CORRECT(6/30):UPDATE:Apollo 3Q Profit Down 11% On Lawsuit Charge; Sees Mixed 4Q

Apollo Group Inc.'s (APOL) fiscal third-quarter profit fell 11% as better-than-expected revenue growth was offset by a $132.6 million pretax charge related to the reversal of a jury award in a class-action lawsuit.

Apollo, which operates the University of Phoenix, also predicted fourth-quarter revenue below Wall Street expectations and provided a modest fiscal 2011 growth forecast as it expands an orientation program that, though expected to improve retention and loan repayment rates, will cut earnings as unprepared prospective students are weeded out before enrolling. The program, which had been in a pilot phase since last fall, will be required for all students entering with less than a full year of credit beginning in the first fiscal quarter of 2011.

Apollo shares were off 1.1% at $42.00 after-hours. The stock is down nearly 30% so far this year.

Like many other for-profit educators, Apollo expanded quickly as the recession put people out of jobs and back into classrooms, both real and virtual. Degreed enrollment increased 13% in the most recent period, while new enrollment rose 7.5%. Total student enrollment stood at 476,500 at the end of the quarter.

Apollo has tried shifting its growth to the higher margin, lower risk bachelor's and graduate-degree program and is starting to see some success. New students in the associate's degree program rose just 2.9% in the most recent period, compared with a 21.9% increase in new bachelor's degree students.

For the quarter ended May 31, Apollo posted a profit of $179.3 million, or $1.18 a share, down from $201.1 million, or $1.26 a share, a year earlier. Excluding litigation costs, write-downs and other items, earnings from continuing operations rose to $1.74 from $1.30 a share as revenue climbed 28% to $1.34 billion.

In March, the company projected a profit of $1.55 a share on revenue of $1.3 billion, above Wall Street's estimates at the time.

A U.S. appeals court last week reinstated a $278 million award against the company in a case alleging Apollo didn't correctly disclose a Department of Education report. Apollo said in a filing with the Securities and Exchange Commission that it is evaluating options to challenge the jury verdict and appeals court's ruling.

Looking ahead, Apollo forecast a fourth-quarter profit of $1.30 a share on revenue of $1.25 billion. Analysts surveyed by Thomson Reuters expected $1.20 and $1.27 billion, respectively. The company expects fiscal 2011 revenue to increase in the high-single digits on a percentage basis.

Despite its muted forecast, Signal Hill Capital Group analyst Trace Urdan says the company could see some backlash for its recent success. Because of its size, Apollo's University of Phoenix has been a main target of politicians looking to curb predatory recruiting and other unscrupulous practices in for-profit higher education. The House and Senate have both held hearings focusing on the industry and Sen. Richard Durbin (D., Ill.) said in a speech Wednesday at the National Press Club that Congress should consider tightening rules that allow for-profit schools to derive up to 90% of revenue from federal funds, bar schools from buying new campuses in order to get accreditation and take other measures to ensure the schools are acting in accordance with the law.

"My initial reaction was 'Oh, almost a 20-cent beat [for per-share earnings], that's not good'," Urdan said, considering the climate surrounding the sector.

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

(John Kell contributed to this article.)

Apollo Education Group, Inc. (NASDAQ:APOL)
Historical Stock Chart
From Jun 2024 to Jul 2024