Tuesday, 13 March 2012

Apollo Cuts New Enrollment Expectations

An improving labor market and heightened competition led Apollo Group Inc. to cut its new enrollment expectations for the fiscal second quarter, signaling that for-profit educators continue to navigate in a choppy environment.

Apollo, which operates The University of Phoenix, now expects new enrollment for the quarter ended Feb. 29 to be roughly flat to up in the low-single-digit percentage range from the prior year. Less than two months ago, Apollo had predicted new enrollment would grow at a similar rate to that in the fiscal first quarter, when the figure jumped 13%.

The news, along with some downbeat industry comments from Career Education Corp.'s quarterly conference call, sent the for-profit sector's shares broadly lower. Apollo's stock fell 12% to $45.18. Education Management Corp., ITT Educational Services Inc. and Bridgepoint Education Inc. were among those dragged lower.

The muted expectations come after Apollo had reported new enrollment growth in the first quarter for the first time in at least a year. Like its for-profit peers in the education business, Apollo has been tightening its standards after facing public criticism over graduates' debt loads and job prospects.

Apollo also trimmed its operating profit range for the fiscal year, though it reaffirmed its net revenue guidance. Apollo Co-Chief Executive Chas Edelstein said the company expected enrollment to fluctuate for the remainder of the year.

Analysts say Apollo's statements suggest enrollment and profit will be pressured over a longer period than previously estimated and that the company's about-face roughly 50 days after the initial enrollment guidance shows near-term visibility is limited.

Morningstar analyst Peter Wahlstrom said Apollo's warning shows profit and enrollment are trending on the downside, a reversal from the prevailing view that the sector could be poised for growth.

"The industry might not be out of the woods yet and there might need to be a few more hurdles before jumping into or aggressively recommending these stocks," Wahlstrom said.

Career Education President and Chief Executive Steven Lesnik earlier Tuesday said 2011 was a challenging year for postsecondary educators, noting "the downward pressure on student population, revenues and margins for everyone was readily apparent and we were no exception."

Trace Urdan, a Wunderlich Securities analyst, said though students are feeling more confident about enrolling in schools and the regulatory environment remains a worrying factor, the main hurdle for Apollo and other for-profits was heightened competition from traditional schools.

Traditional schools are offering new online degree programs as they face their own fiscal pressures. Efforts to court that population may result in gains of only a few thousand students, but Urdan said it was enough to pressure margins and keep a lid on some areas of for-profit enrollment in a competitive market.

He said for-profit educators that offer more specialized programs would be better positioned as it is harder for traditional schools to compete in those areas. But Apollo relies heavily on degrees such as business administration, which seems to be an area where more programs from traditional schools are being offered.

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