Seriously, kids: If you want to make money, stay in school.
Why, just look at investors who held on to their stock in struggling Apollo Group (Nasdaq: APOL). On Tuesday evening, the for-profit educator reported fiscal third-quarter 2008 earnings, and those who held through thick and thin are today around 20% richer than on Tuesday morning. Here's why:
- Apollo Group grew the numbers of degree-seeking students enrolled at its campuses 11% year over year in Q3.
- Tuition hikes pushed revenue up even higher, to 14% growth.
- And thanks to a 10.8-million-share reduction in the weighted average of shares outstanding, profits came in close behind, up 13% to $0.85 per share.
Critical thinking
Now, the brighter students in class are probably thinking something like this: Hey, wait a sec. Profits didn't grow as fast as revenue, so that must mean margins slipped. But shouldn't the tuition hikes have caused the opposite to happen? And what about the share buybacks -- if those didn't succeed in getting per-share profits rising faster than sales, the margins must have been hurt a lot.
For you guys, a gold star
Margins did in fact drop ... a lot. It wasn't the cost of providing services that did the damage, though. In fact, "instructional costs and services" declined 220 basis points as a percentage of revenue. Rather, CFO Joe D’Amico advised that "the overall cost to acquire a student has increased versus a year ago." Not at all the result we were looking for when Apollo decided to buy ad shop Aptimus last summer, aiming to make itself less dependent on advertisers such as Time Warner's (NYSE: TWX) AOL division by bringing marketing in-house.
In fact, Aptimus notwithstanding, Apollo's marketing costs ran up 25% in comparison to last year's Q3 -- nearly twice as fast as overall revenue. As a result, Apollo gave back all 220 basis points’ worth of margin improvement that it had garnered on the COGS line of its income statement.
For those keeping score, Apollo's operating profit margin now sits at about 16.5% year-to-date, down significantly from last year's 23.6%, far below the margins being posted by rivals ITT Educational (NYSE: ESI) and Strayer (Nasdaq: STRA), and dropping rapidly toward the levels of DeVry (NYSE: DV) and Capella (Nasdaq: CPLA).
Turn on, tune in, drop out?
Multiple times within its earnings release, Apollo management assured investors that its margin deterioration is a "near term" phenomenon and that Aptimus will yet "lower our student acquisition costs over time." But it's been nearly a year already since Apollo ate Aptimus. This Fool wonders how much longer we must wait.
Extra-credit readings on Apollo are located in the Fool library:
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