Apollo Group results – BPP and University of Phoenix

The Apollo Group – parent company of both the University of Phoenix and BPP (the first for-profit private University College in the UK) – reported its results a couple of months ago. It’s an interesting read, and they certainly seem to have a strong grasp of their situation.

I’m not going to look closely at the academic side of the University of Phoenix part of the business, because Tony Bates has done a comprehensive job of assessing their results from their Annual Academic Report. He gives them an A+ compared to the rest of the system for ‘meeting a real need, in terms of the market it serves’; a B- for quality assurance, “could improve on this a great deal, but then this is a challenge for the whole post-secondary system”; and a D for its graduation rate:

It should be finding a way to get more students graduated, especially given the high level of fees that UofPx’s students are paying, and the financial aid students are getting through Federal grants. On this I would give UofPx a D grade. (But then I would give more or less the same to public institutions on this measure).

He also notes that they make money “by the bucket: $1.04 billion profit in 2009 (before tax), which is more than the total operating budget of most research universities”. They do indeed make a lot of money, and in the rest of this post I’m going to dig in to some of the figures for the University of Phoenix and – closer to home – BPP.

The Apollo Group’s annual statement shows total net revenue growing from  $3,953.6m to $4,925.8m (p.73) from 2009 to 2010. But their current market perception isn’t correspondingly great: the high and low bid share prices for the Apollo Group’s tradeable stock were $72.86/$52.79 in the first quarter of 2010, but softened significantly to $53.21/$38.39 by the end of 2010 (p.61). A quick look at their share price suggests it spent the first four months of 2010 trading well over $60, but sank thereafter, with a noticeable drop on the publication of their results, then staying steady around $35-$40. This despite the fact that they have been substantially buying back their stock year on year – about $450m in 2008, 2009, and 2010, p.95. (They don’t pay a dividend, but share repurchases do the same thing but with several cunning advantages.) The reasons for this are beyond this post, but probably include what some US commenters are calling a potential ‘higher education bubble’.

What about BPP specifically? Well, BPP booked net revenue of $251.7m, with an operating loss of $186.6m, most of which was due to a goodwill and intangibles writedown (of which more in a moment). This contrasts with the University of Phoenix, which had net revenue of $4,498.3m and an operating profit of $1,447.6m in 2010, substantially up from $1,131.3m in 2009. They reckon the growth at Phoenix is due to better marketing and quality improvements, and “Economic uncertainties, as working learners seek to advance their education to improve their job security or reemployment prospects.”

The most stark item for BPP is a writedown in ‘goodwill’ from $422m to $241m. Goodwill is one of those funny accounting thingummies that can be a bit hard to grasp – it’s basically the difference between what you paid for a company and the paper value of its identifiable assets. Here, the starting figure for goodwill ($422m) is the difference between the net identifiable assets of BPP at the time of purchase and what the Apollo Group paid for it. The end figure ($241m) is the result of a calculation of the present value of the future cash flows from BPP, minus the net identifiable assets. Basically, this writedown is saying that the Apollo Group now expect to make a lot less money from BPP than they (implicitly) did when they bought it.

(A quick word of caution on interpreting the figures for the writedown in the report. The value for goodwill in the table on p.75 goes down from $421,836k to $241,204k, a $180,632k reduction, but the text explaining this writedown on p.77 says they recorded a $156.3m impairment charge for goodwill. It also mentions an aggregate net $170.4m writedown of goodwill plus intangibles (which, possibly confusingly, are always accounted for separately – intangibles are things you can identify but can’t put your hand on). This latter figure was picked up by the THE in their report on the writedown. Later on in the report (e.g. on p.86) they talk about a total impairment of goodwill and other intangibles of $175.9m, which is the gross figure for the total writedown – there’s a $5.5m tax saving for the writedown of intangibles, mentioned on p.77. The full accounts (p.125) make it clearer: the difference between the $156.3m and the $180.6m goodwill figures is an extra loss of $24,311k, due to currency changes – BPP earns money in pounds sterling, but Apollo Group reports in US dollars, and the pound has weakened against the dollar.)

Anyway – a net writedown of $170.4m of all intangible value is a substantial reduction on a purchase price of about $600m.

Why did it happen? Well, they reckon the “fall enrollment period […] was adversely impacted by the continued economic downturn in the U.K.” (p77), and their calculation of the present value of the future cash flows from BPP) now assumes:

no near-term recovery in the markets in which BPP operates, modest overall long-term growth in BPP’s core programs and a significant increase in revenues over a long-term horizon at BPP’s University College.

Basically, they think things have got grim at the moment, they’ll pick up a bit in the medium term, and will do very well long term.

The Apollo Group appear to share my belief that there will be more private HE provision in future:

we believe that postsecondary education outside of the U.S. is experiencing governmental funding constraints that create opportunities for a broader private sector role.

This certainly looks to be the case in the UK. As I’m sure you all know, despite the protests (which are planned to continue – see e.g. NetrootsUK ), the increase in tuition fees passed the House of Commons by 332:302 on 4 December, with 21 LibDem and 6 Conservative MPs rebelling. The Guardian reports today that – ahead of this big increase – there’s been an increase in applications this year (applications before Christmas were up 2.5%), meaning “an additional 8,000 candidates are chasing the same number of places as last year”. And there were substantially more applicants than places last year: according to the BBC’s report of UCAS figures, 209,000 more people applied for a place at university last year than got one, 53,000 up on the year before that. So there is a clear unmet desire for HE places.

So the story at Phoenix is of growth in the face of economic uncertainty, but at BPP it’s shrinkage, despite unmet desire for places – at least in the short term. Why would that be?

Well, I think there’s two related factors.

First, the students and what they’re studying are quite different. BPP is narrowly focused on professional programmes in business and law. Phoenix has a broad curriculum covering the range of what you’d expect a general UK university to cover, apart from law and medicine. I haven’t seen a breakdown of socio-economic status indicators for BPP students, but I’m guessing they’re generally substantially less disadvantaged on average than University of Phoenix students.

Second, there’s how the students are paying. One key thing about the University of Phoenix that non-US people might not understand is that, although they are a private, for-profit company, most of their income is from US Federal Government programs. Tuition and fees at Phoenix accounted for 91% of the entire Apollo Group’s revenue, and 88% of that was from “Title IV financial aid programs” – a whole range of Federally-funded loans, grants and so on. As I understand it (and I’d be delighted to be authoritatively corrected or confirmed here) this isn’t the case in the UK, and students at BPP (or indeed the University of Buckingham) are not eligible for Government-arranged student grants and loans for maintenance or fees.

The combination of those two factors makes for a qualitatively different institution.  Tony Bates applauds Phoenix for accommodating disadvantaged minorities: “The UofP is filling a massive hole in the US post-secondary education system vacated by the public institutions and more so by their state governments.” And the funding is arranged – overwhelmingly – by the US Government, which is expanding HE investment. BPP is not playing the same role, and gets no funding via the UK Government (which is contracting HE investment), so it’s not surprising that it affected rather differently by economic downturn. My theory is that BPP students are self-financed, and that funding has dried up seriously – everyone has less spare money than they did, and banks are lending less money and on tighter terms than they were. Going in to HE is widely seen as a smarter move in an economic downturn, but finding the cash to pay for it gets harder, unless the Government steps in, which the US is doing and the UK isn’t.

Medium-to-long term, though, I stand by my prediction that there will be a substantial expansion of private provision of higher education in the UK. It may even happen rapidly if private providers are allowed access to Government-supported loans for fees from 2012. However, if the overall pot of places is not growing (which is very much the way the Government is going), growth of private sector provision in this way can only be at the expense of places in the public sector.

All told, that’s a very different proposition to the University of Phoenix.

–
This work by Doug Clow is copyright but licenced under a Creative Commons BY Licence.
No further permission needed to reuse or remix (with attribution), but it’s nice to be notified if you do use it.