Foolish Forecast: Apollo Group's Q1 Report Card

For most students, the school year only started back up fairly recently. But at for-profit educator Apollo Group (Nasdaq: APOL  ) , the final report card for fiscal 2007 is already in the mail. Results are due out just the other side of the weekend.

What analysts say:

  • Buy, sell, or waffle? Seventeen analysts study Apollo. Eight each give it buy and hold ratings, and only one says sell.
  • Revenues. On average, analysts expect to see revenues rise 12% to $701.1 million.
  • Earnings. Profits are predicted to rise in tandem, up 11% to $0.60 per share.

What management says:
I don't know if it was the biggest news out of Apollo this quarter, but it was certainly the weirdest. In August, the nation's leading provider of for-profit educational services bought ... an unprofitable online advertising company. Yes, you read that right. In August, Apollo agreed to buy tiny Aptimus (Nasdaq: APTM  ) for $48 million in cash. Why in heaven's name would Apollo do such a thing? Judging from the press release, the idea seems to be to bring Apollo's advertising efforts in-house. Apollo President Brian Mueller called the purchase "another step to strategically position the company to best monitor, manage and control our marketing investments and brand."  He also said that once the deal closes early in fiscal 2008 (in other words, sometime around now), it will be "value accretive." I'm not exactly sure what that's supposed to mean. Presumably, hopefully, Apollo isn't going into the business of advertising other peoples' wares. My guess is that Mueller is suggesting that, with Aptimus in-house, Apollo will spend less on outside advertising firms such as Time Warner's (NYSE: TWX  ) AOL division, generating higher profits.  We'll certainly be watching to see whether that's how it works out. 

What management does:
You can see the reason for Apollo's focus on marketing reflected in the table below. Gross margins have been sliding for more than a year, dragging operating and net margins down with them. In fact, operating margins -- where the effects of advertising costs are most evident -- have fallen much faster and much farther than gross margins.

Margins

2/06

5/06

8/06

11/06

2/07

5/07

Gross

57.1%

56.3%

55.1%

54.6%

53.9%

53.9%

Operating

31.5%

30.2%

28.1%

26.5%

23.8%

23.2%

Net

18.9%

18.4%

16.7%

15.9%

14.9%

14.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Why is that? Probably because advertising eats up such a large portion of Apollo's budget. Take last quarter, for example. Advertising-related costs comprised 78% out of the quarter's $209 million budget dedicated to selling, general, and administrative expenses -- a whopping $162 million, and climbing. Year over year, Apollo grew its revenues at a respectable 12% clip last quarter. However, advertising costs grew half again as fast -- up 18%. If buying Aptimus can rein in those costs even a bit, it could be well worth the $48 million outlay.

Side note: Out of curiosity, I took a stroll through the income statements of a few of Apollo's peer for-profit educators to see whether they're spending similarly large sums on marketing. Turns out, many of them are in even worse straits than Apollo. Whereas the giant of the industry, with perhaps the best name recognition, got away with spending 22.1% of its revenues on marketing last quarter, smaller Corinthian Colleges (Nasdaq: COCO  ) and Capella (Nasdaq: CPLA  ) had to ante up quite a bit more: 27.5% and 31.2%, respectively. And the surprise of the bunch: Little Strayer (Nasdaq: STRA  ) gets away with spending just 16.5% of revenues on advertising.

Which of these things is not like the others? One of the companies named above sits just below the level of a formal recommendation on the Watch List at Motley Fool Hidden Gems. To find out who gets the A- from Fool co-founder Tom Gardner, click here and sneak a peek at the teacher's manual.


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