2nd UPDATE:Apollo Group 2Q Profit Drops On Charge; View Upbeat

Apollo Group Inc.'s (APOL) strong fiscal second-quarter enrollment numbers helped it post better-than-expected profits for the quarter. The University of Phoenix operator forecast strong third-quarter earnings as it continues to expand its bachelor's degree program.

While it posted a 26% drop in earnings due to a $44.5 million class-action lawsuit charge, the enrollment and revenue numbers pushed Apollo's shares up 4.1% to $63.78 in recent trading.

Like many other for-profit educators, Apollo has seen strong results recently as the recession put people out of jobs and back into classrooms, both real and virtual, boosting enrollment. Degreed enrollment at the University of Phoenix rose 15.3% to 458,600 students as new enrollment climbed 9.4%.

Now the company is struggling to balance that growth with the increased risk that accompanies a larger student base. Apollo warned in February that its results could be weakened by higher bad-debt expense. It rose to 6.9% of revenue in the latest period from 4.1% a year earlier as the economic downturn led to lower collection rates.

The company does expect bad debt to fall slightly in the third quarter on a dollar basis and even more significantly on a percentage basis as revenue rises sequentially. Providing its first quarterly guidance in more than a year, Apollo forecast third-quarter earnings of $1.55 a share on revenue of $1.3 billion. Analysts surveyed by Thomson Reuters expected $1.45 and $1.28 billion, respectively.

The school is making a concerted effort to attract students who have a better chance of finishing out their degrees--and paying back their loans--even if that means enrolling fewer students. Excluding the orientation program, Apollo said new enrollment would have been close to 19% in the second quarter.

"Our management team continues to focus our efforts on lowering our risk profile," Charles Edelstein, co-chief executive officer, said in a conference call on Monday. The school is piloting an orientation program for students with little exposure to the rigors of college and is advertising its higher-level degree programs more.

Still, associate degree enrollments were stronger than some analysts expected--or wanted. Wedbush Securities analyst Ariel Sokol was disappointed with the 3%-plus increase, writing in a note to investors, "We would have preferred the company to have flushed low quality students out of the system to create a favorable comparison next year." Continued growth on the associate's side means it will take longer to see a meaningful shift in student mix.

For the quarter ended Feb. 28, Apollo reported a profit of $92.6 million, or 60 cents a share, down from $125.3 million, or 77 cents, a year earlier. Excluding the lawsuit charge and other items, earnings rose to 84 cents from 79 cents as revenue jumped 23% to $1.07 billion.

Analysts had most recently forecast earnings of 81 cents on $1.07 billion in revenue.

Apollo booked the $44.5 million charge related to a 2005 consolidated shareholder class-action suit alleging the company didn't properly disclose information related to a Department of Education program review report. The case was initially ruled in Apollo's favor but then appealed; the company is currently awaiting a ruling from a federal appeals court but booked the charge from settlement discussions. Apollo said the loss could ultimately range from zero to $225 million.

The company also said it is continuing to cooperate with the Securities and Exchange Commission, which launched an informal inquiry into its revenue recognition practices and other practices in October. Apollo said Monday that both the company and its auditors have given the SEC documents related to student refunds, the return of Title IV funds to lenders and bad debt reserves.

"We continue to believe that our accounting practices are appropriate and in accordance with GAAP," said Brian Swartz, senior vice president and chief financial officer.

Apollo also saw expenses related to its U.K. operation, BPP Holdings PLC, which the company bought last summer. BPP's corporate training revenue has suffered in the midst of the continued economic weakness in the U.K.; it experiences significant seasonality but has many fixed costs. The unit drained six cents a share from earnings this quarter. However, Greg Cappelli, co-chief executive and chairman of Apollo Global, said operations there are showing signs of stabilization.

As part of its focus on University of Phoenix, Apollo announced Monday it is looking to sell Insight Schools, its online high school operation. The company booked a $9.4 million goodwill impairment in the second quarter related to that unit.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

(Nathan Becker contributed to this article.)

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