For-profit educator Apollo Group (Nasdaq: APOL) started off its new fiscal year with a bang Tuesday evening, reporting a rollicking 17% rise in revenue for Q1 2008, and walloping the Street's consensus earnings estimate by a full dime. Sales for the quarter came to $780.7 million, nearly $30 million more than expected, and the firm earned $0.83 per share, diluted. Meanwhile, free cash flow turned into a veritable flood, rising 44% year over year to $183.7 million.

It's all about the margins
After praising Apollo's strong growth in sales and enrollment last week, I underlined the one weak point in its performance: Profit margins. This week, it seems I'll have to praise Apollo across the board. Sales were up 17%, while enrollment rose 11.4%. What's more, when you see sales climb faster than enrollment, you know that students are paying higher tuition bills. Indeed, Apollo's crediting "previously implemented selective tuition price increases based on geographic areas and programs" for much of its growth.

For the slower students in the class, CEO Brian Mueller drove the point home by pointing out Apollo's "improved operating efficiencies." Operating margins grew 113 basis points year over year, to end at 28.1%. That's above-trend for the company, and it'll help pull Apollo's trailing-12-month margins up toward the lofty levels that Strayer (Nasdaq: STRA) and ITT (NYSE: ESI) inhabit. That should also further widen the gap between Apollo and laggards like Corinthian (Nasdaq: COCO), Career Education (Nasdaq: CECO), and Universal Technical (NYSE: UTI).

One demerit
About the only bad news Apollo had to report concerned "bad debt expense," which increased year over year because of "the continuing trend of changes in the Company's enrollment mix to a higher percentage of associate's degree students."

We'll want to keep an eye on that trend, because associate's-degree-seekers provided 50% of new enrollments at Apollo this quarter. Considering that Mueller also ascribes to this portion of the student body both "higher write-offs" and a "greater risk of default," it looks to me like Apollo is taking a calculated risk here. Associates are proving to be Apollo's growth engine, but as engines go, this one is relatively light on horsepower. In addition to their higher default risk, these short-term students contribute, on average, 16% less revenue per capita than Apollo's average student.

How smart is that?

What did we expect out of Apollo last quarter, and what did we get? Find out in:

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.