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Executives

Allyson Pooley - Investor Relations

Charles B. Edelstein - Co-Chief Executive Officer and Director

Brian L. Swartz - Senior Vice President, Chief Financial Officer and Treasurer

Gregory W. Cappelli - Co-Chief Executive Officer

Joseph L. D'Amico - President and Chief Operating Officer

Analysts

Andrew Fones - UBS

Suzi Stein - Morgan Stanley

Kelly Flynn - Credit Suisse

Andrew Steinerman - JPMorgan

Mark Marostica - Piper Jaffray

Jerry Herman - Stifel Nicolaus

Trace Urdan - Signal Hill

Jeffrey Silber - BMO Capital Markets

Amy Yunker - Robert W. Baird

Paul Ginocchio - Deutsche Bank Securities

Gary Bisbee - Barclays Capital

Corey Greendale - First Analysis

Jim Giannakouros - Oppenheimer & Co

Apollo Group, Inc. (APOL) F4Q09 (Qtr End 08/31/09) Earnings Call October 27, 2009 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen. And welcome to Apollo Group Incorporated Fiscal 2009 Fourth Quarter and Year End Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. Please refrain from entering into the queue until those instructions are given. (Operator Instructions).

This conference call is being recorded today, October 27, 2009 and may not be reproduced in whole or in part without permission from the company. There will be a replay of this call available till November 6, 2009, beginning approximately two hours after we conclude today. The replay number is 800-642-1687, 4706-645-9291 internationally. The conference id for the replay is 32796980. Additionally this call will be broadcast over the internet and can be accessed via the company's website at www.apollogrp.edu.

I'll now like to turn the call over to Allyson Pooley, Vice President, Investor Relations of Apollo Group. Ms. Pooley, go ahead, please.

Allyson Pooley

Thank you. And thank you, everyone for joining us today. Speaking on our call will be Charles Edelstein, our Co-Chief Executive Officer; Greg Cappelli, our Co-Chief Executive Officer and Chairman of Apollo Global; and Brian Swartz, our Senior Vice President, Chief Financial Officer and Treasurer. Joe D'Amico, our President and Chief Officer is also here with us and will be available during the Q&A period.

Before we begin, I'd like to remind you that as we discuss our results unless we note otherwise we will be comparing our fourth quarter of fiscal 2009 which ended August 31, 2009 to the fourth quarter of fiscal 2008. I would also like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of Apollo Group 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 in Item 1A and elsewhere in the Company's most recent 10-K report filed with the Securities and Exchange Commission today. The company does not undertake any obligation to update anyone with regard to the forward-looking statements made during the conference call.

Additionally during the call we may refer to non-GAAP financial measures which are intended to supplement but not substitute the most directly comparable GAAP measures. A reconciliation of these GAAP to non-GAAP metrics is included in our press release issued today and available on our website.

On today's call Charles will provide you with some highlights from the quarter and year, Brian will review our financial results in more detail and Greg will provide you with an update in some areas of investment as well as certain operational aspects of the business. And with that I would like to turn the call over to Charles.

Charles B. Edelstein

Thanks Allyson. And good afternoon everyone. Thanks for joining us today to discuss our fourth quarter and year-end results. We are pleased to be sharing another strong quarter which capped an exceptional year from the perspective of improved retention, higher enrollment and increased margins.

For the year, we generated close to $4 billion in revenue, a 27% increase over the prior year and excluding special items which Brian will summarize a bit later. Earnings per share increased approximately 49% year-over-year. In the fourth quarter revenue grew approximately 29% to 1.1 billion and net income, excluding special items grew 37% to 166 million or $1.06 per share. Additionally during the fourth quarter Apollo Global closed its largest acquisitions to date, acquiring London-based BPP. BPP's operation negatively impact backed at fourth quarter EPS by $0.3. Excluding special items as well as BPP, earnings per share would have been approximately $1.09, a 45% year-over-year increase.

University of Phoenix, our flagship institution enrolled 102,000 new students during the fourth quarter with total degree enrollment of 443,000 students. During the fourth quarter we did have one additional new enrollment day for our associates programs compared to the fourth quarter a year ago. We haven't experience this calendar phenomenon for over three years and it will impact our data presentation in almost every quarter for the next couple of years. Without this extra week, we estimate new enrollment growth would have been in a high teens versus the reported 23%.

In addition, we saw retention improved at most degree levels. Over the last several months we have embarked on a company-wide initiative to enhance our strategic plan and position ourselves for responsible growth.

The over arching objective of our strategy is to continue to provide access to high quality education through innovation to a broad spectrum of working learners, while balancing this against our responsibility to ensure that only students who have a reasonable chance to succeed enroll in our Universities. Greg is going to elaborate a little more on our specific efforts in this area.

We remain committed to our belief that delivering a superior student experience, enabled by our talented and engaged faculty and our counselors is essential for our shareholders to achieve attractive returns on their capital over time. To that end we will continue to invest in our people, our systems and our organization with a long term perspective as they are the foundation of our future success.

We believe our efforts will enable us to meet and exceed our students' expectation and further differentiate us from our competition.

With that, let me turn the call to Brian to discuss the financial results in more detail.

Brian L. Swartz

Thanks, Charles and good afternoon everyone. Our fourth quarter's results were driven by revenue increasing over 29% compared to the same period a year ago and excluding the one month of revenue contribution from our recent acquisitions of BPP of $30 million revenue growth would advance 28%. The components of these increases were primarily University of Phoenix's 22% enrollment growth combined with increased tuition rates.

Net-income for the fourth quarter was $92 million or $0.59 per share. That compared to $230 million or a 100 -- $1.43 per share in the fourth quarter of a year ago. Excluding special items, in both years, net-income increased 37% to 166 million resulting in EPS of $1.06 per share. Including in this EPS amount is a loss from BPP's operations of $0.03 per share. So excluding BPP our EPS would have been a $1.09.

The special items net of tax in the fourth quarter of 2009 totaled $74 million. That compared to gains net of tax of a $109 million in the fourth quarter of 2008. The four special items in the fourth quarter of 2009 were one, $80.5 million for estimated settlement including all legal expenses in the Qui Tam Lawsuit. Two, $9.4 million related to our rationalization of software. Three, 5.5 million for the cost of a currency hedge associated our BPP acquisition. And four, the write off to our tax provision of $4.7 million of deferred tax assets as a result of certain disallowed deductions option related to share-based compensation.

In our press release we have provided a detail reconciliation of these special items to our GAAP based financial statements. Additionally we have provided a table that breaks out to impact of BPP on our fourth quarter financial result. We will continue to provide these details regarding BPP's financial results until we anniversary the acquisition.

Operating income increase 42% to $281 million, excluding the special items I mentioned. And our operating margin expanded 230 basis point to 26.1% from 23.8% a year ago. Excluding the impact of BPP's operations the operating margin would have been 90 basis points higher. The increase in operating margin excluding special items was driven by a 150 basis point decrease as the percentage of revenue in instructional costs and services or ICS and a 240 basis point decrease in selling and promotional expenses which was partially offset by a 160 basis point increase in general and administrative expenses or G&A.

I'll spend a minute on the variances in each of these expense categories.

First, ICS. The significant improvement in ICS was primarily driven by economies of scale associated with our 29% increase in revenue as well as continued saving from our lower negotiated contract costs with third party vendors, particularly in the area of financial aid. As a reminder, the renegotiation of this contract went into effect on September 1 2008. As a result we have now anniversaried the savings.

Offsetting some of this improvement in ICS were two primary items. BPP's expenses and higher bad debt expense. BPP's operations in August increased our ICS expense as a percentage of revenue by approximately a 110 basis points. Bad debt expense increased to 120 basis points to 4.2% of revenue compared to 3.0 a year ago. The year-over-year increase was primarily due to three items.

First, lower collection rates and order receivables in part due to a difficult economy. Two, an increase in the aging of our receivables and the related risk of collecting them. And three, the shift in our student body to more associate students. Consisting with past quarters our total allowance for doubtful accounts continued to exceed all receivables greater than 90 days old.

Selling and promotional expense improved for the third quarter in a row which in large part is a result of more effective marketing as well as continued improvement in enrollment count effectiveness.

Finally, G&A. The increase in G&A as a percentage of revenue excluding the software write-off I mentioned earlier is predominantly due to lower compensation expense in the fourth quarter of 2008 due the departure of certain senior executives. As a reminder, that lower compensation added about $0.04 to last years fourth quarter EPS. Included in our operating expense in the fourth quarter was approximately $90 million of share-based compensation which brought the total for the year to $68 million.

Looking ahead we currently believe share-based compensation for fiscal 2010 will be approximately 65-70 million dollars. Our effective tax rate in the fourth quarter was higher than anticipated primarily due to three factors.

One higher state taxes. Two the estimated tax impact of the Qui Tam Lawsuit reserve and three the write-off of the deferred tax assets previously discussed. Regarding taxes, I'd like to note that we recently reached an agreement in principle with the IRS office of Appeals related to our open tax, open audits for tax years 2003-2005.

Subject to negotiation of final documentation, we have settled these open matters for less than $50 million reserve we have approved. The settlement when finalized will result in a reduction in this accrual and a one time decrease to our effective tax rate for a portion of the amount accrued.

Looking ahead we expect our tax rate for fiscal 2010, excluding any discrete or time item adjustments including the settlement of our open tax audit to be approximately 41%. But this could vary depending on a number of factors including the outcome of our State tax initiatives and the results of our international operations.

Now let me turn to the balances sheet and cash flows. We continue to maintain a well capitalized balance sheet and generated approximately $175 million for a 60% increase of adjusted free cash flow during the fourth quarter and $785 million or a 47% increase for the full year of 2009 compared to 2008.

As a reminder we define adjusted free cash flow as cash flow from operations but CapEx and changes in restricted cash. Excluding Apollo Global our day sales outstanding for the fourth quarter increased to 32 day compared to 29 days a year ago. This increase is due those structural and temporary changes to our operations. One of the structural changes is that we now ensure transfer credits are evaluated and student exclude matriculated prior to certifying their loan which supports ours commitment to have better student experience.

Temporary items include the timing of the billing cycle relative to year-end, any more pronounced seasonal increase due to our annual student financial aid system enhancements and upgrades. This temporarily postpones the processing of student financial aid requests, which results in a delay of the corresponding disbursement at our forefronts.

Total debt outstanding increased to $589 million at August 31, 2009 primarily due to us drawing the maximum amount, $500 million under our revolving credit facility. Subsequent to year-end, we repaid approximately $393 million of our revolving credit facility. We drew on our credit facility in part to manage our liquidity as well as to provide a natural hedge -- natural hedge against a portion of our BPP net assets.

I'd like to touch on two other items quickly. The extra new enrollment day during the quarter that Charles mentioned earlier, as well as tuition discounts. During the fourth quarter, due to the way that calendar fell, we had an extra new enrollment day for our associates program as compared to a year ago. For our online operations, we begin classes one day per week, Mondays for associates and Tuesdays for the rest of our online operations.

During the fourth quarter of 2009, there were 14 Mondays versus the typical 13 in any given quarter. This phenomenon continues in various quarters through the third quarter of fiscal 2012 and will then normalize again for several years. While this calendar issue impacts enrollments, it does not have a significant impact on revenue.

Now on to tuition discounts. As has happened historically at the University of Phoenix during the fourth quarter we experienced a seasonal increase in discounts as a percentage of growth gross revenues due to increase in student prepayments prior to our July tuition changes. This year a part of our tuition changes, we also began offerings higher discounts for our Active Duty Military students and we are participating to the fullest extent possible in the department of Veterans Affairs Yellow Ribbon program. As a result, we expect that going forward discounts will likely be higher as a percentage of gross revenues then what we've historically experienced.

Before I turn the call over to Greg, I want to address the SEC informal inquiry which we announced today. We have been notified by the enforcement division of the Security Exchange Commission, that they are commencing informal inquiry into our revenue recognition practices. Unfortunately, we don't have any further insight into the scope duration or outcome of this inquiry at this time. But we are fully co-operating with the SEC. Importantly we believe that our revenue recognition policies are appropriate and in accordance with GAAP.

And with that I'll turn the call over to Greg.

Gregory W. Cappelli

Thanks, Brian. Today I'd like to briefly address some of key factors including an update on key investment areas of the University of Phoenix and Apollo Global, also provide you an update on inside schools as well as 9010 and then finally update you on our internal long term growth targets.

First, key areas of investment with the University of Phoenix. We continue to invest in numerous quality initiatives within the University of Phoenix including faculty and employee training, new program development, brand building and enhancements to our learning management system.

We also continue to invest in our admissions process and are increasing the development and uses sophisticated tools to identify students with the greatest likelihood of success. We currently have a pilot program in place which combines stronger commitment of time and energy from students upfront with more help and assistance from us prior to their formal enrollment and application for Title IV loans.

Additionally we rolled out a responsible borrowing calculator to assist students as they evaluate the amount of Title IV funds they need for their education. Now importantly our intension by taking these steps particularly with entry level students in the area of our university where we've -- we have well we've open enrollment -- environment we can get better at determining their commitment and readiness to enroll in college courses, prior to their taking on the burden debt.

The problem balancing open access to education with the responsibility of completion is not unique to the private sectors. It's a national problem in higher education. But for Apollo we feel its even more importance that we take leadership role in investing in the policies, systems and process to protect students and that put us on the leading edge of keeping the student success and education experience front and centre.

If this results in slower a slower rate of growth in the future in new student enrollment, we would gladly made this trade off for higher retention and better student outcomes for those enrolled in the University of Phoenix. In addition the financial impact should ultimately be positive for Apollo, if students that enroll and repay have a far greater impact on our profitability then these that enrolled for a short-time to try their hand at college and then drop-out.

Now, on the marketing this is being another area of key investment for us and the one that is inevitably linked to the student experience and ultimately the student completion.

We continue to improve our Internet marketing efficiencies while taking steps to produce better inform students about the University of Phoenix. We think these higher quality student inquires have a better chance of succeeding in our University.

As previously noted, we continue to invest a greater proportion of our marketing spend on long-term brand building which we will hope will continue the better align the perception of the University of Phoenix with the quality we think our students receive when they enroll in one of our programs of study.

In fact the majority of the increase in marketing expense in the first quarter versus a year ago was due to our long-term branding specifically our IMF Phoenix campaign being delivered online as well as in traditional local advertising channels including television, radio and print.

Now a brief update on Apollo Global. During the fourth quarter, Global closed on its third transaction, the acquisition of BPP, a UK based education company. The final purchase price was 602 million. We have now been working with the BPP team for almost three months and integration is well on its way. We're very impressed by the talent and passion of the employees and look forward to developing and growing this business together.

I'm not going to go on a lot of detail on BPP on this call, as there is more detail available in our 10-K, also filed today but just briefly want to point on a couple of key items. This is a fairly late cycle economic company. It's test breath (ph) has long pipelines. BPP experienced lower new student enrollments in the fall of '09, 2008 due to the economic conditions in the UK. And while some of this could be offset by price and cost containment efforts, we don't expect to see much in the way of growth this year at BPP.

Additionally, earnings profitability will be impacted by significant amortization of intangibles related to purchase accounting, as well as investments being made in order to grow the business college. Accordingly depending on our financial results, we expect BPP to be slightly dilutive to our '10 earnings, but expect it to be accretive thereafter. BPP is also more seasonal then some of our other businesses which impacts both the income statement as well as cash flows. The business tend to be strongest in our fiscal first quarter due to strong revenue and student intakes followed by our fiscal third quarter which is driven by professional education. Our fiscal fourth quarter's BPP is weakest from a profitability and cash flow perspective followed by our fiscal second quarter.

Now let me quickly move to Insight Schools, Apollo Group acquired Insight Schools in 2006 and has invested significantly to grow this business over the last several years. During 2009, Insight generated an increased operating loss, primarily due to regulatory compliance costs and additional start-up expenses. While showing good revenue gains during the year, the business has encountered a number of administrative challenges, which ultimately led us to exit two states where they served students.

As part of enhanced long-term strategic plan, we have made the decision to explore the sale of Insight Schools as we see the need to focus more of our time on the huge and growing group (ph) for secondary portion of the education market. We are early in this process, and so there isn't much in a way of detail that we can provide you with right now but we will certainly update you on any meaningful progress going forward.

Briefly on 90/10, as you know this is a Federal regulatory requirement, the State's proprietary schools cannot obtain more than 90% of the cash revenues from Title IV funds. Due in large part to the loan limit increases put in place over the last couple of year as well as the growth of our associates program, the University of Phoenix's percentage of revenue that has come from Title IV continues to trend up. During our fiscal '09, the amount was 86%, excluding any temporary relief for loan limit increases that we might obtain, which we estimate could decrease the percentage by about 15 to 300 basis points.

In conclusion, the fourth quarter was a positive ending to a terrific year, and although both our enrolment and financial metrics reached record levels, we are most excited about the progress we've made during the year on certain other key initiatives.

These include an exceptional focus on retention, our commitment to student service and student interest and the significant investments we've made to enhance the student experience of the University of Phoenix.

In addition, we've invested and continue to invest significant dollars into our technology capabilities, as we look to build our online learning platform and classroom for the future, which we're very excited about and look forward to showing you more on this front at the appropriate time.

Additionally this past year we took the time to plan and invest back into assets wholly owned at Apollo like WIU, which is being led by an exceptional new management team, and we have made significant investments to Apollo Global, which is quickly becoming a major player in the international marketplace.

In summary, we have many exciting things happening at Apollo Group today. We have the financial and human capital and importantly we have the discipline in place to execute in our strategic plan. But most importantly, our management team is completely aligned on the belief that none of these would be possible without always remembering to put our students first. We strongly believe that maximizing the returns of our students will alternately drive the magnitude of our long-term success. With this as our foundation, we can successfully work to further improve the quality and access the higher education around the globe.

We believe that if we achieve these goals, over the next three to five years, our organization can continue to grow responsibly and we have internal objectives to generate low double digit revenue growth and mid-team's operating profit growth at Apollo Group globally.

Before we take your questions, we just like to thanks our dedicated employees and faculties that work so hard to deliver high quality education to all of our students everyday. Their passion and talent are what drives the positive results we generated this year, and their efforts and innovations will allow us to continue to succeed in the years ahead.

With that, we'll turn the call back over to the operator. So, we can take your questions, thanks.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will open the call for a question-and-answer session. (Operator Instructions). And your first question comes from Andrew Fones with UBS.

Andrew Fones - UBS

Yes, thank you. Just regarding the SEC enquiry, I was wondering if you can tell us this relates at all to the letter that you received, that I guess responded to regarding the revenue recognition practices back in February?

Brian Swartz

Hi Andrew, it's Brian. We don't know if it does. That matter was from the division of corporate finance of the SEC and we addressed their comments to their satisfaction in that letter in response to their questions.

Andrew Fones - UBS

And is this enquiry from that same division within the SEC?

Brian Swartz

No, that letter came from the division of corporate finance, this is from the Division of Enforcement.

Andrew Fones - UBS

Okay. And then just in terms of the guidance, I was wondering if you could just kind of elaborate in terms of the double digit top-line growth, the break-out there between expected enrolment growth and pricing things.

Brian Swartz

Andrew, what we can say about that is that in general we've been asked about pricing from an industry's perspective and the power group and versus Phoenix perspective and what we have said is that that's going to depend on what's happening in any given year but that generally speaking we see a price increases in the sort of 3 to 5% range overtime. So you can back into what that means for revenue and enrolment growth.

Andrew Fones - UBS

Thanks. And then just finally on the Qui Tam settlement, I was wondering, if you can detail roughly how much the legal costs for this settlement. And whether there is any difference old tax payment on those two elements? Thanks.

Brian Swartz

Andrew, with regard to the Qui Tam that amounts includes both expected settlement and legal cost and but we don't have any specific break out to offer at this time

Andrew Fones - UBS

Okay, thank you.

Brian Swartz

Thank you, Andrew.

Operator

Your next question comes from Suzi Stein with Morgan Stanley.

Suzi Stein - Morgan Stanley

Hi, can you just talk about, have you changed the way you recognized revenues? I mean, are you doing anything different from the industry? Is there anything that you can make us aware of that would help shed some light on this?

Brian Swartz

Yeah, Suzi, it's Brain. There have been no significant changes and has been applied consistently in connection with the calendaring issues that I discussed in the script in Q4 of this year. We went from recognizing revenue on a weekly basis to a daily basis, which isn't significant. Had we not done that, we would have accelerated revenue into the fourth quarter which would be in advance of delivering the services and we think it that's very appropriate. And since did not have a significant impact on the prior period.

Suzi Stein - Morgan Stanley

Okay. Can you just also tell us when you became aware of this enquiry?

Brian Swartz

Last week.

Suzi Stein - Morgan Stanley

Okay and going forward how do you plan on communicating information to the Street on that?

Brian Swartz

We plan on co-operating fully with the SEC and we'll make any further discussions in light whatever is discussed at that time.

Suzi Stein - Morgan Stanley

Okay. Thank you.

Operator

Your next question comes from Kelly Flynn with Credit Suisse.

Kelly Flynn - Credit Suisse

Thanks. Just five of the revenue recognition things, I read in the 10-K that you don't haven't received the program review from the Department of Ed. I was wondering have you have any dialog with them about how you recognize enrolments and drop-outs or anything that might be broadly related to this. I understand the SEC and Department of Ed are separate entities but wondering if there is anything you discussed with the department of Ed that you think might relate?

Brian Swartz

No. There is absolutely no connection to the best of my knowledge.

Kelly Flynn - Credit Suisse

Okay. Thanks. All right thanks, so and then hey Greg on the operating goals you lead out, what's the timeframe on that?

Gregory Cappelli

The timeframe is the next three to five years.

Kelly Flynn - Credit Suisse

Okay.

Gregory Cappelli

These are the long-term model and our strategy in strategic plan is built around that.

Kelly Flynn - Credit Suisse

Okay, thanks. And just a picking on G&A do you concern about to be it a normalized level right now, that we can somewhat extrapolate to next year?

Brian Swartz

Hi, Kelly, it's Brian. As I mentioned the software rationalization charges about $9 million. Those are included in G&A. So when you take those out of Q4 2009 and you adjust for the compense -- the lower compensation in Q4 of '08, its actually consistent as a percentage of the revenue. So that was the unusual items falling through Q4 '09.

Kelly Flynn - Credit Suisse

But ex-those and if you think it's normal. I'm just trying to make sure you mentioned some of the year ago items that there is nothing else that we should consider as we model it going forward, but that one-off item.

Brian Swartz

Nothing that comes to mind

Kelly Flynn - Credit Suisse

Okay. And then on BPP, you said a $0.03 loss in this quarter and then you also said losses in 2010. Do you think the losses are going to be similar to what they are in the run rate of Q4. Do you expect them to narrow as we progress to '10.

Brian Swartz

We expect for the full year of 2010 for it to be slightly dilutive. 2004 I'm sorry, Q4 is the weakest our Q4 is BPP's weakest quarter. They were included for one month in our Q4 results. And then for our Q1 and Q3 there is also stronger followed by their Q4 and Q2. In Q2 there is a weaker quarter for them as well.

Kelly Flynn - Credit Suisse

Okay. So for the weaker quarter is $0.03 baseline or you seeing it have to increase that loss because you only had positive quarter.

Charles Edelstein

It depends on the economy.

Brian Swartz

Depends on the economy and then a lot of other things. The fourth quarter like I said is their weakest quarter and August specifically is a very weak month in that quarter.

Kelly Flynn - Credit Suisse

Okay. Thank you very much.

Brian Swartz

Thanks, Kelly.

Operator

Your next question comes from Sierra Givens (ph) with Bank of America

Unidentified Analyst

Thank you. In terms of the goals that you laid out, the longer-term goals, I'm trying to think about how to apply those for 2010 particularly given the impact of BPP. Is the fact that the underlying business excluding BPP would be up in the mid-teens or would that include the negative impact of BPP.

Brian Swartz

Remember that wasn't a 2010 number that I gave. Those are our long-term goals. So you can average those over three to five years.

Unidentified Analyst

Okay so I guess I'm just trying to get a little bit more color ahead of it into 2010 given a lot of moving parts both around the unusual number of start dates as well the impact of BPP. Can you give us any other color there?

Charles Edelstein

Sierra maybe the other thing that would help on that is that those long-term goals are excluding acquisitions. So we wouldn't include an acquisition for example in the year we made it. And those are internal growth numbers. So you'd only expect to see acquisitions included once they are anniversaried, if that helps.

Unidentified Analyst

Okay. I guess that I'm wondering is, would you expect 2010 to be better than those calls you said you're able to talk about it?

Charles Edelstein

We're not giving guidance but you can see what kind of -- as we come up the past couple years, what we've said in the past is, we're not looking for stair step kinds of functions in our financials in any given year unless there is something that happens to the business or economically or what not certainly not the way we're planning for our business.

Unidentified Analyst

Okay. In terms of the SEC enquiry, can you give any details around what they may have requested, if there any way to give an indication of what it is that they're looking for and I'm just particularly wondering if it's a net impact this company as a whole or if its specific to any part of your operations of the company?

Brian Swartz

Yeah. This is Brian. We don't know what the focus of their enquiry is. We believe all of our revenue recognition is appropriate in accordance to GAAP.

Unidentified Analyst

Okay, great. And then you're -- ?

Gregory Cappelli

We just note also that obviously we put out a 10-K and that 10-K is signed by the Deloitte, our auditors.

Unidentified Analyst

Okay. And then your academic report, when should we expect that out?

Gregory Cappelli

We're hoping that comes out in the next few weeks. This is formatting and things and that's done by the university.

Unidentified Analyst

Okay.

Gregory Cappelli

So that's going to be up to them but that's we're hoping for.

Unidentified Analyst

Okay any preview of how that looks?

Gregory Cappelli

No we don't have a preview for you at this time.

Unidentified Analyst

Okay. Thank you.

Gregory Cappelli

Sure, thank you.

Operator

Your next question comes from Andrew Steinerman with JPMorgan.

Andrew Steinerman - JPMorgan

Hi, there. My question is about 2010 operating margin if it's going to be a year of operating margin, expansion or could it be investment I just sort of bridge off with the comment that you just made Greg, in general we don't look for stair-step moves in either direction and with that kind of fluctuation. Could you just give us general comment on 2010 operating margin.

Gregory Cappelli

Sure. One, we are not managing the business for the operating margin. I know you already know that. But two, we believe that the business has the ability to continue to have some increases in the margin over the next three to five years. So that possibility is there for 2010. I'd like to be able to give you more than that but again there is the possibility for us to have margin improvement fiscal 2010.

Andrew Steinerman - JPMorgan

Okay. So there is nothing in terms of investments just to borrow it upwards that would make that a challenging proposition.

Gregory Cappelli

We're investing very significant margin point at this point back into the business, but even with that we've done that the last year and we've been able to show margin improvement.

Andrew Steinerman - JPMorgan

Okay. Thank you very much.

Gregory Cappelli

Welcome. Thank you.

Operator

Your next question comes from Mark Marostica with Piper Jaffray.

Mark Marostica - Piper Jaffray

Thank you. I wonder if you could frame for us the increase in discounts that we should expect going forward.

Brian Swartz

Hi, Mark. It's Brian. I don't have a specific number for you but clearly without participation in the program and discounts we provide are after duty military which we think are obviously very important for our members of the armed forces that will go up.

Mark Marostica - Piper Jaffray

Do you expect -- could you give us in terms of basis point, is it material or is it something we should -- for modeling purposes be beware of your -- give us a sense if you would on a quantitative basis, how we should look at that.

Brian Swartz

Mark again we don't think it'll be stair-step but these are changes we're doing for the benefit of our students which is what we're focused on. We're not giving specific guidance on the number.

Mark Marostica - Piper Jaffray

Okay, fair enough. And then on the selling promotion line in action you saw signification leverage there. What proportion of the leverage was driven by lower enquiry cost versus rep productivity improvement? Could you bifurcate those for us?

Brian Swartz

Mark, its Brian. We're not giving that out, we're not giving that detail out anymore but we did see improvement in both.

Mark Marostica - Piper Jaffray

In both okay, very good. And then just a question on negreg. Does Apollo or university have any representation on the committees for next week and going forward or any comments on the negreg process that you might provide to us?

Brian Swartz

No, we don't have any representation on that.

Mark Marostica - Piper Jaffray

Okay, fair enough. I'll turn it over. Thanks.

Brian Swartz

Thank you.

Operator

Your next question comes from Jerry Herman with Stifel Nicolaus.

Jerry Herman - Stifel Nicolaus

Thanks.

Gregory Cappelli

Good afternoon, I will just add on to that there is representation from an industry standpoint on that.

Jerry Herman - Stifel Nicolaus

Can I ask something too and also we of course are monitoring the negregs very closely and those --

Gregory Cappelli

Okay, go ahead.

Jerry Herman - Stifel Nicolaus

Question about negreg, you referenced 86% excluding the benefit, I'm assuming that beyond subsidies (ph) and more specifically the question is, can you talk about sort of the percentages as you exited the year as opposed to the average of the year and progress on your reference to diversify those revenue streams?

Gregory Cappelli

Well, let me fix the last part of that first. As we mentioned last year we are very focused on diversifying the revenue streams from both the corporate perspective, corporate business perspective, military perspective and also some other areas as well. And we laid those out very specifically in our 10-K just for people to review on that. So I think things are on track and going well there and we're please the 90/10 came out this year, this fiscal year.

Jerry Herman - Stifel Nicolaus

Okay great. And then just an update on the direct loan program i.e. the implementation process that you guys intend?

Brian Swartz

Hi, Jerry, it's Brian. We did rollout direct loans for very small part of our loans I believe it was in July this past summer and we're gearing up to be prepared to ramp that up over the course of the next 10 to 12 months.

Jerry Herman - Stifel Nicolaus

On the negreg brand you noticed any difference in timing, of either cash flows or administrative burden?

Brian Swartz

Nothing that I'm aware.

Jerry Herman - Stifel Nicolaus

Okay and there is just one final question with regard to the Qui Tam potential settlement. I am trying to recall if you guys verify that the negotiations include the relatives as well as the DOJ the DOE and the OIG?

Gregory Cappelli

So you want to -- what we verified is that it includes the Department of Justice, the relatives and ourselves. I think that's what you asked right okay.

Jerry Herman - Stifel Nicolaus

Okay great. Thanks guys. I'll turn it over.

Gregory Cappelli

Thank you, Gerry.

Operator

Your next question comes from Trace Urdan with Signal Hill.

Trace Urdan - Signal Hill

Thanks, good afternoon. In house -- in Congress recently the acting Inspector General Department of Ed talked about the difficulty of sort of monitoring and verifying online student attendance. And I wondered if you guys could address how you deal with that issue internally? When you decide a student is dropped out and not simply away from the computer for a period of time?

Joseph D'Amico

Trace we have specific policies with respect to monitoring students in class. And our online classes we actually have attendance requirements for students to be in attendance. If they are not then we have policies with respect to the withdrawal of those students either from the course or from the University.

Trace Urdan - Signal Hill

Is it weekly?

Joseph D'Amico

The attendance statement.

Trace Urdan - Signal Hill

Yeah.

Joseph D'Amico

Yes.

Trace Urdan - Signal Hill

Okay. And so I presume that then relates as well to revenue recognition that sort of stops if he failed to attend within a week?

Joseph D'Amico

Yeah, it's -- I didn't say that if they fail to attend in a week that, that has any particular ramifications. But we do follow if a student withdrawals from a class or from the University we do not recognize revenue.

Trace Urdan - Signal Hill

Well, okay. I presumed that that's the case. I just was asking for a little more specificity there Joe.

Joseph D'Amico

Trace can you rephrase I mean just maybe you can rephrase the question?

Trace Urdan - Signal Hill

I am hoping you can maybe just tell us a little bit more about what's the specific polities are? How do you, how do you monitor student attendance and at what point do you...

Gregory Cappelli

Okay we got it yeah. That's fair sure, we'll do that.

Joseph D'Amico

And maybe just to clarify Trace when a student attends first time in class, we record an accounts receivable related to that course and we also record deferred revenue. That's deferred revenue is amortized into the income statement as revenue as that course takes place and is delivered over whatever respective period of time generally five to nine weeks. If a student withdraws and they qualify for a refund in accordance to our refund policy then we stop recognizing the revenue.

Trace Urdan - Signal Hill

Right. The question is when a student does informally withdraw how do you make a determination?

Gregory Cappelli

Well they are required to post attendance in the courses and if they don't post attendance then they follow the withdrawal process and the refund policy.

Trace Urdan - Signal Hill

And is there a grace period?

Gregory Cappelli

I am not sure what you mean by a grace period?

Trace Urdan - Signal Hill

You said the attendance is weekly and then I made the statement then you stop recognizing revenue and I think Joe objected to that. So I am asking so if they fail to record their attendance in a given week, what happens next?

Gregory Cappelli

If the student is out of attendance for two weeks any two weeks within the five or nine week period, at least I know with the nine week period it's a two-week non-attendance then they are withdrawn from the course by us.

Trace Urdan - Signal Hill

Okay. And the sixteen week course, is it different?

Gregory Cappelli

It's nine or five weeks and I don't recall if in the five week course what the rules are.

Trace Urdan - Signal Hill

Okay, fair enough. And then I noticed in the Q that you changed the refund policy there. It looks like you are actually being more conservative in terms of recognizing or sort of refunding dollars to students and I wonder if you could just sort of talk about the decision process in making that change?

Gregory Cappelli

Yeah Trace. Just to be clear we modified our refund policy approximately six quarters ago. So this is in the spring of 2008 and that policy change actually made it more favorable for the students. So they can from the standpoint that if they attend just a couple month of courses or one item course they are eligible for being refund then were previously.

That policy was reviewed as I mentioned earlier from Andrews question by the Division of Corporate Finance in our SEC comment letter and to our knowledge was satisfactory resolved. So that disclosure has been in our public filings I believe for the last six quarters.

Trace Urdan - Signal Hill

Fair enough. And that was the specific issue that came up in the other situation?

Gregory Cappelli

Other situation?

Trace Urdan - Signal Hill

I'm sorry. I am just asking you to I think what I heard you just say is this that was the other SEC inquiry that came up recently that you resolved is related to that policy?.

Gregory Cappelli

The SEC comment letter that came out last January-February time frame, that letter had some questions about the refund policy that was put in place about three quarters ago.

Trace Urdan - Signal Hill

Right and they are happy with that?

Gregory Cappelli

As far as we know. They were satisfactory results.

Trace Urdan - Signal Hill

Thanks for your patience. I'll let you move on.

Gregory Cappelli

No problem. Thanks Trace.

Operator

Your next question comes from Jeff Silber with BMO Capital Markets.

Gregory Cappelli

Hi Jeff.

Jeffrey Silber - BMO Capital Markets

How are you doing? I hate to go back to this SEC issue but I am going to.

Gregory Cappelli

We figured there probably wouldn't be any questions.

Jeffrey Silber - BMO Capital Markets

If you got this information last week wouldn't it been considered enough to disclose it last week as supposed waiting for tonight? In the way your stocks reacting it's certainly material?

Gregory Cappelli

Yeah we consulted with legal counsel and we made the determination that disclosing it today was the appropriate time.

Charles Edelstein

In light of the fact that we had our 10-K filing and earnings releases too there.

Jeffrey Silber - BMO Capital Markets

All right. Let me just move to BPP. In terms and I think you mentioned this in the K I haven't gone through every page yet, but what are the expected amortization expense associated with that acquisition in fiscal year 2010?

Joseph D'Amico

Yeah. I don't have the numbers exactly handy, but there is, I can point you to where they are in the 10-K. They are in goodwill and intangibles footnote. It will show you the amortization for the next five years in that footnote.

Jeffrey Silber - BMO Capital Markets

Okay. Actually that will be helpful. You plan on disclosing BPP's operation separately each quarter like you did in press release tonight?

Joseph D'Amico

Yeah. Two clarifying points, one as you read through the 10-K you will note that BPP is a separate segment we're presenting outside not just as part of, its part of the Apollo Global segment but we are reporting the results separately the revenue and operating profit. And then further as I mentioned in the press release there is a schedule that separately will show BPP's full income statement relative to Apollo's non BPP financial statement and will continue to show that until we anniversary the acquisition.

Jeffrey Silber - BMO Capital Markets

Okay great that will be helpful. Thanks so much.

Operator

Our next question comes from Amy Yunker with Robert W. Baird.

Gregory Cappelli

Hi Amy.

Amy Yunker - Robert W. Baird

Hi thanks. I think I am not going to ask a question about the SEC investigation. I'll instead ask about if you could spend a minute on retention and you've made some huge strides there and can you just talk a little bit about how much more opportunity you think you can get I guess that's the question. How much more opportunity can you get and is that kind of baked into your longer-term targets of low double-digit top-line?

Charles Edelstein

Well I think your question implies that is it harder to get improvements in retention the higher the rate goes?

Amy Yunker - Robert W. Baird

Yeah.

Charles Edelstein

The higher the retention rates grow and I think it is harder as it gets better. But we're -- we've got still we believe room to go as we drive to culture more focused on retention. So we talked a little bit on it during -- in the script about the steps that we are taking to identify students that are most likely to succeed. And those kinds of steps if we can pick here out upfront who is most likely to succeed, we expect that, that will positively impact retention through a number of various, through our mix students and make up of the students. And so that really is the focus of our student retention efforts.

Amy Yunker - Robert W. Baird

Okay, and then so my understanding with your long-term targets is, that does assume some continued improvement in retention is that fair?

Charles Edelstein

That's fair.

Amy Yunker - Robert W. Baird

Okay great. And then if I can just ask one on probably for Greg your investments that you've talked about WIU -- that's the business you've talked about a little bit more in last two quarters and I feel like you haven't talked about it two years prior to that.

So what really changed to make you decide that, that was the business worthy of really accelerating the investment in and what's the ultimate strategy there with that business?

Gregory Cappelli

It's a very high quality accredited university, that Apollo Group did not focus on previously to the extent that, that we are now. We see the potential to grow WIU in a number of different areas where it won't overlap exactly with the University of Phoenix where we see opportunities in the marketplace globally. And that's really one of the reasons why we're putting more of a focus on it now. So it's taking some investment. There is an excellent management team in pace. We're doing some exciting things both academically and technologically, and we think there's good prospects going forward.

Amy Yunker - Robert W. Baird

Should we expect campus expansions through WIU or is this more going to be done in an online forum?

Gregory Cappelli

The possibility exists for both.

Amy Yunker - Robert W. Baird

Okay great it's like can you speak more in (ph) on the inside. I am just curious to what drove the decision to go ahead and step aside there. Did you feel that was maybe that the decision to get in to that business well perhaps rash or was it not what you expected it to be?

Charles Edelstein

Well the Insight schools is a great business. It's led by great people that have worked very, very hard. It's grown very fast to get where it is today. There are so many hours in the day for us to focus on our businesses and we see a lot of opportunity in post secondary education, an area that we think we know very, very well.

We spent a lot of time getting to know the global market place and that's where we want to focus the bulk of our time.

Amy Yunker - Robert W. Baird

Great, thank you.

Charles Edelstein

Thank you.

Operator

Your next question comes from Paul Ginocchio with Deutsche Bank Securities. Sir your line is open.

Paul Ginocchio - Deutsche Bank Securities

Oh sorry, sorry about that. Going back to that SEC investigation, looking at the revenue recognition, would you agree me with that the determining when a student drops is probably the biggest assumption you make in that revenue recognition calculation. Would you agree with that comment?

Gregory Cappelli

Okay. I know in terms of judgment we make -- I believe our revenue recognition policy, first of all don't have a lot of judgment polls, that was your question. The policies are straight forward and they are in accordance with GAAP, all of them.

Paul Ginocchio - Deutsche Bank Securities

That two weeks are determining then deciding to withdraw, but over a five week period that would be maybe the biggest assumption you make otherwise it's a pretty clear cut direction.

Gregory Cappelli

Well they either post attendance or they don't post attendance. So, that not a judgment call, they post attendance, they're going to attend, we're recognizing revenue. If they don't post attendance or stop posting attendance, and it's for a period of time that exceeds our policies then it triggers a withdrawal. No, we refund and stop recognizing revenue.

Paul Ginocchio - Deutsche Bank Securities

And if it's -- let's just say it's two weeks, you then go back and take off those two weeks or do you leave the two weeks of revenue?

Gregory Cappelli

No, whatever the re-- you follow their refund policy. And of course if they' attend two nights, we recognize revenue for two nights and then if they get a refund on the balance we stop recognizing revenue; once the refund is processed.

If they have attended enough of the course say whatever it is, I don't know the exact numbers, four or five weeks or even 100% of it and then they drop out we continue to recognize revenue and ask for money for that. Because we had a valid receivable from our customer or our student.

Paul Ginocchio - Deutsche Bank Securities

And maybe in other words, just to size this, can you give us what typically the amount of revenues from the return to lender calculation per quarter or roughly per quarter?

Gregory Cappelli

No, we don't provide that data.

Paul Ginocchio - Deutsche Bank Securities

Just take the market will want personally I think maybe you should be focused on and if this might provide a size at least on the revenue record help the market size the potential issue?

Gregory Cappelli

Yeah. Paul, to be honest with you, we don't provide the data. I can't even tell you off the top of my head how much our return to lender is in any given period.

Paul Ginocchio - Deutsche Bank Securities

Okay. I just going ask you about the guidance you said, certainly you have given us some guidance of mid-teens EBIT growth into an approving economy. Is there any assumptions on where US unemployment goes over that sort of five year period that you -- is there any sensitivity to unemployment in that five year assumption? Thanks.

Charles Edelstein

We are taking lots of things under consideration for that. Again that -- those are internal goals for us. It is not guidance for you but with factored into that Paul are a lot of things. It's our domestic business. It's certainly the University of Phoenix and what we're doing there. It's is our other operating assets by WIU, it's global factored into that. So, there's a lot that goes into it and we don't we're are not -- what I can tell you we're not doing is thinking about whether the economy improves by a certain amount and whether it will make these investments into these areas going forward.

What we want to do is make good rational decisions in terms of using our capital and if we use our capital the right way and we could achieve the kinds of returns that we are looking for we want to make those decisions where the economy is currently good or bad. Because we believe there is going to be a demand for our educational services globally for a long time to come and we want to be well positioned for that.

Paul Ginocchio - Deutsche Bank Securities

Thank you.

Gregory Cappelli

Thank you.

Charles Edelstein

I can make one clarifying. Paul you were asking some questions about return to lender versus refund and revenue recognition policy, I want to be clear the return to lender calculations are separate and apart from the way we recognized revenue and is separate from our commercial refund policy with our student.

So we have a commercial refund policy with our student that is different from the amount of funds we might either return to one of their lenders if they were to drop out. The return to lender rules follow the education department rules and our revenue recognition policies or our commercial refund policy with our students.

Joseph D'Amico

And this is Joe D'Amico. Let me make another clarifying point. First of all we're not required as I understand it by the department rules to take attendance. We do happen to take attendance. So we set up policies to basically deal with an online situation where we take attendance and some withdraws. Of course if we're told that someone wants to withdraw from the university, then we're obligated to actually process that withdrawal. And otherwise for correction if its nine week course, if you miss three weeks you are withdrawn from the course and the university.

If it's two weeks, I mean if it's a five or six week course then it's a two week timeframe.

Paul Ginocchio - Deutsche Bank Securities

I think the policies are that you're withdrawn from the course. Not necessarily the university overall, right?

Joseph D'Amico

Yeah. So there is some rule that apply then potentially they withdraw you from the university.

Operator

And gentlemen, your next question comes from Gary Bisbee with Barclays Capital.

Gary Bisbee - Barclays Capital

Hi guys. Couple of questions. I guess even adjusting for the extra start Monday and active enrollment new student enrollment is very strong given what was the first much tougher comp. Can you give us any sense, how we should think about the next couple of quarters? Given that you, did so well against the tough comps we continue, should we expect that this type of good growth will continue or is there anything to understand in terms of lead or anything, in terms of how you're investing that would leads us to believe this may moderate somewhat or quite a bit during fiscal '10?

Charles Edelstein

It's hard to say exactly Gary. We're working very hard. Our goal is to honestly as we put this in place maybe last year or the year before for this year to make the right investments in the right places and hopefully that yields good results. We have -- one of the aspects of our plan going forward is that it should appeal to and enrolls student who are better prepared for the challenge of our programs, right? Which are rigorous.

And to that end, we've seen a greater number of students in the industry that are seeking to the go to college. And for us we want a make sure that those students are prepared to go to the University of Phoenix. So, we're putting some tougher policies in place to make sure that we're enrolling students that will retain. It's better for them, it's better for us, it's better for the university. And frankly, we really don't want to take their money if they are just trying it out. And we think they are going to drop. So we're taking that into consideration as well going forward. But that ultimately should yield a student that retains longer which will yield better metrics for us and even better financial results.

So we're taking a lot of things into consideration. We were pleased with the enrollment growth in the quarter and there is nothing as we look out to fiscal 2010 outside of what I'm telling you, we're doing in terms of our plan that we can see will have a big impact at this point.

Gary Bisbee - Barclays Capital

I think the risk does not given that you're two months into the quarter and not saying anymore than that is that estimates are going to be all over the map and maybe you don't care. But I guess it seems to me that okay that comp would be a couple of percentage point more difficult. So, maybe it's slows couple percentage point. I mean is that two months into the quarter, does that seem reasonable or is there any reason that you should really think that maybe some of these policies could get more quality students in the door and going to lead to bigger funds?

Gregory Cappelli

Gary, you can see the trend and now you have seen the trend over the past year and now you've seen the trend with the tougher comp. And we made comments about stair-step functions. But what we're telling you is, we're going in a direction here to try to make sure that we're enrolling students that are well prepared for college.

And if that happens to have a bigger impact, then what I made the comment about the stair-step function, we're okay with that. Because we'll be doing the right things for the university and ultimately for our profit ability long term.

Gary Bisbee - Barclays Capital

Okay.

Gregory Cappelli

And obviously most importantly for the student.

Gary Bisbee - Barclays Capital

Has there been big change in that over the last couple of quarters, I understand the long term and I think you're spot on with that. I guess I am just trying to understand have you made a little progress figuring out how to do that?

Gregory Cappelli

I will say over the past year probably due to today's economic circumstances, we are seeing more students enrolled who are less well prepared for college then we've seen in the past that. So I guess that in a sense that is a change. And we're looking to respond that change by increasing the sophistication of the tools that we're using to try to identify these students. So if that results in lower new student enrollment but with a better with instead a group of students that are better prepared for our university, that's okay. That's what we're saying.

Charles Edelstein

It's not a sea change in our philosophy. We're just continuing to move forward with it.

Gary Bisbee - Barclays Capital

Okay I'll move on to something else. Can you give us any sense what type of investment you are likely to make in BPP and I guess we've given that they didn't have quarterly results and we just haven't seen a lot of the financials. What we have probably most of us seen is sort of the projection that some of the analysts across the pond had for the business but they were really not investing much in the college business. Is it safe to assume that you guys would be thinking 10, 15, 20 million type investment in infrastructure and marketing all this stuff to really kick start that business.

Can you give us any sense, think about.

Gregory Cappelli

Sure built into our plan in fiscal year '10 and going forward is significant investment dollars into BPP for the business school and for some other thing that collectively we have planned together to do going forward. This is a major platform for us in the UK and hopefully the rest of Europe. We see great opportunities right now. We're the only university that is for profit that has to degree awarding powers and again we are looking to make the investments now to grow that business and so we can offer a good education to more people in the UK and Europe going forward.

Gary Bisbee - Barclays Capital

Do you have approval to offer online classes or is that something that you are going to get at this point?

Gregory Cappelli

We do have approval.

Gary Bisbee - Barclays Capital

And then just one last question, can you talk to us how you thinking about holding debt. I realized you've paid down a lot of that a line of credit borrowing but given how much cash you have, given how much cash you're generating, how should we think about this moving forward? Thanks a lot

Charles Edelstein

Gary, when you think about our current debt levels and we manage our liquidity as necessary and we paid off a lot of the draws on the credit facility that we made in Q4 subsequently as I mentioned. So I'm not sure what you mean

Gary Bisbee - Barclays Capital

For example you have more than enough cash to pay down all the debt and still have 700 million of cash. So, I can appreciate why company is the full debt (ph). I guess I am trying to understand your medium term meaning that couple of years philosophy would you more likely buy back stock and keep that debt or do additional acquisition. You're earning a lot less in interest on the cash than you're paying on the debt. So I guess trying to understand how you're thinking about all this thing. Thanks.

Charles Edelstein

Well a couple of things, the reason why we didn't tail off the entire balance subsequent to year-end and this is all disclosed as you work through the 10-K is we borrowed a portion of the balance we did not repay is borrowed in pounds so it acts as a hedge in our net investments in BPP. So that's kind of the shorter-term.

In terms of longer-term as Greg has talked about in the past and Joe has talked about we think about our capital allocation impairment structure with the University of Phoenix at the top and our existing businesses next acquisition thereafter and when it's appropriate we return the capital to shareholders.

Gary Bisbee - Barclays Capital

Okay. Thanks a lot.

Operator

Your next question comes from Corey Greendale with First Analysis..

Corey Greendale - First Analysis

Hi, good afternoon.

Charles Edelstein

Hi, Corey.

Corey Greendale - First Analysis

I guess my question about the SEC investigation, one of the things that the department has been talking about is more interconnecting various Federal agencies like the FTC, the department of education, is you're understanding that just the very fact that there is an SEC enquiry could trigger other types of whether it's a program review or whether it's accreditation question, any other things that could be triggered by this?

Charles Edelstein

Corey, we don't know.

Corey Greendale - First Analysis

Okay. And then the second question is on the guidance you provide, Greg. I think the way you framed it was that this is guidance for the overall company and I believe the prior long-term targets you talked about were for domestic growth. So within the new numbers, are there different assumptions for domestic growth than you had communicated in the past?

Gregory Cappelli

Yeah. Again just to be clear it's not guidance. Although our internal goals were sharing with you and there is some shift index in both domestic and global and what not, but its just more it takes into consideration the entire company now instead of just domestic organic growth.

Corey Greendale - First Analysis

Okay. And one other regulatory question, would you be linked to share how your preliminary default rates for the '08 have been trending/

Gregory Cappelli

Yeah. We actually expect to exceed the 10%, when those rates come out late winter or spring next year. So we do expect to exceed the 10%.

Corey Greendale - First Analysis

Does it slightly exceed or just I am trying to benchmark how it could be off relative to that covered.

Gregory Cappelli

Yeah, we are not giving the exact number Corey. I would like to point out as you'll know as you work through the 10-K as well, it won't have any impacts on us when we exceed the 10% threshold. We actually early adopted the 30 day delay for first year, first time borrowers during the fourth -- this past fourth quarter.

Corey Greendale - First Analysis

Okay thank you.

Gregory Cappelli

Thanks Corey.

Operator

Your next question come from the Scott Schneeberger with Oppenheimer & Co.

Jim Giannakouros - Oppenheimer & Co

Good afternoon this is Jim Giannakouros for Scott. Just a question on the -- on bad debt and you are provisioning for that, looking at your write-offs actually for the year and for 2009 I see it actually lower than the last year net of recoveries and your provision is higher. Can you just speak to how you are thinking about that and also average age of receivables that are that specifically delinquent bucket if can kind of give us a trend there? Thank you.

Gregory Cappelli

Yeah Scott. We are couple of things really break those down and in terms of first question in any point in time you can't really compare increases in bad debt expanses with increases in write-offs. Over time they should equal each other but expenses in any given period than is a function of what we -- or the balance reserve rather is a function of what we expect future write-offs to be. So that's the way you will look at it. Overtime they should be equal but that can be over a several year period through the estimation process for bad debt.

With respect to your second question, given the current environment we are comfortable with the bad debt levels with where they are at and as long as stay kind of the 4 to 5% range on LTM basis, that feels right given the current environment to us. If at any time we felt uncomfortable was absolutely things we can do to control the bad debts overtime.

Jim Giannakouros - Oppenheimer & Co

Okay Thank you.

Gregory Cappelli

Thank you.

Operator

Your next question comes from Chris Shuttler (ph) with William Blair.

Unidentified Analyst

Hi guys good afternoon. Could I just ask first about the strength and persistence especially at the bachelor's level this quarter? Can you just quickly review for us the top few items there that are that have impacted that from a positive perspective?

Gregory Cappelli

Chris one of the things that we've talked about in the past in terms of retention or persistence level is there is number of things we've talked about that we are doing to try and drive persistence or retention higher. One of them that we think that has had an impact on the bachelor's areas has been over the past year, we have more of a gap between our GAAP levels of student entitled for funding that a big portion of that went away last year, when the limits got increased.

We think that that's been having a positive impact on that and there's other thing that we are doing as well. And obviously that we talked about in the past to help improve retention across the board. We're still not satisfied with the retention. We know that as you get close higher and higher its harder to get continued improvements but as Charles mentioned we're working very hard and that's part of the reasons why we made the comments we did in terms of working hard to have prepared students that are going to college.

Unidentified Analyst

Fair enough. And then on the topic of data revenue recognition may be you can just talk about I am sorry if you've already answered this but how do you actually verify that somebody attends the class. Is it the teachers call or is it all automated or how does that work?

Gregory Cappelli

Well for courses that are at the on ground campuses we actually take attendance when a students shows up and there is a form that you sign in when you come in to verify attendance and in the online environment it actually tracks every time an individual logs in and obviously those log ins are with student specific identifiers. So we know when a student logs into the online logging system.

Unidentified Analyst

Okay.

Charles Edelstein

I'll just add to that that normally log in but make substantive posts during the weekend and I believe the requirement is at least two substantive posts during that week.

Unidentified Analyst

Okay, then final question, a minor one. Brian, can you just tell us that if the currency hedge in the quarter, is that in the other line of the P&L is that where that's located?

Brian Swartz

Yeah, it below income operations in the other non operating income.

Unidentified Analyst

Okay, thanks guys.

Operator

Your next question comes from Arvind Badia (ph) with Stern Agee.

Unidentified Analyst

Thank you. I'm not familiar with your February messages (ph) settlement to that point. I am just wondering if you can tell us how much time it took for you to respond to that inquiry and the whole process at that point.

Brian Swartz

Just to be clear there was no settlement of any kind. Its absolutely normal course for public companies to get comment letters from the Division of Corporate Finance. In fact my understanding is that they required to review every public registrar I believe every two years. Although I could be mistaken. So it's a very ordinary course to get comment letters on disclosures and accounting policies.

We received one I don't remember when we exactly received it. I think it might have been last December. We receive the letter, I recall there were five questions in that letter. I think three of them had to do with revenue recognition. We went back and forth with the SEC which is very common, this is all ordinary very ordinary course, normal. The SEC accepted our responses to those letters without any significant implications and then in accordance with the SEC policies they post all those comment letters to their website. I believe it's 30 or 45 days after the comment letter review process is over.

Unidentified Analyst

Would you expect a similar kind of time frame for this issue to be closed?

Brian Swartz

We don't know.

Unidentified Analyst

Okay. Couple of minor ones. Can you shed some light on how much growth in the military enrollment that you saw this quarter and how much is left on your stock buyback program right now?

Brian Swartz

We have $500 million in our stock to purchase program right now before we have to go back to the Board and to get another re-authorization. And I'm sorry what was the first question?

Unidentified Analyst

The enrollment on the military side; what was the growth rate during the quarter?

Brian Swartz

We don't comment on that specifically we'll just tell we've been pleased with the enrollment growth over there.

Unidentified Analyst

Great, thank you, guys.

Brian Swartz

Thank you.

Operator

Your next question comes from Kelly Flynn with Credit Suisse.

Kelly Flynn - Credit Suisse

Thank you so much for taking another one for taking another one. Hard to believe this but I'm going back to this revenue recognition point. You've mentioned a couple of times once the refund is processed so the question is do you stop recognizing revenue once they stop attending class or once the refund is processed?

Gregory Cappelli

We stop recognizing revenue when the refund is processed for whatever we haven't earned. So the refund policy says for the first few courses we recon we earn as an institutional a commercial refund policy with our student. We on a pro-rata basis. The cost of that course based on the number of nights attended versus the total nights that will be attending. Once we've -- if it's still within the early part of that where we were recognizing that rateably and they withdraw from the course or say they don't want to go that course anymore we will refund the balance and we stop recognizing revenue.

Kelly Flynn - Credit Suisse

Okay but what if it and what if you don't process it say a month after they stop attending do you then reimburse or you recognize?

Gregory Cappelli

No we have processes in place Kelly that adjust for refunds and to a extent there is a late refund that happens two or three later we push that back to the appropriate period before we close the box. So there are processes and procedures in place to properly adjust for the timing of when refunds are processed.

Kelly Flynn - Credit Suisse

Okay. And then just to clarify on that specific 60% cut off that I mean expansion by the Department of Ed observing our refund policy. If someone attends 61% of the course do you recognize all of the revenue even if they drop-out thereafter?

Gregory Cappelli

I'm sorry, can you say that again?

Kelly Flynn - Credit Suisse

So, I'm referencing the 60% cut-off

Gregory Cappelli

Right.

Kelly Flynn - Credit Suisse

If someone attempt just for the sake of discussion 61% of a course and they drop-out let's say in the 70th do you get to recognize all the revenues?

Gregory Cappelli

Yeah. We continue to recognize the revenue until the end and we have a receivable on our books that's a valid receivable and we either collect that or we don't collect that in some cases and that's bad debt expense.

Kelly Flynn - Credit Suisse

Okay. So after 60% you recognize everything, all revenues.

Gregory Cappelli

Yeah. That's what the refund policy says and that's how we recognize it from a revenue perspective.

Kelly Flynn - Credit Suisse

Okay. Thank a lot. I appreciate your taking it on.

Gregory Cappelli

You're welcome.

Operator

Your next question is a follow up from Paul Ginocchio with Deutsche Bank Securities.

Paul Ginocchio - Deutsche Bank Securities

Hey thanks for taking my question. Another one on that, what is more -- what is more conservative policy. You recognized more revenues in the return to lender calculation or you recognize revenue and that's roughly the same as return on the calculation? Thanks.

Gregory Cappelli

Yeah. Just a clarify kind of a high level. The policy reference is 60% which is consist with the 60% number that's in the return to lender requirement for the department of education. But do keep in mind that department education is over academic year which generally is 24 credit hours. We have a policy in place for each course that we have which generally three credit hours. So it nears it but they don't line up exactly.

Paul Ginocchio - Deutsche Bank Securities

Okay this is the rough revenue recognition would follow the return to lender calculation?

Gregory Cappelli

Yeah. The policy does by keep the mind they are over very different time periods. The refund policy is over a course which is three credits, and can last from five to nine weeks. The general return to lender rules are over a 24 academic, a 24 credit hour academic year which can be upwards, many more months than that.

Paul Ginocchio - Deutsche Bank Securities

Right. And maybe I should ask the question different way. How many students per quarter would be in the returns to lender calculation out of the total? Any idea roughly what that would be?

Gregory Cappelli

I don't know that number.

Paul Ginocchio - Deutsche Bank Securities

Thank you.

Operator

Your next question is a follow up from Andrew Fones with UBS.

Andrew Fones - UBS

Yes thank you. On a different topic, you mentioned the adjustment that you told was appropriate approximately for the additional stock period in the fourth quarter. And I guess 14 versus 13 stocks that would an 8% increase. But you told that the reduction will be less than that. I was just wondering how count things to do where are the actual Monday falls within the quarter, if it's a Monday right at end of the quarter than you collected everyone that was interested or just how you think about that? Thanks.

Gregory Cappelli

Andrew, just to be clear, you're referring to the growth in new enrolments versus the high teens number that Charles referred to, correct?

Andrew Fones - UBS

That's right.

Gregory Cappelli

Yeah. As you mentioned there is 14 Mondays in the quarter, when there is traditionally 13. You can't exactly do a pro-rata adjustment for that 14th Monday because you're talking about people, right students. They start a course, they don't start a course, you can't do a pro-rata.

So we've done some internal measurements of what it would like had we had 13 Mondays. And as Charles mentioned, believe that number is the high teens. We can't slice a person into seven parts and adjust accordingly.

Andrew Fones - UBS

Okay. So that will be high teens relative to the 21%. So more might be three 4% reductions of the more on those lines.

Gregory Cappelli

It was relative to 23%.

Andrew Fones - UBS

Okay, okay. But you said it only impacts the associate students.

Gregory Cappelli

Correct. Because as I mentioned in my comments, all of this only impacts our online operations. For our operations on campus the night of attendance either happens on a Monday, Tuesday, Wednesday or Thursday night, some students show up to class. And in our online environment all of the associate classes start on Monday and all of the non-associate online courses start on a Tuesday.

So in this particular quarter we had fourteen Monday versus the typical thirteen. So in this quarter it only impacted the associate students.

Andrew Fones - UBS

Okay. Thanks. Okay so it sounds like you probably closer to the 8% pro rata. But thanks for that. Thanks for clarification.

Gregory Cappelli

Thank you.

Operator

Ladies and gentlemen, we have reached the end of our valid time today. I would like to turn the call back to Charles Edelstein for closing comments.

Charles Edelstein

Well, we very much appreciate you being with us today and look forward to future conversations. Thanks very much.

Operator

Ladies and gentlemen, this does conclude today' teleconference. You may now all disconnect.

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Source: Apollo Group F4Q09 (Qtr End 08/31/09) Earnings Call Transcript
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