October 28, 2009 / 12:09 AM / 10 years ago

UPDATE 3-Apollo says SEC begins informal probe; shares fall

* SEC begins informal probe into rev recognition practice

* Details scant, Apollo says will cooperate

* Q4 adj. EPS $1.06 vs Wall St. view $1.04

* Shares fall 20.5 percent (Adds analyst and DeVry comments, details from call, byline)

By Aarthi Sivaraman/Amulya Nagaraj

SEATTLE/BANGALORE, Oct 27 (Reuters) - For-profit education provider Apollo Group Inc APOL.O said regulatory authorities have launched an informal inquiry over its revenue recognition practices, and its shares fell 20.5 percent.

Apollo, parent of the University of Phoenix, said on Tuesday that it intends to cooperate with the U.S. Securities and Exchange Commission’s inquiry, but did not give further details. The scope, duration or outcome of the inquiry could not be determined, Apollo said.

A spokeswoman for Apollo, Sara Jones, said the information in the statement was all it had at the moment.

Apollo executives said in a conference call that the company became aware of the inquiry last week, but Tuesday seemed “the appropriate time” to reveal it since it reported quarterly results and filed its annual report with the SEC.

Other education stocks like Corinthian Colleges Inc COCO.O and Career Education Corp (CECO.O) also fell after Apollo’s announcement.

“What is very disconcerting is that the SEC targeted Apollo which is a large, publicly-traded, for profit institution,” said Wedbush Morgan Securities analyst Ariel Sokol.

The inquiry could point to more than possible issues at Apollo itself, Signal Hill analyst Trace Urdan suggested.

“It is either something related to Apollo and we just don’t know what it is, or it is related to the industry, about how it recognizes revenue related to student attendance, and they just picked on Apollo because it is the biggest player in the space, Urdan said.

NOT THE FIRST TIME

Apollo, which was founded in 1973, counts adults for half of its students, 80 percent of whom work full-time. But this is not the first time it has run into accounting troubles.

In 1999, the U.S. Department of Education completed a year-long review of its accounting methods for student enrollments, withdrawals and tuition payments. As a result of the review, Apollo was required to pay the U.S. Department of Education and other lenders about $650,000.

Also, the company’s former chief financial officer resigned in 2007 after an investigation found errors in the way it was accounting for stock option grants.

The for-profit education industry has faced a variety of government probes and investigations over its accounting. The SEC looked into allegations related to accounting, student populations and placement data at Career Education last year, but without taking action against it.

Minutes after Apollo’s news, rival DeVry Inc DV.N, which also reported its quarterly results, said in a conference call that DeVry had never had any issues with revenue recognition.

Revenue recognition errors are the second most frequently cited reason for financial restatements, according to the Government Accountability Office, behind cost or expense related issues.

From July 2002 through September 2005, revenue recognition issues accounted for 20 percent of all the restatements. Before 2002, revenue recognition errors accounted for almost 40 percent of restatements.

OVERSHADOWS QUARTERLY RESULTS

Apollo’s announcement about the inquiry overshadowed its quarterly results. Though it posted a drop in fourth-quarter profit, it topped Wall Street’s expectations.

Its net income fell to $91.5 million or 59 cents per share, from $229.6 million or $1.43 per share a year earlier.

Excluding certain items, its earnings of $1.06 per share were above the average analyst expectation for $1.04 per share, according to Thomson Reuters I/B/E/S.

Revenue rose to about $1.08 billion from $831.4 million a year ago, the company said.

Apollo said it expects British education company BPP Holdings, which it acquired earlier this year, to be slightly dilutive to 2010 earnings.

Its shares, which closed at $72.97 on the Nasdaq, fell about 20.5 percent after markets closed. Corinthian Colleges shares fell 6.5 percent in after-hours trade. (Reporting by Aarthi Sivaraman; additional reporting by Emily Chasan in New York; Editing by Bernard Orr and Carol Bishopric)

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