 9.08* |

Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.

Reason for Report: Flash Update: FY3Q16 Earnings Results

Prev. Ed.: May 3, 2016; FY2Q16 Earnings Update

Note: The tables below for Revenue, Margins, and Earnings per Share contain fewer brokers’ material than that used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Flash Update

Apollo Education Third Quarter Earnings & Revenues Beat - July 7, 2016

Apollo Education’s adjusted earnings (excluding special items) of $0.37 per share in the third quarter of fiscal 2016 surpassed the Zacks Consensus Estimate of $0.28 by 32.14%. The bottom line declined 32.7% year over year due to lower revenues.

Third quarter 2016 net revenue of $558.0 million surpassed the Zacks Consensus Estimate of $543 million by 2.82%. Revenues however declined 17.5% from the prior-year quarter due to lower enrollments.

Adjusted EBITDA was $90.7 million during the quarter, down from $132.2 million in the prior year quarter.

Segment Details

University of Phoenix (UOP) revenues declined 24.3% year over year to $424.5 million due to a 24.8% decline in total enrollment to 155,600. New enrollment, or starts, at UOP declined 39.1% year over year to 17,900.

UOP’s enrollments have been sluggish for several quarters now due to regulatory challenges, and changes and competition in the higher education industry. The company adopted a transformation strategy for UOP to turn it into a “smaller, but better performing” university. However, some of its efforts hurt enrollment in the quarter.

Apollo Global reported net revenue of $125.0 million, up 14.1% year over year. Apollo Global continues to expand in international markets, thereby providing top line support.

Other Schools reported revenues of $8.5 million in the third quarter of fiscal 2016, up 41.7% year over year.

Outlook

Due to the upcoming merger, Apollo Education Group did not provide any update on its guidance.

Details, other news update and broker comments will be provided in the next edition.

Executive Summary

Apollo Education is a leading provider of educational programs and services, both online and on-campus, for working adults.

Of the 6 firms covering the stock in the Digest group, 5 firms provided a neutral rating, while 1 rated the stock negatively.

Neutral or equivalent stance (5/6 firms) – The neutral firms appreciate the company’s aggressive international expansion efforts through Apollo Global to capitalize on stronger growth prospects in these markets. They believe that Apollo Global will be significantly contributing to the company’s growth in the upcoming years. They are however concerned about declining enrollments and sales trends at the flagship university, University of Phoenix (UOP), a trend that is not likely to reverse in the near term.

Negative or equivalent stance (1/6 firms) – The bearish firm is concerned about declining enrollments at UOP, which offset the benefits of a strong performance at Apollo Global in the past few quarters. Though the company is undertaking several initiatives to transform UOP, it will take several quarters for enrollments to rebound and stabilize. Also, Apollo Education informed at the first quarter fiscal 2016 earnings call that its board of directors intends to explore “strategic alternatives”, which caught investors’ attention.

May 3, 2016

Overview

Based in Phoenix, AZ, Apollo Education Group, Inc. (APOL) is a leading private education service provider in the U.S. Apollo Education offers both online and on-campus programs through its subsidiaries.

Apollo Education reports its operating results under the following segments:

University of Phoenix (UOP) – UOP is the company’s flagship segment that offers undergraduate and graduate degrees in many programs including business, education and nursing through its nine colleges. However, the majority of UOP students study online.

Apollo Global – Apollo Global makes investments in the international education market. Apollo Global, Inc. includes revenues from the largest Apollo global subsidiary, BPP Holdings plc, a UK-based company that provides education and training to legal and finance professionals. BPP Holdings was acquired by Apollo Global in Jul 2009. This segment also includes revenues from other subsidiaries of Apollo Global in Chile (UNIACC and IACC) and Mexico (ULA). Apollo Global also includes Indian Education Services Private Ltd., a joint venture with an Indian media company, HT Media Limited, to build Bridge School of Management in India. Newest additions to the Apollo Global segment are Open Colleges in Australia, acquired in Dec 2013 and Milpark Education in South Africa, acquired in May 2014. Apollo Global acquired Faculdade da Educacional da Lapa (FAEL) in Brazil in Dec 2014. In Dec 2015, the company acquired Germany based education provider, Career Partner GmbH.

Other – The Other segment includes revenues from Western International University (WIU) and The College for Financial Planning Institutes Corporation, Inc (CFFP). The segment also includes Apollo Lightspeed (innovation business unit). During the first quarter of fiscal 2016, the company sold Carnegie Learning, a publisher of research-based math curricula and adaptive learning software acquired in Sep 2011.

The firms have identified the following issues as critical to evaluating the investment merits of Apollo:

|Key Positive Arguments |Key Negative Arguments |

|Apollo Education is expanding its global footprint with acquisitions in |Apollo Education’s revenues declined from fiscal 2013 through fiscal 2015 |

|Australia and South Africa. |and in the first two quarters of fiscal 2016 due to lower enrollments and |

| |declining revenue per student at UOP. |

|The company is working to develop new programs and student support |Apollo Education derives a significant portion of its revenues from federal|

|service offerings. It is consistently enhancing and expanding its |student financial aid programs, such as Title IV programs. Many regulatory |

|services and investing in academic quality, which can improve student |changes are being proposed in relation to the Title IV funds. If these |

|experience and outcomes. |changes are implemented then the business of the company will require |

| |significant alterations. |

|Apollo Global is expected to become a much bigger part of its portfolio | |

|in the next five years. Its focus on medical programs that are in high | |

|demand will continue to drive revenues in the near term. | |

Additional information is available on the company’s website .

Apollo Education’s fiscal year ends on Aug 31; fiscal references do not coincide with the calendar year.

May 3, 2016

Long-Term Growth

Apollo Education has been consistently enhancing and expanding its services, as well as investing in academic quality to improve student experience and outcomes. The company’s initiatives include investments in adaptive learning, new degree- and certificate-based programs, and new learning and service platforms. In the fourth quarter of fiscal 2014, the company implemented a new online classroom at UOP to provide more personalized learning to students. The company expects this classroom transition to improve students experience and outcome in the long term.

Apollo Education has undertaken five initiatives to transform UOP into a “smaller, but better performing” university. These initiatives include improvements in the orientation program in order to understand students needs and improve student retention rates. Further, the company’s admission criteria and alternative admission pathways enable the admission of more students who are academically suitable for the programs offered by the University. These students are more likely to complete the programs and eventually improve retention rates.

Secondly, the company is realigning programs and courses offered, and retire many programs with low student retention. The company is refreshing programs and upgrading them with skills demanded by the industry. The upgraded programs will eventually improve student outcome by training them in skills demanded by the industry and improving their employability.

The third strategy includes campus realignment. The company is focusing on fewer “best-performing major metro markets” where it enjoys a strong presence.

Its fourth strategy includes the simplification of the course calendar. This includes trimming the number of program starts and frequency of a program offered during an academic year. This simplification strategy will reduce operational complexity and expenses. The company expects this initiative to improve student retention, optimize class sizes and result in fewer course cancellations.

Finally, the company is using a better mode of connecting with existing and prospective students. During the first quarter of fiscal 2016, the company stopped using third-party affiliates, and shifted focus toward adopting a more direct approach for reaching out to students. Its focus remains on creating a balanced marketing mix, thereby improving traffic to the company’s website. This marketing strategy focuses on student fit and college-specific messaging. Efforts are also being made to improve employer awareness of programs, and redesigning the website – Phoenix.edu. The company is implementing this marketing strategy in the second quarter of fiscal 2016 in order to create a stronger foundation for UOP.

Together, these initiatives are expected to lead to the creation of a strong university that evolves in the long term on the back of higher student satisfaction, higher retention and less complexity.

The company is also undertaking aggressive international expansion through Apollo Global to capitalize on stronger growth prospects. Apollo Global has acquired educational institutions in the UK, Mexico, Chile, Australia, South Africa, Brazil and Germany, and has established a joint venture in India.

Currently, Apollo Global has institutions based in six continents. All international colleges of Apollo Global have shown significant progress through 2014 and 2015. Management expects Apollo Global to become a much bigger part of its portfolio in the next five years. Its focus on medical programs and increasing demand will continue to drive revenues in the near term. Apollo Global is expected to have a revenue run rate of more than 20% over the next five years.

May 3, 2016

Target Price/Valuation

|Rating Distribution |

|Positive |0.0% |

|Neutral |83.3% |

|Negative |16.7% |

|Highest Target Price |$10.00↑ |

|Lowest Target Price |$8.00 |

|Avg. Target Price |$8.83↑ |

| No. of Analysts with Target Price/Total |6/6 |

Key risks to the achievement of the price target include the loss of regional accreditation, the loss of access to Title IV funding, potentially declining corporate tuition reimbursements and regulatory changes by federal, state and accreditation bodies.

Recent Events

Apollo Education Second Quarter Loss Widens, Outlook Scrapped - Apr 6 , 2016

Apollo Education Group announced disappointing second-quarter fiscal 2016 results. Also the company withdrew its 2016 guidance provided during the first quarter 2016 conference call.

Apollo Education Group signed a definitive agreement to be acquired by a consortium of investors for about $1.1 billion in Feb 2016. These investors include Chicago-based investment company, The Vistria Group, LLC; funds affiliated with Apollo Global Management, LLC (APO), one of the leading global alternative investment managers; and Najafi Companies, an Arizona-based investment firm. If the deal gets all the necessary approvals, the transaction is expected to close in Aug 2016.

Apollo Education’s adjusted loss (excluding special items) of $0.31 per share in the second quarter of fiscal 2016 was wider than the Zacks Consensus Estimate of a loss of $0.10 by a massive 210%. The bottom line declined 55.7% year over year from a loss of $0.07 reported in the prior year quarter due to lower revenues.

Net revenue of $465.3 million lagged the Zacks Consensus Estimate of $471 million by 1.2%. Revenues declined 19.1% from the prior-year quarter due to lower enrollments.

Adjusted EBITDA was negative $12.9 million during the quarter, down from $17.9 million in the prior year quarter.

Revenues

Net revenue of $465.3 million declined 19.1% from the prior-year quarter due to lower enrollments.

.

Segment Details

University of Phoenix (UOP) revenues declined 25.2% year over year to $365 million due to a 24% decline in total enrollment to 162,400. New enrollment, or starts, at UOP declined 39.2% year over year to 17,200.

UOP’s enrollments have been sluggish for several quarters now due to regulatory challenges, and changes and competition in the higher education industry. The company adopted a transformation strategy for UOP to turn it into a “smaller, but better performing” university. However, some of its efforts hurt enrollment in the second quarter. These include reducing the number of program starts and frequency of a program offered during an academic year. Though this simplification strategy was expected to reduce operational complexity and expenses, new enrollment was hurt and the company reported lower-than-expected continuing students in the quarter.

Apollo Global reported net revenue of $93.8 million, up 15.7% year over year. Apollo Global continues to expand in the international market, thereby driving top line growth.

Other Schools reported revenues of $6.6 million in the second quarter of fiscal 2016, up 5.8% year over year.

Outlook

Apollo Education Group scrapped the 2016 guidance provided during the first quarter of fiscal 2016 conference call due to the upcoming merger and ongoing transformation of the University of Phoenix. In fact, the company mentioned that revenue, operating income and degreed enrollment are expected to be lower than prior expectations. The company did not provide any further update on its guidance.

Margins

Adjusted EBITDA was negative $12.9 million during the quarter, down from $17.9 million in the prior year quarter.

Earnings per Share

Apollo Education posted adjusted loss (excluding special items) of $0.31 in 2Q16, which declined 55.7% year over year from a loss of $0.07 reported in the prior year quarter due to lower revenues.

|Research Analyst |Sarmistha Roy Chowdhury |

|Lead Analyst |Kinjel Shah |

|QCA |Kinjel Shah |

|Copy Editor |Sarmistha Roy Chowdhury |

|Content Ed. |Sarmistha Roy Chowdhury |

|Last done by |Sarmistha Roy Chowdhury |

|Reason for Update |Flash |

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July 12, 2016

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