Apollo Group, Inc. Reports Fiscal 2008 Fourth Quarter and Year-End Financial Results

Apollo Group, Inc. (Nasdaq: APOL) ("Apollo Group,” "Apollo” or "the Company”) today reported financial results for the three months and fiscal year ended August 31, 2008. During the fourth quarter, Charles "Chas” B. Edelstein joined the Company as Chief Executive Officer of Apollo Group. Subsequent to the year-end, Joseph L. D’Amico was appointed President of Apollo Group, in addition to being the Chief Financial Officer and Treasurer.

Chas Edelstein commented, "I am delighted to be a part of the successful and talented team at Apollo Group. In my short time here I have validated my prior belief that this is a world-class organization with tremendous opportunity in its future. I look forward to working with the team as we strengthen and grow our business both domestically and internationally.”

Unaudited Fourth Quarter of Fiscal 2008 Results of Operations

Consolidated revenues for the three months ended August 31, 2008, totaled $831.4 million, which represents a 16.5% increase over the fourth quarter of fiscal 2007. Total Degreed Enrollment grew by 15.4% year-over-year to 362,100. The Company reported net income for the three months ended August 31, 2008, of $229.6 million, or $1.43 per share (160.1 million weighted average diluted shares outstanding), compared to net income of $103.2 million, or $0.60 per share (171.3 million weighted average diluted shares outstanding) for the three months ended August 31, 2007.

During the fourth quarter, the Company reversed its previously recorded charge for estimated damages of $170 million associated with the judgment in a securities class action lawsuit because the Ninth Circuit vacated the earlier judgment.

Before giving effect to this reversal, and to a $9.5 million gain (including interest) during the fourth quarter of 2008 from a third party’s forfeiture of an escrow deposit due to the expiration of their option to purchase the Company’s headquarters building, and to restatement costs of $6.4 million in the fourth quarter of fiscal 2007, net income increased 12.5% to $120.5 million, or $0.75 per share in the fourth quarter of fiscal 2008, as compared to net income of $107.1 million, or $0.62 per share in the fourth quarter of fiscal 2007.

Excluding share-based compensation expense of $4.1 million and $13.2 million in the fourth quarters of fiscal 2008 and 2007, respectively, as well as the special items described above, net income would have been $123.0 million, or $0.77 per share in the fourth quarter of fiscal 2008, as compared to net income of $115.1 million, or $0.67 per share in the fourth quarter of fiscal 2007.

(See the reconciliation of Generally Accepted Accounting Principles ("GAAP”) financial information to non-GAAP financial information in the tables section of this press release.)

"The fourth quarter concluded a transformative and rewarding year for Apollo Group and its stakeholders, as we made solid financial, operational and organizational strides. In fiscal 2008, we grew our revenue by approximately 15% over the prior year, and importantly, for the first time in several years, meaningfully grew earnings per share, while continuing to produce significant cash flow,” said Joseph L. D’Amico. "In the fourth quarter we again reported solid revenue and enrollment growth, and we experienced an increase in the year-over-year growth rate of New Degreed Enrollments for the second quarter in a row. During the fourth quarter we had Degreed Enrollment of 362,100 students, having started a record 83,100 students during the quarter. And, while the overall cost to acquire a student is still higher than we would like, we continue to work diligently and are pleased with the efforts we have in process.”

Greg Cappelli, Executive Vice President, Global Strategy and Assistant to the Executive Chairman added, "During the year, we made significant investments in our core University of Phoenix business, which continues to generate the highest returns for our shareholders. We also invested in several new growth opportunities which we believe will generate incremental shareholder value over time. During the fourth quarter, Apollo Global, which was formed a year ago, completed its second acquisition, the purchase of a majority stake in Universidad Latinoamericana, S.C. ("ULA”), a private university based in Mexico City. Separately, Insight Schools, our online high school provider, started the 2008 school year with 11 schools in 10 states, and finally, Meritus, our new Canadian university, had its ribbon-cutting ceremony last month and recently began enrolling its first cohort of students. We are pleased with the progress we made this year toward our goal of being a leading global institution.”

Instructional costs and services increased by $35.1 million, or 10.7% to $362.3 million for the three months ended August 31, 2008, from $327.2 million in the three months ended August 31, 2007. As a percentage of net revenue, instructional costs and services declined to 43.6% versus 45.8% in the prior year quarter, primarily as a result of decreases as a percentage of net revenue, in bad debt expense, classroom lease expenses and depreciation and other instructional costs and services. These decreases were partially offset by an increase, as a percentage of net revenue, in employee compensation and related expenses which is due, in part, to investments in Insight Schools and Apollo Global, as well as increases in the Company’s compensation rates for academic and financial counselors.

As previously reported, during the first quarter of fiscal 2008, the Company reviewed the components of bad debt expense and identified certain items that should have been classified as discounts or refunds (reduction of tuition revenue) rather than bad debt expense. No reclassification was made for prior periods as the amounts were not material to prior period financial statements and had no effect on reported net income. Had the Company reclassified these items in the fourth quarter of fiscal 2007, the amounts reported for net revenue and bad debt expense would have been $6.5 million lower. On a comparable basis, bad debt expense, as a percentage of net revenue, decreased approximately 140 basis points from 4.4% in the fourth quarter of fiscal 2007 to 3.0% in the fourth quarter of fiscal 2008. This decrease is primarily due to the continued focus on front-end collections as well as improvements in student retention rates.

Selling and promotional expenses increased by $49.3 million, or 28.4%, to $223.1 million for the three months ended August 31, 2008, from $173.8 million in the three months ended August 31, 2007. As a percentage of net revenue, selling and promotional expenses increased 250 basis points to 26.8%, from 24.3% in the prior year’s fourth quarter. This was a result of an increase, as a percentage of net revenue, in enrollment counselors’ compensation and related expenses, advertising and other selling and promotional expenses which includes expenses related to Aptimus which the Company acquired in the first quarter of 2008. The Company continues to invest in marketing to build greater brand identity as well as to drive and support future enrollment growth. As a result, selling and promotional expenses may continue to increase in the near-term; however, the Company believes its efforts and investments will help it reduce these costs over the long-term.

General and administrative ("G&A”) expenses for the three months ended August 31, 2008, declined by $14.3 million, or 23.0%, to $48.0 million, from $62.3 million in the three months ended August 31, 2007. As reported, G&A, as a percentage of net revenue, decreased to 5.8% in the fourth quarter of 2008, versus 8.7% in the comparable period a year ago. Excluding special items in the fourth quarter of fiscal 2007, primarily related to the stock option investigation and restatement costs of $6.4 million, G&A expenses were $55.9 million, or 7.8% of net revenue, for the three months ended August 31, 2007. The 200 basis point decline to 5.8%, as a percentage of net revenue, in the fourth quarter of 2008, is mainly attributable to a decrease in share-based compensation expense, due primarily to the forfeiture of unvested options related to the departure of the former President of Apollo Group in June 2008.

Financial and Operating Metrics

Below are Apollo Group’s unaudited financial data and operating metrics for fiscal 2008.

⁽¹⁾ Represents information for University of Phoenix and associate's degree students enrolled in Western International University. Degree seeking students (and related revenues) include students enrolled in degree programs or participating in certificate programs of at least 18 credit hours in length with some course applicability into a related degree program. Non-degree seeking students include all other certificate programs, single course and continuing education students.

⁽²⁾ Represents revenues from IPD, CFP, Western International University (excluding associate's degree students), Insight Schools, Apollo Global and other.

⁽³⁾ Represents individual students enrolled in a University of Phoenix degree program or Western International University associate's degree program who attended a course during the quarter and did not graduate as of the end of the quarter. Degreed Enrollment for a quarter also includes any student who previously graduated from one degree program and started a new degree program in the quarter (for example, a graduate of the associate's degree program returns for a bachelor's degree or a bachelor's degree graduate returns for a master's degree.) In addition, Degreed Enrollment includes students participating in certificate programs of at least 18 credit hours in length with some course applicability into a related degree program.

⁽⁴⁾ Represents any individual student enrolled in a University of Phoenix degree program or Western International University associate's degree program who is a new student and started a course in the quarter, any individual student who previously graduated from one degree program and started a new degree program in the quarter (for example, a graduate of an associate’s degree program returns for a bachelor’s degree, or a graduate of a bachelor’s degree program returns for a master’s degree), as well as any individual student who started a degree program in the quarter and had been out of attendance for greater than 12 months. In addition, New Degreed Enrollments includes students who during the quarter started participating in certificate programs of at least 18 credit hours in length with some course applicability into a related degree program.

2008 Fiscal Year-End Results of Operations

Consolidated revenues for the fiscal year ended August 31, 2008, were $3.1 billion, a 15.3% increase over fiscal 2007. Average quarterly Degreed Enrollment grew by 12.1% for fiscal 2008 as compared to fiscal 2007.

The Company reported net income of $476.5 million, or $2.87 per share, (165.9 million weighted average diluted shares outstanding), and $408.8 million, or $2.35 per share, (173.6 million weighted average diluted shares outstanding) for fiscal years 2008 and 2007, respectively. During fiscal 2008, the Company repurchased approximately 9.8 million shares of its common stock at a weighted average purchase price of approximately $46 for a total expenditure of $454 million. The Company currently has an outstanding share repurchase authorization of up to $500 million.

Before giving effect to a $9.5 million gain (including interest) from a third party’s forfeiture of an escrow deposit due to the expiration of their option to purchase the Company’s headquarters building, in fiscal 2008, and to special items related to the stock option investigation and restatement costs of $33.8 million in fiscal 2007, net income increased 9.6% to $470.7 million, or $2.84 per share in fiscal 2008, as compared to net income of $429.3 million, or $2.47 per share in fiscal 2007.

Excluding total share-based compensation of $53.6 million and the $9.5 million gain, described above, in fiscal 2008, and share-based compensation expense of $54.0 million and stock option investigation and restatement costs of $21.7 million (net of the $12.1 million stock option modification included in share-based compensation) in fiscal 2007, net income would have been $503.3 million, or $3.03 per share in fiscal 2008, as compared to net income of $454.8 million, or $2.62 per share in fiscal 2007.

(See the reconciliation of GAAP financial information to non-GAAP financial information in the tables section of this press release.)

Unaudited Balance Sheet

As of August 31, 2008, the Company’s cash, cash equivalents, and marketable securities, excluding restricted cash, totaled $511.5 million as compared to $392.7 million as of August 31, 2007. During the fourth quarter of fiscal 2008, the $95.0 million appeal bond posted in February 2008 was released when the District Court vacated the earlier judgment in the Company’s securities class action lawsuit and entered judgment in favor of Apollo Group. As a result, the $95.0 million was removed from restricted cash and is included in cash and cash equivalents.

Restricted cash and student deposits increased by approximately $87.7 million and $85.3 million since August 31, 2007, respectively. These increases were primarily due to increased student enrollment and to increases in Title IV funds available to students.

At August 31, 2008, accounts receivable increased to $221.9 million from $190.9 million at August 31, 2007. The increase includes a combined $29.9 million in student account receivables at Universidad de Artes, Ciencias y Comunicación ("UNIACC”) and ULA. Excluding this amount and the associated revenue, the Company’s days sales outstanding ("DSO”) declined to 29 days for the fourth quarter of fiscal 2008 as compared to 38 days for the fourth quarter of fiscal 2007. The decrease in DSO is primarily due to improvements in processing time for the receipt of student financial aid and the write-off of approximately $125.7 million in previously reserved uncollectible accounts receivable during the year.

Goodwill increased by $56.3 million to $86.0 million at August 31, 2008, from $29.6 million at August 31, 2007, and intangible assets, net, increased by $20.9 million to $23.1 million at August 31, 2008, from $2.2 million at August 31, 2007. The increases in both accounts were primarily due to the acquisition of Aptimus, Inc. in the first quarter of fiscal 2008, and Apollo Global’s acquisitions of UNIACC and ULA during the third and fourth quarters of fiscal 2008, respectively.

Long-term liabilities (including the current portion) increased by $100.0 million to $193.0 million at August 31, 2008, from $93.0 million at August 31, 2007, primarily due to the reclassification from income taxes payable of approximately $53.0 million related to the adoption of FIN 48, Accounting for Uncertain Tax Positions, as well as additional capital lease obligations and other borrowings associated with Apollo Global’s acquisitions.

Total deferred revenue at August 31, 2008, increased to $231.3 million from $167.3 million at August 31, 2007. The increase is principally due to increased student enrollment.

Conference Call Information

The Company will hold a conference call to discuss these earnings results at 5:00 PM Eastern, 2:00 PM Phoenix time, today, Tuesday, October 28, 2008. The call may be accessed by dialing (877) 292-6888 (domestic) or (706) 634-1393 (international). The conference ID number is 63579735. A live webcast of this event may be accessed by visiting the Company’s website at www.apollogrp.edu. A replay of the call will be available on the website or at (706) 645-9291 (conf. ID # 63579735) until November 7, 2008.

About Apollo Group, Inc.

Apollo Group, Inc. has been an education provider for more than 30 years, providing academic access and opportunity to students through its subsidiaries, University of Phoenix, Institute for Professional Development, College for Financial Planning, Western International University, Meritus University, Insight Schools and Apollo Global. It also owns Aptimus, a provider of innovative digital media solutions. The Company's distinctive educational programs and services are provided at the high school, undergraduate and graduate levels in 40 states (as of August 31, 2008) and the District of Columbia; Puerto Rico; Alberta and British Columbia, Canada; Mexico; Chile; and the Netherlands, as well as online throughout the world.

For more information about Apollo Group, Inc. and its subsidiaries, call (800) 990-APOL or visit the Company’s website at www.apollogrp.edu.

Forward-Looking Safe Harbor

Statements in this press release regarding Apollo Group’s business outlook, future financial and operating results, future enrollment, and overall future strategy and plans, are forward-looking statements, and are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current information and expectations and involve a number of risks and uncertainties. Actual results may differ materially from those projected in such statements due to various factors. For a discussion of the various factors that may cause actual results to differ materially from those projected, please refer to the risk factors and other disclosures contained in Apollo Group’s previously filed Form 10-K, Forms 10-Q, and other filings with the Securities and Exchange Commission.

⁽¹⁾ The $9.5 million gain during the three months and year ended August 31, 2008 represents the gain associated with the termination of an option agreement related to our headquarters land and building.

⁽²⁾ The $170.0 million gain during the three months ended August 31, 2008 represents the reversal of the charge for the securities litigation loss.

⁽³⁾ The $4.3 million and $7.0 million in charges for the three months and year ended August 31, 2007, respectively, represent fair value adjustments to the stock options of former employees.

⁽⁴⁾ The $2.1 million and $14.7 million in charges for the three months and year ended August 31, 2007, respectively, represent costs related to the stock option investigation and restatement.

⁽⁵⁾ The $12.1 million in charges for the year ended August 31, 2007 represents stock option modifications.

⁽⁶⁾ Share-based compensation was $4.1 million and $53.6 million for the three months and year ended August 31, 2008, respectively, compared with $13.2 million and 54.0 million (including $12.1 million related to stock option modifications) for the three months and year ended August 31, 2007, respectively.