University of Phoenix Parent Reports $64 Million Loss, Drop in New Students

The University of Phoenix’s struggle to attract new students is likely to ripple into the company’s finances well into next year, executives for the parent company said on Tuesday.

Phoenix-based Apollo Group Inc. reported a $64 million loss for the three months that ended Feb. 28, the company’s first quarterly loss in three years.

The for-profit education giant announced a nearly 45 percent drop in new-student enrollment, the third consecutive quarter it has shrunk. The diluted income per share was negative 45 cents, compared with 60 cents the year before.

New-student enrollment – a key vital sign for University of Phoenix – is expected to fall again next quarter by a similar amount, and the company predicts bigger enrollment and revenue declines for the rest of 2011, said Brian Swartz, chief financial officer.

"We do expect new enrollment to grow again in 2012 and also expect to achieve higher retention rates for those new students," he said.

After the earnings presentation, analysts pressed for a more specific time frame, but he declined to offer more details.

The biggest news was the company’s predictions for its 2012 fiscal year, said Arvind Bhatia, an analyst who follows Apollo. Bhatia is managing director at Sterne Agee & Leach in Dallas.

"This guidance of a 37 percent year-over-year decline in operating income was much worse than analyst expectations of a 5 percent decline. This will likely negatively weigh on the stock in near term," Bhatia said in an interview after the earnings announcement.

For fiscal year 2011, the company expects to have consolidated net revenue of $4.65 billion to $4.75 billion and operating income of $1.15 billion to $1.20 billion, excluding special items.

In fiscal year 2012, Apollo expects net revenue to fall between $4 billion to $4.25 billion and operating income of $675 million to $800 million.

The last time the education company reported a quarterly loss was in 2008, when it reported a second-quarter loss of $32 million, attributed to a one-time charge for litigation.

In an early-morning earnings call, Apollo executives were upbeat, noting that the current "transition" period would strengthen the company over the long term.

Apollo has struggled to adjust financially to new federal rules that bar for-profit schools from paying admission counselors based on how many students they enroll. The rules take effect this year, but the University of Phoenix changed its compensation rules in September.

University of Phoenix also debuted a mandatory student-orientation program last year for new students who administrators categorize as at risk of dropping out.

A few months ago, the school launched an online Visiting Student Center, including free tools that allow students to explore their academic weaknesses and to decide if online or traditional classroom learning works best for them.

The orientation program has temporarily hurt enrollment, company officials have said.

New-student enrollment fell 44.9 percent in the three months that ended Feb. 28, to 48,200 students, compared with 87,500 students in the same period in 2010. The decline follows a 42 percent drop in new students in the previous quarter.

Total enrollment also slid. Apollo reported 405,300 students at the end of the quarter, nearly 12 percent fewer than at the same time in 2010.

Rising expenses also have had an impact on the bottom line.

In the six months that ended Feb. 28, Apollo reported $2.5 million in charges for interest payments and other legal expenses related to a securities class-action lawsuit. A federal jury in Arizona determined that Apollo withheld a damaging 2004 government report from investors.

Earlier this month, the U.S. Supreme Court rejected Apollo’s appeal.

Shares closed down $1.80, or 4.25 percent, to $40.55 Tuesday.


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