UPDATE: Apollo Group Pulls 2011 Views; Roils Education Sector

Apollo Group Inc. (APOL) Wednesday evening made investors in for-profit education stocks wish they hadn't gone back to school this fall. It withdrew its fiscal-2011 guidance and predicted that regulatory scrutiny and falling new enrollments at its University of Phoenix will crimp results.

Its fiscal-fourth-quarter results slightly beat its guidance and analysts' expectations, and included a $175.9 million write-down of goodwill and other intangible assets at its BPP subsidiary thanks to the recession in the U.K. The withdrawn guidance and the potential for weakened future results sent a shudder through the education sector, sending Apollo shares down sharply in late Wednesday trading and giving a back-to-school haircut to the stocks of at least seven of its peers.

Apollo said "challenges" the industry faces, including "regulatory and other scrutiny" and "heightened media attention, much of which has portrayed the sector in an unflattering light," will "adversely impact its operating metrics and financial results." Management later called the recent media coverage "incredibly negative."

It said it expects the decline in new degreed enrollment it saw in the fourth quarter at its University of Phoenix to accelerate in the first quarter, "resulting in a significant year-over-year decline." For the first quarter, that drop in new degreed enrollment could top 40%, and executives said growth may not return until 2012.

The stock fell to a four-year low in August after the University of Phoenix was featured in an undercover investigation by the U.S. Government Accountability Office exposing questionable practices in 15 for-profit schools' student recruitment offices. The sector also faces proposed new rules from the U.S. Department of Education that would penalize individual programs for graduating students with high debt loads.

The company has reported lower earnings in the previous two quarters on litigation and other charges. It also has warned its bottom line will be hurt as it expands an orientation program expected to improve retention and loan-repayment rates as unprepared prospective students are weeded out before enrolling. The program, which had been in a pilot phase since last fall, will be required starting Nov. 1 for all students entering with less than a full year of credit beginning in the current quarter.

In a late Wednesday conference call to discuss its results, Apollo said any final rules instituted by regulators look to come after the November mid-term elections, and as such can't be quantified today. Management said its goals are "aligned" with those of regulators, and it is pleased regulators are taking the time to consider "potential unintended consequences" of any such new rules. A spokesman said executives wouldn't be available after the call to further discuss the results.

Apollo also said it expects to double its capital expenditures this fiscal year compared with fiscal 2010.

Not all the news was bleak. It said on the call that it repaid $400 million, or nearly 70%, of its $584.4 million in debt subsequent to the fiscal year's end. It also paid about $100 million to buy back about 2 million shares during the previous quarter, paying an average price about where Apollo traded before late Wednesday's announcement.

For the quarter ended Aug. 31, Apollo reported a profit of $41 million, or 28 cents a share, down from $91.5 million, or 59 cents a share, a year earlier. The latest results included the BPP intangibles write-down while last year's quarter included $95.4 million in charges. Excluding such items, earnings from continuing operations rose to $1.31 a share from $1.10 and topped its and analysts estimates by a penny. Revenue grew 17% to $1.26 billion.

Apollo was off 14.7% in after-hours trading at $42.22, putting it 45% below the high it touched last October. The losses only mounted as Apollo provided more details about its future on its conference call.

Among other education stocks, Corinthian Colleges Inc. (COCO) was down 5.8%, Career Education Corp. (CECO) was down 6.9%, ITT Educational Services Inc. (ESI) was off 8.1%, DeVry Inc. (DV) was off 5.1% and Strayer Education Inc. (STRA) was down 6.4%. Bridgepoint Education Inc. (BPI) and Capella Education Co. (CPLA) were off during most of late trading but the most recent trades brought both back to unchanged from Wednesday's close, according to Nasdaq.com.

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 rose 6.3% in the most recent period, but new enrollment declined almost 10% and it blamed the decline in part on the delay in enrollment caused by its new, free orientation program that's now required for new students lacking 24 transfer credits. Total degree enrollment stood at 470,800 at the end of the quarter, as it added bachelors and doctoral candidates at degreed enrollment, but saw fewer seek associates and masters degrees.

-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171; maxwell.murphy@dowjones.com

(Kathy Shwiff contributed to this article.)

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