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Apollo Group (NASDAQ:APOL)

F3Q 2013 Earnings Call

June 25, 2013 5:00 pm ET

Executives

Beth Coronelli - Vice President of Investor Relations

Gregory W. Cappelli - Chief Executive Officer, Director and Chairman of Apollo Global Inc

Brian L. Swartz - Chief Financial Officer and Senior Vice President of Finance

Analysts

Suzanne E. Stein - Morgan Stanley, Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

John D. Crowther - Piper Jaffray Companies, Research Division

Jeffrey M. Silber - BMO Capital Markets U.S.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Paul Ginocchio - Deutsche Bank AG, Research Division

Jeffrey Scott Lee - Wells Fargo Securities, LLC, Research Division

Timothy Connor - William Blair

Terry M. Lally - Spotlight Funds Management

Operator

Good afternoon, and welcome to the Third Quarter 2013 Earnings Release Conference Call. [Operator Instructions] This conference call is being recorded today, June 25, 2013, and may not be reproduced in whole or in part without permission from the company. There will be a replay of this call available through July 3, 2013, beginning approximately 2 hours after we conclude today. The replay number is (855) 859-2056 or (404) 537-3406 internationally. The conference ID for the replay is 86623109.

I would now like to turn the call over to Beth Coronelli, Vice President of Investor Relations. Mrs. Coronelli, please go ahead.

Beth Coronelli

Thank you for joining us today to discuss our third quarter results. Participating on the call are Gregory Cappelli, Chief Executive Officer of Apollo Group; and Brian Swartz, Senior Vice President and Chief Financial Officer. Greg will update you on our initiatives and strategy, and Brian will discuss the third quarter financials and outlook. As we discuss our results today, unless noted otherwise, we'll be comparing the third quarter of fiscal 2013, which ended May 31, 2013, to the third quarter of fiscal 2012.

I'd also like to remind you that this conference call may contain forward-looking statements with respect to future performance, financial conditions, regulatory compliance and other matters regarding the business of Apollo Group and its subsidiaries that involve risks and uncertainties.

Various factors could cause actual results of the company to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed under Risk Factors and elsewhere in the company's most recent 10-K and our subsequent 10-Q reports filed with the SEC and available on our website at www.apollo.edu. The company disclaims any obligations to update any forward-looking statements made during the call.

Additionally, during the call, we may refer to non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. Our press release, which contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures, is also available on our website.

And with that, I will turn it over to Greg.

Gregory W. Cappelli

All right. Thank you, Beth. Good afternoon, everyone. Today I'll talk about the actions we're taking to reposition Apollo Group in a time of rapid change to ensure we deliver the skills our students require to succeed in the global workforce. At Apollo, we're embracing the spirit of change, creating a more nimble organization focused on operational excellence, reengineering the educational experience at our institutions to ensure we anticipate and support the needs of students and employers for the long term.

First, quickly let me recap our results. We reported revenues of $947 million and EPS of $0.71 per share or $1.05 per share, excluding special items. In the third quarter, the University of Phoenix enrolled about 39,000 new students and ended the quarter with a total enrollment of about 288,000 students.

Enrolling new students is important for the health of our overall organization. Simply put, a 25% decline in new enrollments in University of Phoenix is difficult to accept. We have and continued to focus in strengthening the foundation of our company and our universities, investing in the future of higher education so that we have the ability to compete more effectively going forward.

To differentiate University of Phoenix, we're focused on simplicity of use, functionality, flexibility to adapt to the changing education landscape, speed to market with new offerings and an enhanced overall experience. Our goal is to deliver the programs that are most applicable and desirable to students and that meet employer needs to find qualified employees.

We're focused on truly engaging students, creating an environment that addresses their needs and delivers better learning outcomes. We clearly understand the need to differentiate our offerings and have competitive products in the market to attract new students.

As we've previously discussed, there are a host of issues creating headwinds for us and others in the industry. But also, it's important to note that a smaller student body would create a retention and outcomes, successfully tie you to a strong career will have a far greater positive impact over time leading to future growth.

Improving retention, delivering an outstanding student experience and working to ensure every student has the support they need to reach graduation; that's our top priority. Student success requires regular engagement with students prior to enrolling, throughout their program and after graduation. Creating those lasting connections with our students is very bit -- or excuse me, is every bit as important as driving new enrollment. Some examples of our retention efforts include: having additional full-time faculty teach our first-year sequence of courses, enhancing our student on-boarding programs and using analytics to proactively respond to trends and cohorts and apply early interventions, and of course, adaptive learning. We've taken the valuable science behind the Carnegie Learning platform and integrated it into key math programs at the University of Phoenix, and the early results are positive.

Research conducted by the RAND Corporation and funded by the Department of Education showed that the Carnegie Learning Algebra 1 blended curriculum improves performance significantly, enough so that the amount of learning is nearly double of what an average student learns with a more traditional math curriculum. We're applying the Carnegie Adaptive Learning model more broadly across our offerings.

In addition, we're conducting extensive research in designing and experience around how students engage, taking the best that interactive technology has to offer and applying it to learning.

Working adults, they want tangible skills now, there needs to be a variety of options to acquire the knowledge to compete more effectively in today's labor force. As part of the reengineering of University of Phoenix, the team is connecting all delivery options in higher education, degree-seeking, non-degree and certificate-based programs. The educational experience needs flexibility and improved outcomes, faster for students. One example is through our stackable certificate programs that offer students the option to earn credentials that employers look for when they're hiring while transitioning into a degree program. Delivering demonstrable and marketable job skills during the academic journey rather than at the end to the granting of the degree. We're initially rolling this out in several areas of study to help individuals students stay grounded in their field and apply their education to the job market quickly and during their academic programs.

Now from a skills perspective, we must also match what students and employers want for workforce development. In a word, connectivity. Students want a more efficient way of learning that leads to better careers in the real world. Employers want to ensure higher education is responsive to the human capital needs. We're committed to both, and that means working with employers to understand the skills and the competencies they need to help them hire qualified, engaged workers while taking feedback to constantly improve the instructional design of our courses. This process alone is helping to drive change and helping to make improvements to what we believe differentiate University of Phoenix, in particular. Ultimately, we believe that we're learning from our partnerships with employers, and that will affect our institutions around the world.

Now another cornerstone of our strategy is diversification, leveraging our core strengths. An exciting update on our efforts to diversify Apollo Group includes the learning format and tuition changes at Western International University. West, which has about 3,000 students, has recently launched a new innovative teaching model that we believe delivers a high quality educational experience at half the cost previously incurred by a West student. We have positioned West to appeal to a different segment than University of Phoenix, and although it's very early, we're excited about its prospects. West has 8-week courses that are developed around a learn, practice and apply format, incorporating multimedia content delivery, knowledge checks and engagement with instructors and other students to put the learning in practical context. Students also now enter West through the Smart Start program, taking 2 college-level courses at $200 each. This allows students to test our model and have full transparency into the academic experience before they formally enroll. And importantly, before they take out any financial aid.

At West, we're committed to offering rigorous programs that fit a student's academic and their financial goals.

Now let me switch gears to our international business for a moment. In India, we have an outstanding team in place. In conjunction with our partner HT Media, we are preparing to file the blended learning 11-month postgraduate certificate program in business for working learners. That starts this fall. In Mexico and the U.K., we recently rolled out a new competency-based student-centered learning model; it's going very well. With 3 cohorts of students currently going through their programs, we now believe that we have additional opportunities to expand in both countries.

We're particularly pleased with our growth in Mexico where we've pioneered certain aspects of education for working adult students in a market we believe carries enormous potential going forward.

Regarding our services business, which incorporates Apollo Education Services and IPD, we continue to make progress and we recently partnered with 2 new client institutions. Our innovation group, which we're calling Apollo Lightspeed, is working to create products and services within higher education that leverage our core strengths and capabilities, which you'll be hearing about more this fall. Our Innovator's Accelerator, our high-end course, which teaches business executives how to cultivate innovation, was developed by this group and they're actively working on new and innovative ideas for the future.

In addition to our efforts to differentiate University of Phoenix and diversify Apollo Group, we are continuing to optimize our operations and right-size our business to provide us the runway necessary to successfully reposition our programs in the market. This includes restructuring our cost model. We've just increased our targeted savings through 2014 to a minimum of $400 million. Brian's going to share additional detail on this in just a moment.

Finally, regarding accreditation reaffirmation, the Higher Learning Commission Board of Trustees is meeting later this week and are expected to take final action on the accreditation reaffirmations for both University of Phoenix and West. We expect they'll advise each university of any decision sometime in July.

Let me end with this: We're responding to the extraordinary change in postsecondary education, focused on delivering what students and employers demand and providing the real world skills needed in an increasingly competitive world. There's about 80 million people in the U.S. labor force who today could benefit from some type of higher education, as well as over 250 million people internationally who will need access to education between now and 2025. There has never been more need or demand for education at the postsecondary level, as it has the power to influence a healthier, more productive economy. We're committed to positioning ourselves so that we can play a significant role in educating the global workforce.

And now I'll turn it over to Brian.

Brian L. Swartz

Thank you, Greg, and good afternoon, everyone. I'd like to start by reviewing our third quarter financial results and then I'll share with you our updated business outlook.

During the third quarter, we reported revenues of $947 million, down 16% year-over-year. The decrease was primarily the result of a 17% decline in Degreed Enrollments at the University of Phoenix to approximately 288,000 students. For New Degreed Enrollments, the university reported a year-over-year decline of about 25% to approximately 39,000 students. Revenue per student was flat year-over-year, reflecting increases related to price and mix, which were offset by higher discounts and a decrease in average nights of attendance. In the fourth quarter, we expect revenue per student to be roughly 1% to 2% negative year-over-year.

During the third quarter, University of Phoenix continued its use of more targeted grants, which impacted our revenue per student. Third quarter discounts were slightly higher than anticipated as a result of the University of Phoenix fully rolling out its corporate partner grant program that was initially piloted in the second quarter. As a percentage of revenue, discounts in the third quarter were 8.5%, and our current expectation is that the full year will be around 8%.

For the third quarter, income from continuing operations was $80 million or $0.71 per share. The third quarter results include restructuring and other charges of $63 million that principally consisted of exiting certain facilities. Excluding these restructuring charges, our operating margin was 20.6%, income from continuing operations was approximately $119 million and EPS was $1.05 per share.

We continued to execute on our previously announced University of Phoenix campus realignment and related restructuring activities. We expect to incur additional charges of approximately $75 million as the University closes the respective facilities, which will continue into fiscal year 2014. In addition, we are actively evaluating a number of additional initiatives to adapt our business to the rapidly evolving changes in higher education.

Turning to the third quarter operating expenses. As anticipated, excluding special items, we had declines in all operating expense line items on a year-over-year basis. These decreases were driven by our -- by cost savings from our ongoing restructuring activities, as well as reduced costs associated with lower enrollment levels.

With respect to the cost optimization efforts, we are pleased to report we are increasing our cost savings target by an additional $50 million. We now expect to favorably impact annual operating expenses by at least $400 million, beginning in fiscal year 2014, when compared to the 2012 cost base. We expect to realize about 3/4 or $300 million of these cost savings in fiscal year 2013.

As a result of these efforts, all of our operating expense line items will decrease in fiscal year '13 when compared to 2012 with the exception of marketing, which is expected to be flat. As a reminder, about 13% of our cost as a percentage of revenue are directly variable in nature and are included in our instructional and student advisory expenses.

Share-based compensation was $12 million in the third quarter and for the full year 2013, we expect it to be about $55 million. Bad debt expense as a percentage of revenue was 1.6% in the third quarter versus 3.2% in the prior year quarter. The decline was primarily due to ongoing process improvements and lower enrollments. For 2013, we expect our full year bad debt expense as a percentage of revenue to be consistent with the year-to-date rate of about 2.4%.

Our effective tax rate was 38.2% for the quarter and 41.5% for the first 9 months of the year. We anticipate our tax rate for the full year of 2013 to be approximately 41%.

Turning briefly to the balance sheet and cash flows, at the end of the year -- or at the end of the quarter, rather, we had unrestricted cash and investments of approximately $890 million and outstanding debt of $88 million. Our free cash flow, defined as cash provided by operating activities less capital expenditures, in the third quarter was $44 million as compared to $8 million in the prior year. The third quarter of 2012 free cash flow was negatively impacted by the $145 million securities class action lawsuit settlement. Excluding this item, our free cash flow decreased due to the decline in operating income.

Consistent with our strategy, we continue to evaluate all investment opportunities and allocate capital to differentiate the University of Phoenix, diversify and expand our operations both domestically and internationally and as appropriate, return capital to shareholders.

Now I'd like to spend a few minutes on our business outlook. Based on our current view, our updated financial outlook range for fiscal year 2013 is as follows: net revenue of $3.65 billion to $3.7 billion; and operating income, excluding special charges, of $525 million to $550 million. Regarding enrollments, while we are only in the first 3 weeks of June and it is early in what is seasonally a back-end loaded quarter with August being a big month, University of Phoenix New Degreed Enrollment is trending consistent with the rate of decline we experienced in the third quarter. To reiterate Greg's comments, we are focused on attracting students more likely to succeed in our programs, helping them retain through graduation and ensuring they are prepared to compete in today's global workforce.

With that, let me turn the call over to the operator to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Suzi Stein with Morgan Stanley.

Suzanne E. Stein - Morgan Stanley, Research Division

For the last few quarters, you've been increasing the estimated savings from the cost-cutting efforts. And I'm just wondering how much more is there to go? And is the incremental savings due to rightsizing because you're just coming to terms with the fact that you'll have a much smaller base? Or is there truly still just efficiency and sort of fat in the operations that can be cut? And I guess also on expenses, why is marketing expected to be flat? I guess, I'm just surprised in an environment where you're trying to drive enrollments higher where you wouldn't be increasing the marketing spend.

Gregory W. Cappelli

Suzi, let me -- this is Greg. Let me take the first part of that. I think the answer to your question is we're [ph] , obviously, a smaller organization that is focused on enrolling quality students that are going to retain for the right reasons. Yes, that requires a different expense structure, and that ranges throughout the organization in terms of efficiencies. So we are working very, very hard to put an operational excellence throughout the organization, both domestically and internationally. And we are -- we did update the target. We do think that's achievable. Could there be more? I mean, we're working and we'll keep you updated certainly every quarter. But this is to create a nimble, faster moving, more competitive organization in a more competitive marketplace going forward. We're making really good strides and having that good success to this point. Brian, why don't you take the rest of the question?

Brian L. Swartz

Yes, I think the second part of the question, Suzi, was related to the marketing and the spend there. I mean, we -- this year, in light of the trends in the business, marketing is the one line item that we expect to remain basically flat with fiscal '12. Now we shifted, as you know, and all our investors know, much of the spend in that area. It's really moved out of, what I'll call, direct lead gen, principally the affiliates in the Internet, and we've gone through a lot of off-line branding with our Let's Get To Work campaign that I know many people have seen the various commercials for. So we have not cut back dramatically in aggregate. I mean, our spend is really a mix issue and it's how can we be most effective in targeting and getting the students on the phone that we want to enroll that can be successful with us, and how effective we can be at doing that. So that's what we're focused on doing and that's what we've attempted to do this year.

Gregory W. Cappelli

Yes, I mean, we'll look at every one of those areas critically going forward and make sure that we're getting a return. And if we're not, we'll adjust. In a sense, if I simplify the answer kind of that I -- the way I think about it, to your question is, we're in the process of building out the runway a little longer, right? We're -- so we're becoming a more efficient organization, which is helping our free cash flow. We are very focused and are working on a number of pilots and have identified some things that are showing promise that potentially can give us some serious improvement in retention going forward, which is important for so many different reasons. Those are the things that we can do so that we can have financial performance, right, lengthening the runway until we can get more air under the wings and the nose up in the air and return to growth. It's sort of a simplified way to think about it.

Suzanne E. Stein - Morgan Stanley, Research Division

Will you guys be giving guidance for '14 next quarter?

Brian L. Swartz

Yes, we -- like most companies in our fourth quarter, we go through a budget process for the following year. So I don't want to commit anything, but that would be normal course where we talk about generally the financial -- well, our expected financial performance for fiscal '14.

Gregory W. Cappelli

Certainly do the best to help you understand where -- what we see.

Operator

Your next question comes from the line of Corey Greendale with First Analysis.

Corey Greendale - First Analysis Securities Corporation, Research Division

So I understand a lot of disruptive things are going on in the industry. Where do you rank student debt sensitivity and price sensitivity there? And should we be looking at what's going on, about what you're doing at [indiscernible] Western as maybe a test case to do something more meaningful at the University of Phoenix as well on the pricing front?

Gregory W. Cappelli

Look, I think it's -- I think that we have put everything on the table, that this group has come together, right, both domestically and internationally, and said, we're putting everything on the table to better understand -- to best understand what's important to students and employers, right? And when you look at that entire package, yes, affordability is part of it. We have an offering clearly aimed right at that, which we're going to be gathering data and intelligence on. It's a high-quality offering. I'm excited about it, but we know that it's going to take some time to grow. But, yes, we're going to be -- we're looking at every aspect of the experience of higher education. And the fact, as I said last quarter, that we really only had one vehicle in the marketplace for many years, right, which is kind of like a SUV for all seasons, a full degree-granting program that is used to sell the needs of people's skills, despite what area they're going into. And we're broadening that portfolio of opportunities for students so they can recognize value much earlier in their time or their experience with us and take that to the employers so they can improve their own financial position and outcome, so they can choose to go on and do more in terms of an educational experience with us or others.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. And you mentioned multiple times being the focus on retention and I think everyone kind of agrees with your focus there. What's actually happened with retention, the way we can calculate it? It looks like it's down a little bit but I don't know how much that keeps the graduation of larger classes.

Gregory W. Cappelli

Yes, okay.

Beth Coronelli

Yes, Corey. I mean, the way you calculate I think is the persistence Calc, which I assume is consistent with the way many people do it. It is down. The best way to look at that, obviously, is year-over-year. By quarter, it is down slightly in Q3 relative to Q3 of the prior year. Part of that was impacted by graduations, but also just the trends in the business. I mean, it remained a top priority for us, and I know Greg talked about several of the things we're focused on. I would expect, as we look forward into Q4, that it improves year-over-year. Part of that is some seasonal timing of graduations that impact it. So I would expect the Q4 persistence to improve modestly year-over-year.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. So just to be clear, it was -- actual persistence was down a little bit year-over-year in Q3?

Brian L. Swartz

In Q3, it's down a little bit year-over-year.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. And then in scanning the Q in the couple of minutes we had before the call started. There is a comment -- it's a regulatory question. There was a comment about your expectation on when new regulations, I think, they begin from [indiscernible] go into effect and the Q suggests you think they will be published by this fall and effective, July '14? We've been hearing likely a year after that just because of the timing of the negotiations. Do you -- what are you hearing on that front?

Gregory W. Cappelli

Corey, I'm not sure I understand. Are you talking about the reauthorization? Are you talking about HLC? Could you just clarify? I'm sorry.

Corey Greendale - First Analysis Securities Corporation, Research Division

Yes, no problem. In the Q -- I'm looking -- the version on your website, Page 28 on the PDF version, it talks about the negotiated rule-making -- negotiate a rule-making hearing that the department is planning on doing, basically pertaining to gainful employment. And in the Q it says that the rule-making is expected to produce new regulations that are published by this fall and maybe effective as soon as July '14. And we've been hearing that it was most likely a year later than that since the negotiations aren't going to be over until toward the end of October...

Gregory W. Cappelli

Well, yes, there will be neg reg this fall. It could be ready. That could mean that this process moves probably by the July. But honestly, I mean, we don't have a crystal ball there. So we put our best guess down -- thoughts down and obviously, there's no guarantees there.

Brian L. Swartz

Corey, part of that is the timing of when they finish the rule-making, too, and actually publish it in the federal actually to make them effective. So it's just a matter of how quickly it happens.

Operator

Your next question comes from the line of Jerry Herman with Stifel.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Let me just follow up on Corey's question, if I can, about pricing at West. And I realize it's early and I realize it's small, but clearly that initiative is very visible on the website. I'm wondering if you guys are seeing any increase in the interest or inquiry as a result of that price change.

Gregory W. Cappelli

It's just too early for us. I mean, we could draw some early conclusions, I would prefer not to until we have more substantial data, so we don't lead you one way or another. I mean, we are -- this has not been an overnight type of decision. This process had been in place for a long time. The team has been building this offering for a long time. They're very excited to have it in the market. They literally just started advertising. And I mean, it's just been less than a month. But you know why we have it in place. It's positioned differently than the University of Phoenix. It will help us understand some things about the marketplace again and the value proposition to a student overall, so that we can be positioned sort of in 2 different parts of the marketplace.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then let me ask about HLC, if I can. Obviously, the meeting next week it looks like you guys are going to learn of that "a few weeks" out. I'm just wondering about that disclosure, considering you're -- I'm assuming already existing dialogue with HLC. When did you guys know that sooner? And what sort of disclosure strategy would you have on that, given its relevance? And then finally, could you just clarify the differential between student disclosure requirements on probation versus notice?

Gregory W. Cappelli

Sure. There's less on notice, although there are acquirements for disclosure, and we will abide by exactly what we need to do there. Two, they're going to notify us at some point. We think it's going to be in July and we have a pattern on disclosure of -- if it is material, of making sure that it was disclosed appropriately. So that's our best estimate at this point.

Brian L. Swartz

And Jerry, just to clarify, they're meeting later this week, not next week.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Yes, that's what I meant to say. I realized the date. But won't they know sooner? I mean, won't they know after the meeting?

Gregory W. Cappelli

We really don't know, Jerry. It's -- this is what we know at this point. And what we disclosed before, which was the IACFC had made their recommendation, that will be taken into -- into context for the entire board of HLC. There was a recommendation of 10 years of accreditation on a reaffirmation and the rest, we put in the 8-K as well. But obviously, we'll -- they'll inform us when they're ready and we'll deal with it from there.

Operator

Your next question comes from the line of Sara Gubins with Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch, Research Division

When you're talking about corporate relationships and programs that you're looking to develop, is that mostly corporate spending itself or would it be more still in the tuition reimbursement category?

Gregory W. Cappelli

Sara, are you -- I'm a little confused. So with workforce solutions, obviously, they've been engaging in growing their pipeline in a number of corporations which has taken investment, right? And now they're engaging in trying to drive our offerings into the corporations where they've been building pipelines. And there's investment on that front. Brian talked about mix. I think it's really important to understand, there are certainly ways to near-term enhance student starts, if you will, in different channels. We've been pretty clear that we like what we're seeing from a success factor from our corporate relationships. And so even though it's a slower evolution in terms of resulting in growth and the size that we hope to see that channel at, that's where we've been focused more, in building the infrastructure with our workforce solutions group into those corporations, which we hope will be a meaningful part. It continues to increase as a percentage of the overall enrollment and we're continuing to invest there.

Sara Gubins - BofA Merrill Lynch, Research Division

I guess I'm also wondering, as you look out about -- at how things will develop over time, would you expect revenue coming directly from corporations, meaning more corporate training to become a more important mix of what you're doing? Or is it really trying to drive students who would be getting some level of corporate tuition reimbursement into existing programs?

Gregory W. Cappelli

I see, Sara. And I think it's certainly the latter. But also, remember what we said last quarter, which is again about the 1 sort of SUV for all seasons, we're listening to employers and to students. And it's clear that the answer for everybody is not getting into a full degree-granting to solve the skills gap. There is an enormous -- there've been articles in many journals and papers across the country saying there's 50 million to 80 million people in this country that would benefit from some form of higher education to help close the "skills gap". Well, part of the answer to your question is, to do that, you need a slightly different type of offering to get into that area. And we are also working in building in that area as well. Now in terms of the percentages and how that rolls out, degree versus non-degree, we're not ready to go there yet. But, if you will, the funnel at the top will be broader for us going into 2014 than it has in the past. And we'll help try to distinguish and categorize that as those channels develop for you.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then just 2 other quick questions. If you could give us sort of an update on where you are on your learning management system rollout for University of Phoenix? And then also, on share repurchase, you haven't really done much this year, and so I'm wondering how you're thinking about that.

Gregory W. Cappelli

Okay. Go ahead, Brian.

Brian L. Swartz

Yes, Sara, on the learning management system, by the end of this fiscal year, so the next few months, we expect it to be rolled out to most of the graduate level programs and colleges. There are -- with respect to the undergraduate level, there'll be a staggered rollout through fiscal '14, mostly in the first half of '14, so that's the timing of that as it will roll out. That's slightly delayed just due to -- as we've been looking at the curricula, we've been refreshing that. As a result, we wanted to make sure we put refreshed curriculum on the new platform, not older curriculum. So that's the LMS. With respect to capital and capital allocation...

Gregory W. Cappelli

That's actually the classroom. The [indiscernible] classroom as well.

Brian L. Swartz

Yes, right. That's the -- it's the LMS and the new classroom. With respect to capital, our approach around capital allocation hasn't changed. We are still looking for opportunities. We have a lot of opportunities to expand the enterprise value of a company. We do have an authorization for $250 million to buy back stock, our ability to exercise that is impacted by a variety of factors. Unfortunately, we weren't able to do that most during this -- the most recent quarter. And there's a variety of factors that impact that decision-making from regulatory issues, financial planning outlooks in terms of short-term and long-term forecast, obviously, acquisition opportunities that we might be engaging in. So during this most recent quarter, we were not able to activate any part of that buyback for various reasons, so -- but it's still an important part of our capital allocation approach and will be in the future.

Operator

Your next question comes from the line of Jeff Meuler with Baird.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

I wanted to ask about attention x graduation from today, since it is such a big focus for the company for the university. And I guess where I'm coming from is that it seems to me like you should've seen improvement if I think about the channel evolution and having more year 1 students and all of the initiatives that you guys have been putting into place over it's been several years now. So wondering do you have any data or color on students that don't retain, if there has been a change in the reason for them not retaining, whether it be going to a competitor, it'd be financial difficulty, whatever it may be, any sort of color that you can provide there?

Gregory W. Cappelli

Well, there's a whole variety. It's a good question, Jeff. A whole variety of reasons if that happens. We're seeing -- and we've been trying different things. Some have been good short-term impacts, along with a variety of other things, everything from the economy to a host of other issues that can impact it for us. We've made some changes to our front end in terms of the orientation process and so on and so forth. But we're continuing to learn and gather data, demographics, areas where people are enrolled, mix can affect it. But I feel good about the fact that in really good concrete pilots, we're getting a better idea of what can move the needle. It hasn't been rolled out meaningfully yet. But we're continuing to build our database to understand what can move the needle, and we're putting a very high priority on it for fiscal year '14. So there's a lot of focus on it, it's in our goals for the coming fiscal year and you're going to be hearing more about it.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

So in terms of rolling out those pilots, are they getting rolled out in the next quarter or 2 and we should see an impact on the numbers in fiscal '14? Or are they -- should we more think about them as getting rolled out at some time in fiscal '14 and maybe they take a little bit longer to show the impact?

Brian L. Swartz

Yes, Jeff, it's Brian. There are a couple of different ways to think about that. Much of my retention efforts and some of the ones Greg mentioned in the script, are associated with early student retention, so it's around new students, our ability in the -- call it, the first handful of courses that impact students' success rates in those courses. Because once you get through a handful of courses, which has always been the case, the retention curve flattens quite a bit. So the focus for us is really on those first handful of courses to influence that as best we can. In terms of what you end up seeing in your implied persistence calculation, keep in mind that's the whole student body, it's not just new students. So depending about how quickly we cycle through the students will impact exactly what happens with the persistence quarter-to-quarter. But we will -- retention is a huge focus for us. We will continue to talk about it and dialogue with you and everyone else about it, let you know how it's going, both for early students, as well as the broader student body together.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then, Greg, just on the University of Phoenix value proposition, and I'm asking specifically about value proposition, so not just price. And I know this isn't an area where you guys ever standstill and you're working on a lot of different things to continue to improve it. But from your perspective, how close are you to having the value proposition in the market that you need to grow with the type of high quality student that you want as your students and your being weighed down by macro or whatever other factors there are out there versus how much of it is that there's still a lot of work to be done on the value proposition to get to where you need to be to grow?

Gregory W. Cappelli

Yes, well -- I mean, excellent question. Many of us are being weighed down by macro factors. I think the industry is in its own recession right now for various reasons. And there will come a time when more students can't find jobs and that will drive behavior a bit differently, as we've seen in the past and coming out of other education-type recessions. Although the industry is clearly evolving as well; it's a combination of those things. It's about the product, the experience, the career tool, the adaptive learning, the engagement, aspects of gaming. There's a lot of things that go into this. But I'll answer your question this way: for close to 6 months, we have had a team, a significant and specialized team at Apollo Group, working on reengineering and looking at researching and reengineering from a number of different aspects, our experience -- our education, product and experience, so that we can deliver in fiscal '14, and I'm not giving you a specific date. When it's ready, it's ready. But in fiscal year '14, a much better -- let me put it this way, a more competitive product into this competitive market space. This is not something that we're starting now. There's been investment, time, human capital, financial capital that's gone into this.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

And will that likely include a further adjustment on price?

Gregory W. Cappelli

It may or may not. There's a lot of work going into that. We'll learn some things from West, as I said before. But we are doing more diligence and gathering more information about what will drive that experience and competitiveness within the market. And in some areas, right, here's something that doesn't get talked a lot about. But you think about the different degrees and colleges within universities, and those value propositions can be different to individuals, corporations. The value of a nursing degree might be different than criminal justice or information technology. It's understanding in every college, your market, your competitive set, what you need to be effective, to be attractive, to grow, to retain, right, about each one of those individual areas because, really, in a sense they're very different businesses even though they're under a single banner, the University of Phoenix. That's something that is different for us. And we're going to continue to invest and get better in going forward, in terms of understanding those individual intricacies of the markets that we live in every day at the University of Phoenix, and frankly, all other entities.

Operator

Your next question comes from the line of Peter Appert with Piper Jaffrey.

John D. Crowther - Piper Jaffray Companies, Research Division

Yes, you've got John Crowther on for Peter. Just following up on that last line of questioning, just wondering, as you try and strive here to become a sort of leaner, quicker, faster to market, more differentiated product offering, do you feel like you're in control of the size of the corporation that you need to get to, to be there? Or is that like, as you said just previously, that you're still on sort of a learning phase and that the market, as you progress here, is really going to determine what sort of size of corporation you can be to get to that sort of level of efficiency that you want?

Gregory W. Cappelli

Yes, thank you for the question. I would say that we have done a much better job of looking at the past and understanding who we were, what the size of the sandbox was, where we played in it, how we got the market share we had, what the market conditions were to do that, what that equates to today and then looking out 3 to 5 years and saying, okay, what's the playground look like, where's our sandbox, where do we want to be positioned in this more complex but equally interesting marketplace with over $500 billion that's spent annually in postsecondary education? What does it look like for us? How can we position ourselves to deliver value? Remember, we're also right in the middle of repositioning a brand that's been around for 40 years, that stands for convenience, online access. And we're going for a different type of position within the marketplace, with education, careers and employers and workforce solutions channel. You'll see more and more out of that, but I think it's a great question because it leads you back to really trying to make sure you understand where you came from, what's changed since then, looking out to the future, understanding where the markets going, how you position yourself so you can understand what you need to do to get the market share gains that you're looking for in a really important sector of the economy that's going to continue, both domestically and globally, to grow going forward. So that's the way we're viewing it. And I think it's in our control from that perspective. Now are there macro lens in every country that you don't have as much control over, yes. But I think we look in terms of not just short-term cycles, there's a bigger evolution going on in the U.S. right now than we've seen in a while, but that's different than in other countries around the world. But what we're in control of is choosing our destiny of where we want to be and what role we want to play. We know we play an important role. We have 800,000 graduates, many are working and are taxpayers in the economy today that would have had no chance otherwise. We know we've played an important role. Now it's positioning ourselves, even though it's difficult right now, for the future. We will build the runway longer, we will get efficiencies because it's the right thing to do and will make us healthier. We'll work on retention, which will allow us some time to get the nose back up in the air with a stronger foundation and a better product going forward.

John D. Crowther - Piper Jaffray Companies, Research Division

Great. And you brought it up there, you're in the middle of a rebranding effort. Obviously a lot of what we see is more of the high-level numbers. Just wondering if -- what you're sort of looking at in terms of judging the success of that on a near-term basis that maybe we're not seeing, obviously, as you pointed out, the disappointing near-term enrollment trends.

Gregory W. Cappelli

I mean, it's interesting because to answer that question, what you have to do is look under the cover some. One strategy would be to just grow your enrollments, just grow them and take -- open up the intakes [ph] and bring anybody in at all costs, right? So that you would see enrollment growth. Actually, we think it's better to understand and be experts in the channels we want to operate in, which wasn't the case previously, right? And to execute in the areas that we think are the most important to drive students into our organization. So we do want to grow, I've said that upfront. And we do for the reasons because we think the country needs it and we think we can have a big impact going forward in terms of productivity in the U.S. and other countries going forward. But we would rather be a smaller organization that's healthier, more efficient, and frankly, hypothetically, you can have the same profit at half the size, right, for your stakeholders if you did that and you did it the right way and you had the right students, at the right time. So believe me, everybody here in this organization wants to grow because we want to help the nation and we think we can and other nations around the world, but we're going to do it the right way. And the thing that I have really appreciated about the Apollo Group and the organization, the people involved with it, is this hasn't been easy on them. But I'll tell you, the employees here have all stood up and they understand the mission. They want to do the right thing, they want to do it for the right reasons and they're willing to take some pain in the near term, so we can have a better long-term outcome.

Operator

Your next question comes the line of Jeff Silber with BMO Capital.

Jeffrey M. Silber - BMO Capital Markets U.S.

I know the call is going a bit long, but I just wanted to go back to West. Greg, you had mentioned in your earlier remarks that it's a different segment of the market that you're targeting. If you can explain, how it's a different segment. I know it's a different price point, but are you targeting a different type of student as well?

Gregory W. Cappelli

Yes, sure, Jeff. There's a whole series of research -- range of research that West did, along with the Apollo Group. So look at different channels and segments where individuals come from, how they're positioned, what their demographics are, what their household incomes are, whether they're employed or not employed. West does require, after the first couple of courses, which are relatively inexpensive to test-drive. But there are requirements then to actually move forward and be enrolled in the school. So this isn't just about lowering the price. This is a different segment. They have names and categories for segment that -- the segment that they are going after. There's a lot of work that's gone into it and it ranges from demographics to a number of other areas that are important, and I won't go into every category. That's different than the investments that have been put into the experience of the University of Phoenix, which is high service, high touch, a different type of experience, technology, adaptive learning, a whole number of things versus -- you're going to see more of a competency-based type of system, along with a different kind of service model for the students, but one we think can still be very effective, it requires less support. But we think that the type of student it will attract will be a bit different. And we'll see, it's early days. But again, we're excited to have it be in the market.

Jeffrey M. Silber - BMO Capital Markets U.S.

And have you seen them -- again, I know it's early, any type of cannibalization from University of Phoenix?

Gregory W. Cappelli

It's too early. And I would say no, if anything at this point.

Operator

Your next question is from the line of Jeff Volshteyn with JPMorgan.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Greg, a quick question. You talked about your efforts to adapt delivery systems, to create a better experience, make them easier to use. Could you help us understand kind of what does that mean? Could you give us an example? And how are able to track the success of that effort?

Gregory W. Cappelli

I'm sorry, I didn't understand the question. Could you just restate that again?

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

You talked about the delivery models and adapt-and-delivery models to create better experience, make systems easier to use for new students and existing students. What does that mean? And give us an example, if you could.

Gregory W. Cappelli

An example would be Carnegie Learning, which was an investment for us. Then there was a complete transformation of that product to get it ready for the college level. It was not easy, we had fantastic people working on it. It took 12 to 18 months. But I am now seeing data. And the early data was sort of mediocre, as we were going through it. I'm now seeing the potential for some really exciting retention data, that's coming through Carnegie. That's 15 years of science that we are enhancing and positioning further, to drive gains at the University of Phoenix. And frankly, it's universal. We can use it in any of our institutions. Now no promises here. We want to see more data. But I'll tell you, it's rolled out in the math classes. It's also applicable to non-math courses. So it takes an effort to drive it into the organization, but that's an area we are expecting to drive better results in terms of engagement and retention, to give you an example.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Okay. On the new enrollment front, is there still some impacts from campus closures that is not consistent with your internal expectations?

Gregory W. Cappelli

There's absolutely an impact from -- if you think about it every time a campus is closed, it's in the press, it's in the news locally. There's absolutely an impact there. What's the exact quantification of it, we're not getting into that.

Brian L. Swartz

Yes, Jeff, it's Brian. The only thing I'd add to that is, in general, the plan is, I think, going very well. The teams are really operationalizing it quickly. I did mention in my remarks that of the $200 million or so in restructuring charges we had incurred, I think, it's about -- I don't know the exact number, I think about $130 million today, give or take. Some of those will get pushed off into fiscal '14. So there are just some delays in terms of working through with some of the state regulators, in terms of the timing of when we'll actually exit those. But on balance, the plan is going very well and it's still impacting, as best as we can tell, roughly about 5% of our student body I think [indiscernible] . But to Greg's point, there are certainly public relation impacts every time we close a campus.

Operator

Your next question comes from the line of Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

If I could sneak maybe 3 in. Just on West again, I think it's about 1% of enrollment. Could it be 10% or 20% of the marketing budget in fiscal '14? And then second, any way to size that service business, you mentioned you signed a couple of new clients, just obviously, you're somewhat hamstrung by regulations. But just wondering if there's any way to size the services business in the current growth rate. And then finally, there are some media reports about the FTC down at the APSCU conference, talking to vendors, lead-generation vendors. I'm sure it's not impacting your vendor list, but I'm wondering if it's impacting the lead-generation industry overall? And is that causing any issues with lead flow or conversion for the industry that you've noticed. Is that in the incremental, negative?

Gregory W. Cappelli

Sure, Paul. I've not heard that, so I apologize, I can't answer that FTC question for you with any conviction because that hasn't come to my attention. And certainly whatever was talked about at APSCU, we will look into that and try to follow up with you offline. Brian, I don't know if you want to add anything on it?

Brian L. Swartz

Yes, Paul, the only thing I would add is that -- I mean, so far, we're working through the requirements of that and we'll obviously be compliant with whatever regulations there are. So far now, we haven't seen a major impact yet. I think the rules will go into effect later this fall, so we're watching them closely. But so far, there's no impact.

Gregory W. Cappelli

And then just on the services business, we've got a great leader in place there, a very capable and very experienced person who is actually reinvigorating growth there. And you're right, there are -- there continue to be challenges from a regulatory perspective that we hope we'll get some resolution to in the next several months. But in the meantime, through a structure that we know is approved to use within the space, we have been successful working with new colleges and universities. And that has the potential to be significant for us going forward. We're being a little bit careful in terms of the deals that we're signing and who we're signing them with. And we'll talk more about it as it becomes more significant going forward for us. Obviously, it's a small part of our overall business right now, but an exciting part of the industry because it helps you leverage many of the investments that you've made in your proprietary schools as well, which we have, globally. And then as it relates to West, go ahead, Brian, I know you...

Brian L. Swartz

Yes, Paul. I mean, we are going to invest in West. We're excited, as Greg mentioned, about the offering. I mean, 20% of our marketing budget would be an enormous amount of money. I mean, that's -- but we don't have plans do that today for sure or anything near that size and we'll talk more about it as the fiscal '14 year starts. But we are going to invest in that offering. And we're excited about what the team has developed there. It's innovative, it's exciting, so we need to see how it unfolds, but not down to the level of like 20% of our marketing spend.

Operator

Your next question comes from the line of Jeff Lee with Wells Fargo Securities.

Jeffrey Scott Lee - Wells Fargo Securities, LLC, Research Division

With the significant price decreases at West, do you expect there that the school can running up against the 90-10 limit at some point, and do you think you'll need to make any adjustments to prevent that?

Brian L. Swartz

Yes, so West 90-10 is in kind of the mid to upper 60s right now. We're all watching that very, very closely. We're very cognizant of it. What we're trying to do here is actually make school, obviously, more affordable for students. So we're watching the 90-10, we don't expect it to significantly impact that, but we'll continue to work with students. 90-10 is really a measure of quality. We ought to remember that. That's why it was put in place originally many, many years ago. And what really impacts 90-10 is not just a pure price decrease. You cut price, it impacts 90-10. It's not a dollar-for-dollar impact. It's really about mix of students and which students you're providing a "tuition reduction" for, whether that's in the form of cutting price or scholarships or grants or whatever it might be. A student today who's using 100% Title IV, if we cut their price point, either the price off the top of scholarships, if they're already using 100% Title IV, it doesn't impact our 90-10 because they're already 100% for themselves on the 90-10 side. Having said that, students that are paying some cash or some portion of that from other funds other than Title IV, the question will be is if you provide an effective price reduction, do they continue to utilize other sources. And so it starts to get into student level behavior and it really comes down to mix. So again, it's something we're watching very, very carefully and we have a great financial calculator that's been rolled out to our students. And we continue to talk to them about transparency and encourage them to take on the least amount of debt that they need for their education.

Operator

Your next question comes from the line of Tim Connor with William Blair.

Timothy Connor - William Blair

You touched on some changes to student on-boarding. Can you give some specifics on that? And then more broadly, what are your thoughts on the orientation program now that it's been almost 2 years since you rolled that out? How successful has it been? And what are some of the bigger takeaways from that?

Gregory W. Cappelli

On the orientation program, we've certainly gone through an evolution there. It's been a very important initiative for us, we've put a lot into it, and we've learned a lot. So what I'll tell you is that, that's going to continue to be a significant opportunity for us on the front end to ensure that there is a significant level of transparency on the front end for the University of Phoenix. People who are looking in the option of college or higher education, can basically -- they're going to take 3 weeks out of their life to make sure that they understand what they're getting into. And frankly, the opportunities for them within the program. The other thing I would say about what's being built into the front-end of our organization, if you think about what was talked about so significantly over the past few years in Washington was transparency. And whatever rules and regulations get passed going forward, I'm very proud of the fact for our organization, for what they've done, particularly at University of Phoenix to where -- I have a daughter that's starting to look at colleges. And it's very difficult to figure out what things cost all-in. University of Phoenix has done a great job of making sure you understand the cost of the programs, the entire degree. And in fact going forward, even has really its own gainful employment type of system where it will help you understand how much of your paycheck's going to come out to pay for a certain program, given a certain career. So there's a lot of -- a lot put into the front end and that continues to evolve, and that's all part of that front end process in terms of orientation and beyond. It is going to evolve, we hope. We think it's going to continue to get better for the students and have more optionality for them so you can look for that going forward in fiscal year '14. But again it will be in place and it will be a part of our front end. The other -- did that answer your question? There was another piece of it, too, I think.

Operator

Your next question comes in the line of Terry Lally with Spotlight Funds.

Terry M. Lally - Spotlight Funds Management

Even with a Slim Fast diet, though, you're still throwing off plenty of free cash flow, cash is built to over $7. It's now 38% of the stock price. I wanted to dig deeper, Brian, into why there wasn't any stock repurchases? You always will have the blackout periods on the financial side. Was it related to the accreditation on the regulatory? And when we get that response in July, will that give you the green light there, or it also sounds like you might be looking at acquisitions? And if you're looking at acquisitions, how does that compare to buying your own stock back at 2x EBITDA and 4.5x free cash flow?

Brian L. Swartz

Yes, Terry, it's Brian. Maybe just add a little more color to clarify. I mean, there are -- so there are the standard blackout windows on financials and quarter end and such. There are also other times where various factors and we don't comment specifically on what individual factor it might have been in any given quarter can impact whether or not we can be in the market buying back our stock. Some of those factors, which are just kind of, generally speaking, were the ones I mentioned, right, regulatory items, financial outlooks, things like acquisitions, those types of things. So we don't comment on them specifically. They're just kind of a general list of items that could impact whether or not we are able to be in the market to buy back our stock, so -- and in this quarter, we were not able to.

Terry M. Lally - Spotlight Funds Management

So my guess, you've had the accreditation overhang that will be resolved near term. So I guess it was that or if you're doing acquisitions, my concern on the acquisition side, while the international acquisitions are 10x EBITDA, you can acquire your own business at 2x EBITDA, 20% free cash flow yield, so I'm very surprised that unless it was the regulatory overhang, that whole stock -- acquiring your own stock versus acquisitions.

Gregory W. Cappelli

Yes. Terry, look, you make a very fair point. We've talked about it in the past on this call. We all went to seek that reauthorization for a reason. I think what Brian's trying to convey is there are times when it's not possible. We always have a good discussion about it at the board level. There's different viewpoints of how you move the enterprise value of an organization, not just near-term level returns. I totally understand your point. I am a shareholder as well. I understand the point about where it's trading and whatnot. And I think you can do both. I think there's a mix of certainly with our cash flow generation that where we feel certainly haven't gone up, spent billions and billions of dollars in capital internationally, we've picked our spots. We've been very patient. There are certain markets around the world that are growing well into the double digits. We think it will be important when we find the right relationship to be there. Will that take all of our capital? No. So I think it's both, I think you make a fair point. I believe in what you're saying as well. And we will always include that in the discussion with the board, on the repurchase front as well.

Terry M. Lally - Spotlight Funds Management

In terms of doing both, it seems like targeting free cash flow, say, 50% return to shareholder, 50% for growth, given the war chest that's building. And the way to get around the blackout provision, if you did a dividend yield, 50% payout, you'd have basically a $26.50 stock up, 45% from here. And you'd pay your investors to wait and create a high floor while the whole transition is going on.

Gregory W. Cappelli

Yes. Look, there's a number of different scenarios that you can comment with on that and I guarantee you there'll be a number of other people that say, why would you do that? You have an opportunity to grow the enterprise value of the company significantly if you get into these markets at the right valuations, right, not chasing something to all-in, which we haven't done. There's just -- there are different viewpoints on it. I certainly understand yours. And I think there's a position for it, whether it's dividends and dividend yields, which is a different kind of commitment and a different kind of discussion around tax, right, in general or share repurchases or other ways. Recaps, leverage recaps to effect short-term shareholder value for sure. So we're having those discussions. There are times where it's just not possible to be in the market. And I think Brian is trying to kind of give you the various reasons from quarter-to-quarter that we can or cannot be in the marketplace from a -- I'm sorry, from a share repurchase perspective. Did that answer your question, Terry?

Terry M. Lally - Spotlight Funds Management

Yes. Definitely you answered that, just I think it's attractive 50% discount intrinsic value and 1/2 of the -- more than 2 billion was repurchased at $0.44 [ph] .

Gregory W. Cappelli

Thank you very much. I appreciate that and we absolutely have that in the conversation along with the other things that I mentioned.

Operator

There's no one else in queue at this time. [Operator Instructions]

Gregory W. Cappelli

Okay. Well, then we'll thank everybody for taking the time to be on this call. We'll look forward to updating you on our next call or in between, if there's information that needs to be updated. And I want to thank you for your time and certainly appreciate your interest in the Apollo Group.

Thank you to all of our employees listening in as well for your hard -- tremendously hard work this quarter end and year. Take care, everybody.

Operator

This concludes today's conference call. You may now disconnect.

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