Apollo (APOL) and DeVry (DV) were both poor performers in the quarter. There is no other way to say it, the second quarter numbers for Apollo were very disappointing – particularly the enrollment numbers. APOL has spent a lot of money on a new Learning Management System (LMS) for all University of Phoenix (UoP) students. This was a massive endeavor on the company’s part and will lead to a large differentiation experience for their students versus the competition. Unfortunately, like many new large software rollouts, the LMS rollout had a couple of bugs that needed to be fixed. For example, if your internet browser was updated to a new version, some of the automation links within LMS were not properly coded and the user experience diminished to the point where some students dropped out of the university. APOL believes the majority of the problems have been addressed and fixed, but management took its eye off the ball with respect to converting prospective students to new enrollees during the past quarter. Management indicated that they are now seeing an improvement in enrollments, but it is still very early in their fiscal third quarter to know for sure whether they have adequately addressed the problems.
We are clearly focused on the U.S. business. However, it is important to note that the company’s global operations are in the process of turning around and will likely be generating positive operating cash flow in the second half of this year. With over $6 of net cash per share on the balance sheet and prospects to generate additional free cash flow for the remainder of the year, APOL has the resources to overcome these missteps and get back on track. For your reference, we bought most of our APOL stock between $16 and $19 per share and made it around a 3% position at around $20. When the stock hit $34, we sold over 25% of our position. The stock price is back to $20 and we are back to about a 3% position.
From FPA Capital Fund (Trades, Portfolio)’s First Quarter 2015 Commentary.
