Apollo in Accounting Investigation

University of Phoenix parent Apollo Group Inc. reported strong fourth-quarter results Tuesday, but they were overshadowed by the disclosure of an accounting investigation by securities regulators.

The Phoenix-based company, the nation’s largest operator of for-profit schools and one of Arizona’s largest public companies, said the enforcement division of the federal Securities and Exchange Commission has begun an "informal inquiry" into its revenue-recognition practices. That refers to how and when a company books sales; in this case, tuition and related revenue.

Informal inquiries are not uncommon – this is Apollo’s second since 2006. Other high-profile Arizona companies, including Insight Enterprises and Taser International, have been targets.

But the mention of an SEC inquiry spooks investors until the matter is resolved. The announcement was made after the stock market closed Tuesday. Apollo’s stock was down nearly 20 percent in after-hours trading, suggesting that today may be a rough day.

"At the end of the day, no one knows if this is going to end up being something material or not, but until that happens, I think there’s going to be an overhang on the stock," said Arvind Bhatia, a stock analyst who follows Apollo for Sterne Agee.

Apollo said the "scope, duration and outcome of the inquiry cannot be determined at this time."

The company said that it will cooperate with the SEC and believes that its revenue recognition policies are appropriate and in accordance with generally accepted accounting principles. Co-Chief Executive Officer Greg Cappelli said the disclosure was included in the firm’s 10K annual report, which is approved by its auditor, Deloitte.

Questions about the SEC inquiry dominated the company’s 80-minute earnings conference call. Analysts wanted to know if the inquiry is related to a comment letter the company received from another SEC division earlier this year, which included questions about its revenue recognition. Executives said they believed they answered those questions satisfactorily.

Analysts asked the company repeatedly about how it tracks and accounts for students who drop out of a class, especially in the online division.

"That’s the gray area," Bhatia said. "People are assuming that that’s what it’s (the SEC’s focus) got to be."

Trace Urdan, who follows Apollo for Signal Hill, said it’s tough to know what the SEC is after.

"I think there’s sort of two possibilities: Either the SEC’s got something on Apollo specifically and they’re moving in, or there’s something related to the industry," he said. Apollo’s last informal inquiry, related to its stock-option accounting practices, did not lead to any enforcement action by the SEC. Insight and Taser also avoided enforcement action. The SEC matter comes as Apollo appears close to resolving a major whistleblower lawsuit that dates to 2003. It announced settlement talks late last month and Tuesday revealed that it took an $80.5 million charge for the potential settlement and related legal costs. Apollo has more than enough cash to pay such a tab.

The charge was taken in Apollo’s fourth quarter ending Aug. 31, cutting into its profits. The company reported net income of $91.5 million, down from $229.6 million in the fourth quarter of 2008. Excluding the settlement charge and other one-time items in both periods, the company said its net income was $165.6 million, up from $120.5 million a year earlier, slightly better than analysts expected.

Revenue surged 29 percent, to nearly $1.1 billion from $831 million, as enrollment continued to grow (up 22.3 percent to 443,000 students) and the company raised tuition rates.


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