Apollo Group (APOL) Slammed On SEC Revenue Recognition Probe (Update)

October 27, 2009 5:01 PM EDT
(Update with comments from analysts)

With its earnings report tonight, secondary education leader Apollo Group, Inc. (Nasdaq: APOL) said the SEC has launched an informal probe into the revenue recognition practices of the company. Apollo shares have dropped 20 percent in the after-hours market.

Profit for Apollo in the fourth-quarter reported at $91.5 million, compared with a profit of $229.6 million in the same quarter last year, a 60 percent decrease. This was impacted by the 25 percent, or $90.6 million increase in instructional costs and services.

Apollo reported a fourth-quarter EPS of $1.06, 2 cents better than the analyst estimate of $1.04, while revenue for the quarter beat the market consensus of $1.03 billion at $1.08 billion. Revenue is up from $820 million, while EPS rose from $0.75 in the year-ago quarter.

Total enrollment for the educational institution increased to 443,000, from 362,100 in the same quarter last year. Enrollment increased across all levels of education offered by the company.

Apollo executives stated that they are co-operating completely with the SEC and have no further comment on the situation in a statement preceding the Company's conference call after hours today.

Analyst Comments:
JP Morgan maintains its Overweight rating and $95 price target on Apollo noting that two most obvious areas of SEC review could be revenue impact of refunds and bad debt. In general, both of these areas use a relatively limited amount of “judgment”, thus perhaps limiting the exposure.

Piper Jaffray is maintaining its Overweight rating but are lowering target to $91, down from $108, saying that while the scope, duration, and outcome of the inquiry are unknown at this time, it understands Apollo's revenue recognition practices to be straightforward.

UBS notes management announced the SEC recently began an informal inquiry into revenue recognition. While it is too soon to accurately assess the impact, they think it is likely to be small and so the sharp sell-off after market was likely overdone. UBS maintains its Buy rating and $120 price target.

Current market movement on Apollo has the shares down 17.39 percent at $60.28.

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