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Apollo Group, Inc. (NASDAQ:APOL)

F3Q10 (Qtr End 05/31/10) Earnings Call Transcript

June 30, 2010 5:00 pm ET

Executives

Allyson Pooley – VP, IR

Greg Cappelli – Co-CEO

Brian Swartz – SVP and CFO

Chas Edelstein – Co-CEO

Joe D'Amico – President and COO

Analysts

Andrew Steinerman – JPMorgan

Gary Bisbee – Barclays Capital

Sara Gubins – Banc of America/Merrill Lynch

Scott Schneeberger – Oppenheimer

Bob Wetenhall – Royal Bank of Canada

Corey Greendale – First Analysis

Kelly Flynn – Credit Suisse

Brandon Dobell – William Blair

Gordon Masek [ph]Robert W. Baird

Trace Urdan – Signal Hill

Jeff Silber – BMO Capital Markets

Suzi Stein – Morgan Stanley

Jerry HermanStifel Nicolaus

Operator

Good afternoon, ladies and gentlemen, and welcome to the Apollo Group Incorporated fiscal 2010 third quarter 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, June 30, 2010 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 14, beginning approximately two hours after we conclude today. Additionally, this call will be broadcast over the Internet and can be accessed via the company’s website.

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

Allyson Pooley

Good afternoon, everyone and thank you for joining us to discuss our third quarter results. Participating with me on the call today are Chas Edelstein, Co-Chief Executive Officer, Greg Cappelli, Co-Chief Executive Officer of Chairman of Apollo Global and Brian Swartz, our Senior Vice President and Chief Financial Officer. Joe D’Amico, President and Chief Operating Officer, is also here and will be available during the Q&A portion of the call.

Before we begin, I’d like to remind you that as we discuss our results, unless noted otherwise, we will be comparing the third quarter of fiscal 2010, which ended May 31, 2010 to the third quarter of fiscal 2009.

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 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 and subsequent 10-Q reports filed with the SEC available on our website at www.apollogrp.edu. The company disclaims any obligation 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. A reconciliation of the GAAP to non-GAAP measures is included in our press release, which is also available on our website.

On today’s call, Greg will provide you with an overview of the business and review our long-term strategy and update you on some of the initiatives that we are pursuing to meet these objectives. Brian will then review our financial results and provide you with our outlook for the fourth quarter and 2011 and Chas will conclude by highlighting some recent developments, including events in Washington.

I’ll now turn the call over to Greg.

Greg Cappelli

Thank you, Allyson. Good afternoon, everyone. Hopefully, you’ve all had a chance to review our press release and our operating results for the quarter and in just a moment Brian’s going to review our financials in more detail.

We’re pleased to have made some good progress this quarter on our long-term strategic initiatives, which are designed to enhance the student experience, expand student protections and ensure we enroll students who we believe can succeed in our programs. In addition, this quarter’s results reflect continued success with our efforts to shift the mix of our enrollments for the bachelor level students and above.

Based on some important results we’ve seen from our University Orientation pilot, we’ve decided to roll-out the program more broadly this fall. We’re confident that this is the right thing to do for our students and although it will adversely impact our financial results in fiscal 2011, we believe thereafter it will allow us to deliver sustainable high quality results over the long-term.

Now, before I go any further, I’d like to just take a moment to share with you some perspectives on the challenges our country faces in education and our role is part of the solution.

We believe that education in this country is really at a crossroads. As we previously stated, we’ve experienced an increasing number of students at University of Phoenix who are anxious to enroll in one of our degree granting programs. Their intentions are good, but in a relatively short period of time, we’ve also seen an increase in the number of these students that we think are under prepared for the rigors of our programs. So why is that?

First, we think it starts with our K-12 system, where recent data shows that we now spend more per student than any other major country in the area of K-12 education, yet our results in many key areas as a country are seriously lagging. Studies show that 12th grade science scores are lower today than 15 years ago.

Two-thirds of 12th graders can’t read at the 12th grade level and 77% aren’t even professional in 12th grade math. High school drop-out rates in major cities like Los Angeles and New York have reached 55%. As a result, according to the World Economic Forum’s Global Competitiveness Report, we’ve lost our number one competitive ranking in the world. And this is at a time when our citizens have to compete globally for their jobs.

50 years ago when America was a manufacturing powerhouse, we weren’t competing globally for our jobs and post secondary education was small, it was selective and it was elite, because the majority of jobs didn’t require it. But now the Bureau of Labor Statistics suggest that over the next 10 years the fastest growing jobs would be those requiring a higher education.

According to a study done by the Lumina Foundation, the U.S. will need to add a million graduates per year over the next 16 years to stay competitive as a nation. These facts help us understand the current state of the higher education market and why so many more Americans are seeking a college degree.

There is a reason why President Obama has set three very important education goals for our nation: First, to have every American receive at least one full year of a college education; second, to have the highest graduation rate among developed countries by 2020; and third to encourage lifelong learning.

Again, according to the Bureau of Labor Statistics, the United States labor force includes about 132 million people over the age of 25. Of those, more than 80 million don’t have a bachelor’s degree and 50 million have never tried. So with eight million jobs gone due to the recent recession and some of those never coming back, of course, Americans are looking for better opportunities to better themselves with a higher education.

So what does it all mean for our higher education system? Without question there is an increased burden on the system and it’s at the very time when resources are scarce. State and local budgets are getting hit very hard. In fact, 39 states have cut education funding this year. The traditional educational system needs help and we applaud the administration’s effort to invest an additional $2 billion into the community colleges across the country, but it’s not enough to reach the president’s goals.

In order to educate the 50 million Americans in labor force, who never started college, we estimate that we would need to invest billions of dollars in infrastructure, as it would mean adding almost 500,000 new teachers and one million to two million additional classrooms and unfortunately, the traditional system can’t support that growth alone.

And in fact, it isn’t really structured to address the needs of the majority of today’s students, as over 70% of all students are now classified as non-traditional by the Department of Education. Only about one in four students in higher-ed now goes to college full time, right from high school and live on campus, the other three out of four have to juggle family, work responsibilities, along with their studies.

University of Phoenix helped pioneer education for the working learner over 35 years ago, introduced online education over 20 years ago and now we are investing hundreds of millions of dollars into the next-generation of learners.

In today’s world we need on-demand, rapidly deployed education. Today’s working learners need industry adaptive faculty and curriculum, faculty who are in the fields of study and teach curriculum that can immediately be applied in the workforce. Programs today need to prepare students for today’s economy, not the economy of the past.

We believe that the University of Phoenix through our technological innovation, advanced learning methodologies and our national reach can dramatically accelerate the innovation that’s essential to transform education in America and we can do it at a much lower cost of the taxpayer as well.

Now, in recent quarters, we’ve discussed a number of key initiatives which will allow us to execute in our long-term plan at Apollo Group and although time won’t allow us to go through all of these today, I’d like to touch on a couple of them with you now.

We’ve been investing in our admissions process by better aligning our marketing efforts to focus on attracting and putting the right students into the right programs at the University of Phoenix.

As for marketing, we continue to enhance and develop sophisticated tools that we can use to identify students with the greatest likelihood of success. We’ve improved our data analytics, allowing us to more intelligently use our marketing dollars and that’s resulting in a notable transition and our overall marketing focus, which, as you know, is now more focused on higher level degree granting programs.

Now, let me spend a minute on University Orientation, which has been a very large area of focus for us over the past year. Orientation is a free three-week course required of students with fewer than 24 credit hours to gain admission into the University of Phoenix. As you’ll recall, we started this pilot last summer and have been learning from it and enhancing it along the way to improve the outcomes.

Since inception about 25,000 students have gone through the program. We began to develop student orientation well over a year ago when we saw an influx in demand from students that were anxious to get a college degree, but, as I said before, we are not as prepared for the rigors of college level work. We initially rolled out the program in areas of the country where we were seeing the largest gap in incoming student preparedness.

Orientation provides potential students with the opportunity on our dime to make sure college and specifically University of Phoenix is right for them. It provides them with an understanding of what will be expected from them. And our analyses suggest positive outcomes. Students appreciate this effort and have the positive view of our University even if they don’t enroll. And importantly, because we pay for Orientation, they leave without any debt burden to us or to federal government.

We also believe there are quantitative benefits. We would expect to see improved student outcomes, including improved retention rates and ultimately, we hope to see better graduation rates. We also expect the improved retention rates of students who go through Orientation to result in a favorable long-term impact on bad debt expense and default rates and position us for more stable, long-term results.

Future, we believe the combined benefit of greater student satisfaction and improvement in certain operating metrics will yield positive benefits to the University brand and our reputation over time.

We’ve been pleased with the initial results of Orientation and specifically of those students who did enroll after going through the program. In these cases, we’ve seen a significant improvement in student success over the first few courses compared to students who didn’t go to the program.

Based on our data, we plan to require the program for all students who come to us with less than 24 credit hours beginning this fall. We’ll also continue to review the specifics of the program and modify it over time, as we gather more data on its impact on the student experience.

So in summary, we believe this is the right thing to do for the student and importantly we believe that over time, it will put our organization on a path of higher quality, growth and position us to more consistently deliver on our future academic and financial goals.

Now, I’d like to turn the call over to Brian.

Brian Swartz

Thanks, Greg, and good afternoon everyone. I’d like to start by viewing our third quarter financial results and then I’ll provide our outlook for the fourth quarter and 2011. During the third quarter, revenue increased 28%, excluding $76 million in revenue from BPP; revenue growth was approximately 20%. BPP’s revenue was at the lower end of the range we provided last quarter primarily due to the strengthening of the U.S. dollar relative to the British pound.

Contributing to this revenue growth was University of Phoenix’s enrollment growth combined with increased tuition rates. In total, we enrolled 94,100 new students during the third quarter for total degreed enrollment of 476,500 students, that’s a 13% increase in total degreed enrollment versus a year ago.

During the third quarter, there was one additional Monday, which positively impacted new enrollment growth by about 400 basis points. Of course, the impact was even greater at the associates’ degree level. As a reminder, in the fourth quarter there would be one less Monday, which impacts our associates program but one additional Tuesday, which is a day our other online programs begin.

Income from continuing operations was $177 million or $1.16 per share, compared to $206 million or $1.30 per share in the third quarter a year ago. During the third quarter, we conducted annual impairment test of Apollo Global subsidiary ULA and UNIACC.

As a result of those tests included in our third quarter results is a goodwill impairment charge for ULA of $8.7 million, or $7.5 million net of our joint venture partner’s interest in the loss. Additionally, we took a pre-tax charge of approximately $133 million related to a securities class action lawsuit.

If we exclude these charges, income from continuing operations increased 28% to $265 million and EPS increased 34% to $1.74 per share from $1.30 per share a year ago. BPP’s operations accounted for $0.05 of our EPS, principally due to their seasonally strong third quarter revenue. As a reminder, our fourth quarter is BPP’s seasonally weakest quarter of the year.

Operating income decreased 12% to $302 million, but increased almost 29% to $444 million if we exclude the special charges I mentioned previously. Excluding the special charges, our operating margin was essentially flat versus a year ago, in part due to BPP’s cost structure and an increase in bad debt expense. Excluding the impact of BPP’s operations, our margin excluding the special items would have increased about 120 basis points.

Now, let’s spend a minute discussing each of the expense categories, starting with instructional cost and services or ICS. As a percentage of revenue, ICS increased 310 basis points, which was primarily driven by BPP’s expenses, as well as the 200 basis point increase in bad debt expense. Bad debt expense as a percentage of revenue was 5.4% compared to 3.4% a year ago. BPP’s operations positively impacted bad debt expense as a percentage of revenue by 30 basis points.

The year-over-year increase in bad debt expense is a result of lower collection rates and older receivables, due in part to a difficult economy and a larger portion of students who enroll with a low number of credit hours, particularly, at the associates level.

As expected, on an absolute dollar basis bad debt expense was slightly below the second quarter level. We continue to see some signs of stabilization of bad debt expense and we expect bad debt expense in the fourth quarter to be relatively consistent with the third quarter on an absolute dollar basis.

We continue to focus on efforts to lower our bad debt expense and believe an improvement will come over time, as we shift our student mix towards bachelor’s and graduate degree students.

Selling and promotional expense as a percentage of revenue was down 260 basis points, some of which was due to BPP’s operations. However, the improvement was also due to improved enrollment counselor efficiency and lower advertising cost as a percentage of revenue. The lower advertising spend is temporary in nature.

We are transitioning our marketing investments consistent with our objective of shifting our student mix toward more bachelor’s and graduate level students. The result in the third quarter was that total marketing spend came in lower than anticipated.

In our efforts to attract these higher degree level students, we’re planning to deploy incremental marketing resources, including human resources, as well as additional advertising dollars, which we expect you’ll begin to see in the fourth quarter.

We continue to see operating efficiencies in our Internet spend, which we are leveraging and consistent with the past few quarters, the majority of the dollar increase in selling and promotional was due to non-Internet marketing, which is primarily focused on long-term branding initiatives.

Finally G&A. G&A was down 80 basis points, primarily due to lower legal cost and share-based compensation. For the year, we believe share-based compensation will be about $65 million. We suggest an expense of approximately $90 million in the fourth quarter.

Our effective tax rate in the third quarter was 40.8%. We continue to believe our effective tax rate in the fourth quarter will be about 40%, as we expect to report a discrete item that relates to the release of uncertain tax positions. As always, the rate could vary depending upon the outcome of our state tax initiatives and the results of our foreign operations.

Now, let me turn to the balance sheet and cash flows. We continued to maintain a well capitalized balance sheet at May 31st 2010, with unrestricted cash and cash equivalents of $892 million. Our outstanding debt was $167 million versus $589 million at the end of last year.

During the third quarter, our adjusted free cash flow increased approximately 14% to $355 million compared with $312 million in the third quarter of last year. As a reminder, we define adjusted free cash flow as cash flow from operations, less CapEx and changes in restricted cash.

Additionally, subsequent to quarter-end, we posted a letter of credit for approximately $126 million associated with University of Phoenix’s recently received program review. The LC is fully cash collateralized and therefore, effectively reduced our reported $892 million of available cash at May 31st.

Excluding Apollo Global, our day sales outstanding for the quarter declined 30 days from 32 days at the end of last year, but increased from 24 days from a year ago. The year-over-year increase is primarily due to the previously discussed operational changes at the University of Phoenix, as well as increases in accounts receivable due to lower collection rates.

During the third quarter, we utilized approximately $140 million in capital to repurchase 2.5 million shares for an average price of about $56 per share. Additionally, subsequent to quarter-end, we used an additional $100 million to repurchase another 2 million shares for an average price of just under $50 per share. Taking into account these purchases, we have approximately $560 million available under our current repurchase authorization.

Now, I’d like to provide an outlook for the fourth quarter and give our preliminary view of 2011, taking into account our intent to roll-out University Orientation during the first quarter of 2011, as Greg discussed earlier.

Our outlook is based on the current business trends and, of course, many things can and will change. It also accounts for a tuition increase of approximately 4% to 6%, which goes into effect tomorrow.

We do want to remind you that our management team is focused on long-term value creation, which means we make investments when we believe we can create long-term value, even if it may cost us near-term margin dollars.

So with that in mind, our current trends indicate fourth quarter revenue of approximately $1.25 billion. At current exchange rates, this assumes $30 million to $35 million of revenue contribution from BPP.

As in any additional share repurchases, beyond the ones I mentioned previously, and thus assuming approximately 148 million diluted shares outstanding, as well as a tax rate consistent with my previous comments, this results in earnings per share of approximately $1.30. This assumes a loss per share from BPP based on current exchange rates of approximately $0.15, owing to the seasonality of BPP’s operations.

Looking to 2011, we’d like to provide you with some initial thoughts. However, keep in mind, that it’s early, earlier than we would otherwise provide commentary on the year ahead. As we’ve yet to finalize our 2011 budget, so our initial view could change.

As Greg suggested, we’ve done significant analysis on the results of the University Orientation pilot program and I’d like to provide a little of that data to you, to give you an understanding of the assumptions behind the 2011 outlook.

First, a majority of our new students meet the criteria for University Orientation. At the associates’ level, it’s nearly everyone and at the bachelor’s level, those students entering with less than 24 credit hours have increased significantly over the last year.

In the pilot, of the students who went through Orientation, approximately 80% successfully complete the program and go on to formally enroll in the University. Importantly, of those students who did enroll after going through the program, we have seen a significant improvement in their success after their first few courses, compared to students who did not go through the Orientation.

We are measuring the success by looking at the percentage of students who receive passing grades as opposed to a fail or withdrawal and we are watching the retention rates of those students. Some of the early tests have shown initial retention rate improvements of as much as 500 to a 1,000 basis points. This is important as historically a significant number of our students who drop do so in the first few courses and this contributes to a higher bad debt expense.

Thus, we believe that orientation should begin to favorably impact our bad debt in fiscal 2011, with more improvement expected over time. Based on these assumptions, we believe that we could see high single-digit revenue growth in fiscal year 2011 and operating profit about flat with the 2010 level. Having said that, beyond fiscal 2011, our long-term internal growth targets continue to be low double-digit revenue growth and mid-teens operating profit growth.

With that, I’ll turn the call over to Chas.

Chas Edelstein

Thanks, Brian. I’d like to spend the remaining time with you discussing our efforts to reduce our risk profile as a company, which we believe is important to maximizing long-term value. We believe this includes, both how we operate our business, as well as removing uncertainties to the extent we can.

Greg discussed certain of the operational efforts we have in this regard and I’d like to expand on other internal efforts, including recent reports received from the Department of Education, enhancements we have made to student protections, as well as update you on our views of the events taking place in Washington.

First, last week we announced that we received the Final Program Review Determination Letter from the Department of Education, which successfully closes University of Phoenix Program Review that was conducted in February of '09.

We are very pleased to have successfully resolved the findings reported by the Department. In doing so, we’ve adopted a series of processes and procedures to further strengthen our rigorous internal controls and administrative capability, particularly, around the use of Title IV funds.

Some examples include implementation of a new withdrawal process, including a self-service withdrawal tool, which is available on the student website, also additional training for our campus advisors and University staff and other procedures that help to ensure timely return of Title IV funds.

I’m also pleased to announce that Western International University recently received its program participation agreement from the Department, which recertifies it to continue to participate in the Title IV program through September of 2014.

Next, in our ongoing efforts to serve the best interest of students, we are implementing simple changes focused on student protection. One of these tools involved our efforts to promote responsible borrowing, including our financial aid calculator, which we rolled out almost a year ago.

As you know, we can’t legally restrict the amount a student borrows under the Title IV program; however, since the implementation of this new tool, the percentage of student who chose to borrow the maximum allowed has significantly declined.

Another tool is our digital call recording system, which we use in states where it is allowed. This system records calls between students and counselors for quality control and compliance purposes. And we are also developing a video for students to view prior to enrolling, which will reinforce the required time commitments and other information necessary for success in our programs.

Finally, I want to spend a minute on the developments in Washington. As you know, a couple of weeks ago, the Department issued the notice of proposed rulemaking for 13 of the 14 program integrity topics and indicated it expects a separate notice to be published regarding the definition of gainful employment later this summer.

We are now in the 45-day public comment period. As we have indicated previously, we fully support the Department’s intent to enhance accountability within higher education and we strive to play a leadership role in continuously improving and transparently reporting the outcomes and achievements of students serviced by our schools.

In fact, in early 2009, we initiated a comprehensive evaluation of how our counselors who advise and enroll students in our schools perform their duties and how they are compensated. Based on this evaluation, we expect to roll out a new evaluation and compensation structure for our counselors this fall, the details and implementation of which are being evaluated now.

This new program will be consistent with our goal of focusing on the student and enhancing the student experience and will be compliant with the incentive compensation rules as currently proposed.

While the new plan could have an impact on our counselors efficiency, our primarily goal is to ensure that students receive informative counseling and advice to help them make decisions for their academic future. We plan to provide further updates on this new plan prior to its implementation.

I’d also like to take a moment to discuss some of the regulatory debate in Washington. The Senate Committee on Health, Education, Labor and Pensions is holding a serious of hearings to examine the proposed rulemaking by the Department of Education and related issues.

During the first hearing which was held last week, there was testimony surrounding a number of topics with which we agree. For example, it was stated that the Federal government’s methods of calculating data on student outcomes needs improvement. And it was also noted that the private education sector plays a critical role in the future of our country’s education system.

However, there was other testimony with which we will need to work with the committee and others in coming weeks and months to ensure that the record is clear with respect to University at Phoenix. Education is our top priority and students come first and our company spending and investments reflect this.

Specifically, I’d like to address a couple of points. First, our focus is on delivering value to our students. We invest heavily for our students and educational spending is our largest category of expenditure. This includes investing in curriculum development, content delivery, learning platforms and academic student services as well as faculty.

Second, our per student spend on enrollment is only modestly higher than the $2,400 per student average of traditional schools. What we spend includes additional services provided to students such as our pre-University Orientation program that Greg spoke of.

Additionally, the industry average numbers excludes certain promotional efforts used by traditional schools, such as athletic programs, which can cost up to $100 million annually.

On average, our non-traditional student population has a greater financial need than those at traditional schools. While we’re proud of our mission to fulfill an educational need that hasn’t been met by traditional schools, we are increasingly focused on balancing providing access with our need to address the recent influx of students coming to us, who are not as well prepared for college.

Additionally, because of the risks factors associated with non-traditional students that we serve, they disproportionately benefit from recent legislative changes that expand availability of federal financial aid such as Pell Grants.

In summary, all the initiatives we’ve talked about today are squarely centered on what’s doing right for the student, whether it’s in student protection measures that we’ve developed and put in place, the new counselor compensation plan or implementing our University Orientation program.

We are a leading provider of high-quality accessible education for individuals around the world. And we believe that if we do this right, delivering on our students’ expectations of receiving a quality education and improving their quality of life and thereby providing them with a good value proposition, we will continue to be an important part of the solution for our nation and ultimately drive returns for our shareholders.

Finally, I’d like to extend our deep appreciation to our dedicated staff and faculty who live the values of our schools and protect the interest of our students every day.

With that, I’ll turn the call back over to the operator, so we can take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And your first question comes from the line of Andrew Steinerman from JPMorgan. Your line is now open.

Andrew Steinerman – JPMorgan

Good evening, gentlemen. On your initial guidance for fiscal year '11, its suggesting operating margins will be down and surely you’ve spoke about a lot of areas of investment. Could you just be specific on the reason for our 2011 operating margin at least in the initial look to be down? What would be the top one or two items that will pull down operating margins? And how intimately is it related to the University Orientation?

Brian Swartz

It’s Brian. The impact on the outlook for '11 is principally due to University Orientation. I mean by rolling it out to the full student body, it cover or will cover approximately half of our new enrollments, as I mentioned and so it shifts timing of revenue, where we don’t get revenue for some of those students. So, that’s the principal impact that is taking down the margin in fiscal '11.

Andrew Steinerman – JPMorgan

Right. But even with all that revenues are still up high single-digits, I don’t quite understand why costs would be so misaligned with revenues then?

Brian Swartz

Today, the students that come through University Orientation still require us to enroll those students. We still today have some of the upfront marketing spend associated with those students and no revenue. So over time, we do, as we’ve talked about previously, are getting better and better on the marketing front to help identify students earlier on with some of the data analytics. But until we do that or until we get more traction there, we could see slightly eroded margins over 2010.

Andrew Steinerman – JPMorgan

Thank you very much.

Operator

Your next question comes from the line of Gary Bisbee from Barclays Capital. Your line is now open.

Gary Bisbee – Barclays Capital

Hi, guys, good afternoon. Just following up on that one, can you give us any sense as to how we should think about the level of investments in BPP in fiscal '11, firstly? And secondly, how does the new comp policy for your reps play into this outlook for flat operating profit?

Greg Cappelli

Gary, I’ll answer BPP; we haven’t talked about any different levels of investments since we did originally when we purchased the company. Our investment there is on a number of fronts, but as you know, we’re focused on building out the business school and a number of other fronts for (inaudible) programs. So I’ll leave BPP at that.

Chas Edelstein

It’s Chas. Gary, with regard to the compensation plan, the outlook that we reviewed does not include any specific adjustments for the compensation plan. We’ll provide more color on that before we implement the plan.

Gary Bisbee – Barclays Capital

And then I think you guys may have addressed this in some of your remarks here. But just given what seems like an increasingly hostile PR campaign being waged by several fronts against the industry. What’s your plan here? I think a lot of things you said in your prepared comments certainly address that, but is there a plan to get more aggressive either as it relates to the press and what’s going on in Congress or even in the public common period for what we’ve seen so far and later when we get the gainful employment rules, are you going to get more aggressive?

Greg Cappelli

This is Greg. Gary, we’re incredibly respectful about the process that’s going on in Washington, obviously, and are in the dialogue and part of the process. Where there is facts that are thrown out that are clearly wrong? Yes. Our intention is to set the record straight and facts that are incorrect. You got a lot of those facts today on the call and in our press release and in our filings and we’ll continue to do that going forward.

Our primary mission and goal is to focus on building the best university that we possibly can. We’ve clearly stated what we’re doing with the University over the course of the next year and beyond and that will speak for itself, but again, where there is facts that are thrown out there that are incorrect, we’re correcting them.

In fact, when you see stories that are in the press that have information that’s incorrect or misleading information, we’ve printed corrections to that and we do in almost every case. Now, whether they choose to print it or not, we can’t control that, but we are always correcting the facts when they are wrong. We’re not going to stand by and watch our employees, our University, our students, our alumni or faculty have to deal with that. So, we will always try to correct the record and put out the right information.

Gary Bisbee – Barclays Capital

Then just one last one. Brian, did I hear you correctly that price increase for this next year would be 4% to 6% and assuming that’s right, should we then think that maybe total company starts would actually be down and total enrolment would fall to low-to-mid single digits to get that high single-digit revenue growth? Thanks a lot.

Brian Swartz

Gary, first off, 2011, I mean because there is a shift in the rollout of University Orientation and that it impacts the majority of our students, as I mentioned, you’re comparing an apples and oranges when you look at the growth rate. So it’s fair to say that it will be negative next year. In terms of total enrolment, it’s possible, next year as well. I think were those your two questions, just total enrolment and new enrolment?

Gary Bisbee – Barclays Capital

So did you say 4% to 6% price, I just want to make sure I heard that right?

Brian Swartz

4% to 6% that will be effective tomorrow. Do keep in mind we do have early pay discounts, so we don’t usually see the benefit of that immediately, that kind of trails off in the first three to four, five months kind of thing.

Gary Bisbee – Barclays Capital

Thanks, guys.

Operator

Your next question comes from the line of Sara Gubins from Banc of America/Merrill Lynch. Your line is now open.

Sara Gubins – Banc of America/Merrill Lynch

Hi, thanks, good afternoon. I was interested in your comments about more and more bachelor’s degree students coming in with fewer credits and so they would go through the Orientation. Can you talk about what percent of total bachelor’s students are coming in with less than 24 and are they all coming in on-ground or could you actually have online students that would come in to a bachelor’s degree program with less than 24 credits?

Brian Swartz

Yes, Sara, first of all, they can come into both, so they can come in on-ground or online and the trends, as I mentioned, that we’ve seen is that a larger number of our bachelor’s enrollments, our new enrollments do have lower transfer credits than historically. So yes, I mean what we said is correct, we are seeing that. In terms of an exact percentage, we’re not giving that number out, but we have seen that trend.

Joe D’Amico

One other thing just to clarify, there’s been no change in policy in how we clarify what the bachelor’s or associates student are measured, what that is or what goes into that category.

Sara Gubins – Banc of America/Merrill Lynch

Is this maybe too early to tell, but your comments about the 80% of the students who have gone through the Orientation Program are interested and you talked about retention getting better. I’m actually wondering if you looked at a certain point, given the high level of dropped students who didn’t go through the Orientation Program, do you end up with same amount after I don’t know three classes or something along those lines.

Joe D’Amico

Well, that is certainly our goal and we hope to achieve that down the road just to see those numbers come closer together.

Greg Cappelli

It’s an open question though, what we talked about in the remarks with the retention rate, which is the percentage of students that start and in the end whether we end up with the same number of students, as Joe said, it’s a goal but it’s too soon to tell.

Joe D’Amico

Sara, just to clarify, the goal is eventually you end up with more total enrollments. Now, we are experiencing or we have been experiencing trends where we are starting more students and not enough are finishing to the satisfaction of the University. So yes, if you started exactly the same amount as before, Orientation is going to screen some of those students out, but the idea and the goal is to along with Orientation again to refine our brand, our marketing activities, to attract students that can do better within the organization or within the University, they can persist at a much higher rate. But what goes in the funnel at the top necessarily isn’t going to remain the same.

Sara Gubins – Banc of America/Merrill Lynch

And then just last question. Do you have any data that you could share with us on life time default rates for students?

Greg Cappelli

No, we don’t.

Joe D’Amico

We don’t have that information right now.

Sara Gubins – Banc of America/Merrill Lynch

Thank you.

Joe D’Amico

Thank you, Sara.

Operator

Your next question comes from Scott Schneeberger from Oppenheimer. Your line is now open.

Scott Schneeberger – Oppenheimer

Thanks, good afternoon. I guess first the required question on the SEC inquiry, any update there?

Gary Cappelli

No, we don’t have anything new on the SEC inquiry.

Scott Schneeberger – Oppenheimer

Another quickie, Insight Schools, what’s the update there?

Gary Cappelli

Well, we are continued to be involved in the sale of process. It’s farther along in the process and we expect to conclude that successfully in coming months, but no guarantees until it’s done.

Scott Schneeberger – Oppenheimer

And then just finally if I could on pricing the 46% in aggregate, is that going to be staggered across degrees to any extremes or is that an average that that’s fair to use across the degrees?

Brian Swartz

Yes. It varies by degree levels and also varies by geography and certain groups. For example, our military, we provided higher discount last year and we’ll continue to do that. The associates’ is about 6%.

Scott Schneeberger – Oppenheimer

And then just following up on Gary’s, that’s going to reflect on revenue per student and this question implies no major change in discounting?

Gary Cappelli

If your question is similar what we did last year with significant increases in discounts relative to military, we did not do that again this year. We did that once and the discounts might be comparable on a percentage basis, but there wasn’t any structural changes in the level of discounts.

Scott Schneeberger – Oppenheimer

Thanks very much.

Operator

Your next question comes from the line of Bob Wetenhall with Royal Bank of Canada. Your line is now open.

Bob Wetenhall – Royal Bank of Canada

Hi, good afternoon. I was just curious it sounds like you are implementing some very smart initiatives to improve retention and that will also have a positive impact on bad debt in 2011. And I was just wondering if you could perhaps quantify how positive the influence would be on your bad debt expense?

Brian Swartz

In my comments earlier, I think with Andrew, we expect to see immediate impact on bad debts. How much we don’t exactly know, but there should absolutely be a reduction in bad debts and then over time we expect to see even further improvement.

Bob Wetenhall – Royal Bank of Canada

Is there a level, a target level you are kind of focused on?

Brian Swartz

Not one that we are providing externally.

Bob Wetenhall – Royal Bank of Canada

Got it. Because of the higher admission standards to get in, will this help accelerate the mix shift towards bachelor’s and any way we could get some quantification around that?

Greg Cappelli

Hi, it’s Greg. The shift to bachelor’s, as I’ve said in the past, is an effort on a number of different fronts. One is the branding initiatives that we’ve been working with. Another is getting back into the local communities, which we unfortunately in years passed didn’t necessarily do a great job of we are now. So there is a number of different things of which marketing is one piece, student orientation is a piece, branding is another piece, things that we are doing in local communities, all of that we think is helping move towards a greater number of bachelor students. Again, now our goal is to do that with master’s and doctor students as well and we are starting to work on that as well.

Bob Wetenhall – Royal Bank of Canada

Do you have a target in mind that you would be comfortable disclosing? Obviously, there is a lot of initiatives going on; I am just trying to derive…?

Greg Cappelli

Absolutely, I understand. Not right now a target that we are willing to provide and disclose externally, but just understand what we are doing here. Our aim is to, for now try to make sure that we’re going back into those areas, investing in those areas more heavily and growing those degree granting areas going forward.

Bob Wetenhall – Royal Bank of Canada

Got it. And just one final question. Your press release said that you’re making increased investment in non-internet advertising related to long-term branding and I was hoping to get some color around what that means?

Greg Cappelli

Part of what that means is that right now we don’t think that our brand necessarily stands for what we know the quality is internally at the University of Phoenix and what students’ experience. And it’s our job to make sure and our goal to make sure that we do that and we align that better with the experience students are getting, who retain at the University of Phoenix. And so, we’re doing that in a number of different ways through our students, our alumni, our offline branding campaign, television is one avenue that we’re doing in as well, but it’s a broad-based effort that’s not necessarily happening online, as it all used to historically.

Bob Wetenhall – Royal Bank of Canada

That’s great. Thank you very much.

Greg Cappelli

You're welcome. Thank you.

Operator

Your next question comes from the line of Corey Greendale from First Analysis. Your line is now open.

Corey Greendale – First Analysis

Hi, good afternoon. One thing to follow-up on, I think it was Sara’s question about the students who are coming with fewer than 24 credits enrolling in bachelor programs. Can you just help me understand why they will chose to do that when the per credit cost is lower in the associate program, why don’t they just start there and then matriculate into the bachelor?

Gary Cappelli

Well, the associate program is an online program and the bachelor program is on-ground and a number of students who have zero credits see that they can do better by having the on-ground experience, which is more traditional. So, more are choosing that as a way to get their education and experience is that they retain better on ground as well.

Brian Swartz

Corey, it's Brian. Just to add to it, it’s not always a price decision if you’re going on ground. In some cases, you can go ground bachelor’s depending on where you are in the country, where the pricing is comparable or closer to the associate level pricing.

Corey Greendale – First Analysis

In locations where it’s not comparable, are you comfortable that students are made aware of the fact that there is an online option that although maybe doesn’t suit them as well in terms of the curriculum or how the academics work that there is potentially a less expensive option?

Joe D’Amico

Yes, the counselors are instructed to review alternatives with our perspective students and of course, all this data is readily available online and in a lot of other ways from the University.

Corey Greendale – First Analysis

And then could you just give us a little insight into your decision making process behind share repurchases and obviously, I would think you have to somewhat factor in any potential regulatory changes and the stock charts are signaling that at least a lot of people out there are concerned of a potential impact that that could have and just how you factored it into your decision making and how you get comfortable that the stock is still undervalued despite those possibilities?

Joe D’Amico

Sure, Corey, we don’t necessarily look at stock charts for repurchasing the stock. We do look at our own internal models and we look at our own valuation, our modeling as well. We take into consideration everything, if we’re going to repurchase stock. We take into consideration other investments and uses of capital throughout the company and that could be in global, could be in domestic initiatives that we have in place.

As we said on many occasions, the University of Phoenix is at the top of the pyramid and is going to get every dime that they need because of the high quality value proposition there. And share repurchase is something that we look at in conjunction with our uses of capital. So we do that, we’re constantly evaluating that internally and with our Board and that’s pretty much what I can say about it at this point.

Corey Greendale – First Analysis

And just what I’m trying to get at is, can we take away from the fact that you’re still aggressively repurchasing shares, can we take that as a sign of your views on what may or may not end up happening on the political front?

Joe D’Amico

We can’t really comment on that, but what we can tell you is that we believe in the future of the organization. And yes, we would not be repurchasing shares obviously, if we didn’t believe that there was value in the future of the organization as an entity at these levels or any levels.

Corey Greendale – First Analysis

And I just had one more quick one. The NPRM that did come out, what it did say on gainful employment was the schools are going to be required to disclose information on placement rates, I know you don’t do placement. Do you have had any discussion with the department on just what you will be expecting to do under such a requirement?

Joe D’Amico

No, we have not had those specific discussions and that would be an issue for us because we don’t do placement at this point as many, many traditional universities don’t do placement. So that’s something that we’re going to need to discuss, talk about and work with and we will.

Corey Greendale – First Analysis

Great, thank you.

Joe D’Amico

Thank you, Corey.

Operator

Your next question comes from the line of Kelly Flynn with Credit Suisse. Your line is now open.

Kelly Flynn – Credit Suisse

Thank you. A couple clarification questions and then I have kind of a new question. Just, first of all, on the 24 credit thing that Corey was asking about and Sara did too, I just want to clarify that again, because I thought you originally said in response to Sara’s question that there were students online in the bachelor’s program with fewer than 24 credits. And then I thought, Joe, you just said that related to on ground. So are there students online with fewer than 24 credits and if so kind of why would they do that versus Axia?

Joe D’Amico

We’re talking about the Associates program, the Axia program online and –

Kelly Flynn – Credit Suisse

I’m talking about bachelor’s online. Are there bachelor students online with fewer than 24 credits?

Joe D’Amico

Yes.

Greg Cappelli

Kelly, there are, it’s very few. There aren’t a significant amount, I might have misspoken or in my comments, do not clarify that.

Kelly Flynn – Credit Suisse

Great. Actually this is another for you, Brian. I think you said in response to a question that you thought starts would decline in fiscal '11 and that enrollments might decline. So if you think enrollments might decline and then you’re looking at 4% to 6% pricing, how do you get to the high single digit revenue?

Brian Swartz

Well, we’ve done a lot of modeling internally, Kelly, and with that price increase and do keep in my mind when we roll out the University Orientation there is a structural shift between especially if you’re looking at an operating metric specifically total enrollments, certainly new enrollments where you’re just literally pushing. If you think about pushing out for three weeks where we get no revenue and we still have the majority of those costs. So, we looked out under several different modeling scenarios, especially what kind of retention rates for existing students organic growth, I mean we’re still going to grow and expect to grow in the bachelor’s and master’s level before the roll-out of the University Orientation. So when you do all that math, our models are consistent with what my comments were.

Kelly Flynn – Credit Suisse

So you’re basically saying then you don’t think enrollments are likely to decline on online?

Greg Cappelli

We don’t know Kelly. That’s what we’re saying, it could, and it’s possible.

Kelly Flynn – Credit Suisse

But that’s not what your guidance is implying, is that correct?

Greg Cappelli

We’re not getting into that level of specifics, but –

Kelly Flynn – Credit Suisse

All right. Fair enough. And then just a different issue related to cohort default rates in your 10-Q, you say that the preliminary data for '09 shows a substantially higher default rate than for '08. Can you give us any more color on what you mean by substantially higher?

Brian Swartz

Not quantitatively, Kelly. I mean, we’re doing some work internally that indicates it’s trending that way, but nothing specifically quantitatively. One thing to keep in mind is, because that’s a lagging indicator, we’ve grown the associates program pretty significantly in the last couple of years, that compounded with the economic issues, obviously, in the last two years. It would all indicate that would make sense for the trend to go up.

Kelly Flynn – Credit Suisse

Great, thank you very much.

Operator

Your next question comes from the line of Brandon Dobell from William Blair. Your line is now open.

Brandon Dobell – William Blair

Thanks. I think in your prepared remarks you talked about the changes you may make to the enrollment advisor or enrollment counselor compensation structure in the fall. How do we think about the odds or the probability of that materially changing what the economics of the business looks like in the next year, or year and a half? I mean are you contemplating some major shift up in the structural amount of money that you pay to average enrollment counselor or maybe that’s huge increase in the average per person, but a lot fewer people as this Orientation programs rollout? I guess I’m just trying to gauge, what the range of outcomes is on your operating income from that enrollment advisor compensation change?

Brian Swartz

Brandon, the goal of that program is really to impact how people think about, how they’re being measured. And our people really want to be and we think it makes sense for them to be measured on how they build a relationship with the student and what the student experiences. And so that’s really the goal of the program. The goal of the program is around these measurements and making sure that pay is commensurate with performance against those measurements. It’s not really a program aimed at increasing the total number of counselors or decreasing them or changing the total amount of compensation. It’s more where it’s directed for what activities.

Greg Cappelli

We’ve spent a lot of time, Brandon, over the past 18 months at over 50 of our campuses and we’ve got a lot of input into this, we’ve put pilots into it. We’ll give you more detail as its being implemented, but we really feel this is the right thing to do. It’s a good program. It’s started a while ago in terms of getting data on it and we are excited about it as we are on Orientation.

Brandon Dobell – William Blair

Couple of quick ones, the ULA write-down seems nothing necessarily large, but it seems at least material and relatively quick compared to when that acquisition was made. What’s going on there and are you guys comfortable that the returns that you expected initially when that acquisition was made are going to be the ones that you get going forward?

Greg Cappelli

Yes, the write-down is disappointing from an accounting standpoint and obviously, we are going to follow that to a tee. From a timing perspective, when we bought ULA, it wasn’t that long after that the economy in Mexico really got hit very, very hard. So from a short-term perspective, some of the results have been disappointing. However, there have been some great things that have been done at ULA, in terms of programs that are being put in place, online capabilities, human capital and we’re still really excited about the long-term Brandon.

Brandon Dobell – William Blair

Obviously, a bigger focus on bachelor’s and above that in terms of programmatic growth and if the master’s enrollment starts, those metric continue to bump along at what I would imagine is a pace that you’d like to see increased. What are the efforts there to get especially master’s program, reaccelerated back up and is there a time frame under which we should start to think about seeing some results from the internal efforts there?

Joe D’Amico

Well, we are focused on the master’s part of the business really through our relationships with corporations, where a number of individuals who work in the professional ranks or who are at these companies want to get an additional degree to help them. And also teachers is another area where getting a master’s is helpful and also the military. So we have a number of things that we are focused on to improve the number of master’s students in our program.

Greg Cappelli

So Brandon, there is additional investment being made now. We are dedicating more incremental resources and human resources, as well as advertising a mix shift to that area and hopefully, we’ll start to see some signs. We are focused on it now and we’ll see some signs, hopefully, over the next couple of quarters that it’s paying dividends.

Brandon Dobell – William Blair

Then a final one for Brian. Any sense of how we should build capital spending in for fiscal '11, similar to last year or more or less?

Brian Swartz

Nothing, that’s a stereo stuff kind of change in CapEx, Brandon. It’s just consistent as a percentage of revenue in general dollar levels.

Brandon Dobell – William Blair

Great, thanks, guys.

Operator

Your next question comes from the line of Gordon Masek [ph] with Robert W. Baird. Your line is now open.

Gordon Masek – Robert W. Baird

Hi, guys, thanks for taking my questions. First, I just had a quick follow-up to Joe’s comments on kind of reinvigorating bachelor’s and master’s growth. You talked about adding additional corporate alliances and really growing that? Can you tell us how many corporate alliances you currently have and how that’s stranded over time?

Greg Cappelli

It’s not a number that we, I believe have disclosed, but the trends are actually very, very good. We’ve had nice success in, I’ll say two situations that were competitive were companies started out supporting like 2,000 universities and noted down to 200 in one case and I think 13 in other case, which we were successful in a competitive environment because of the quality of our education and because of how they feel we treat and educate students. But we have a team of people who are focused on this and there are number of them in the market today. We’ve also hired an individual to help oversee that group and continue to achieve the objectives that we’ve set out to do.

Brian Swartz

I think we feel as a management team that we’ve made some progress there, but we still have room to go in terms of improvement.

Greg Cappelli

Yes, one notable alliance that we have is with the National Manufacturing Association, the institute for manufacturing, has actually added us to their institute board and we are an integral part of their focus on bringing jobs back to the manufacturing sector and educating, providing the university level education that’s required for their constituents. There is thousands of members and 12 million employees that are included in that group.

Gordon Masek – Robert W. Baird

Just a question on gainful employment, sorry to go back to this, but given the gainful employment disproportionately impacts bachelor’s programs because of increased duration and depth levels et cetera. How does that affect how you think about your long-term bachelor’s’ strategy if at all? Are you already steering students toward programs that would be less impacted by gainful employment like business?

Greg Cappelli

No. Bachelors’ is an important area for the country and we know that, we’re focused on that. We’ll deal with the policy whatever it ends up being. But right now, no, we haven’t steered students to certain programs. We told you how we have been focused in terms of our own initiatives for associates, bachelor’s, master’s and doctoral, but that hasn’t taken into consideration any finalization of gainful employment.

Gordon Masek – Robert W. Baird

Just a couple of quick ones for Brain. Do you have any comments on expectations for free cash flow fiscal 2010 or '11? And what drove the increase in revenue per student this quarter particularly in master’s?

Brian Swartz

On your first question, I mean I would expect it to be in line with operating income trends, which is generally the case, given our low CapEx requirements. I didn’t catch your second question, I’m sorry.

Gordon Masek – Robert W. Baird

What drove the increase in revenue per enrollment this quarter, I think it was up 7% for the company and really it was up 11% for master’s. I’m just wondering because your tuition increases don’t effect today. So what drove that for a fiscal 3Q?

Brian Swartz

Yes, it varies from quarter-to-quarter. A lot of it goes to persistence and the timing of when students enroll to. So it was down slightly I believe last quarter and then it is back up this quarter. I mean it’s generally in the ballpark of what we announced around price increases, but does vary.

Gordon Masek– Robert W. Baird

Thank you.

Operator

Your next question comes from the line of Trace Urdan from Signal Hill. Your line is now open.

Trace Urdan – Signal Hill

Hey, good afternoon. Could you characterize the scope of the Orientation program as it stands today? Then maybe clarify are you intending to roll it out sort of company or school-wide, I should say in September or will there still be a gradual process of rolling that out through the course of fiscal '11?

Chas Edelstein

Yes, Trace. We’ve had about 25,000 people go through the program and our intent is to roll it out in the November time frame in or around November system-wide. What we’re doing is we collected all the data we need. We feel good about what’s most important to us, which is as we said before it helps us to make sure we’re putting people in the right programs and helping those self-select out that aren’t right for the University. But also, it’s, I think, going to help us better position the University as a whole going forward. So it will get rolled out system-wide in and around the November time frame.

Trace Urdan – Signal Hill

Then just another quick question. Would you say that 90/10 was a factor at all in your decision to raise prices 4% to 6%?

Chas Edelstein

No, it really wasn’t. I mean we’re investing contrary to some of the things I read. We are investing very heavily into the classroom, into technology, into our teachers and instructors. So with that comes a moderate, I would say, price increase of 4% to 6% as we said.

Brian Swartz

We look at a variety of factors when we analyze prices by geography. We look at our level of investment as Greg mentioned, what it takes for our employees from an inflationary perspective, what our competitors are doing. We do look at certain regulatory hurdles as well or not hurdles but guidelines. So I mean, it is an important process or pricing process and it’s not taken lightly.

Greg Cappelli

Yes, it’s important to us that our programs are still in and around the Title IV levels as well in terms of where they are capped out.

Trace Urdan – Signal Hill

Fair enough. Thanks very much.

Operator

Your next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open.

Jeff Silber – BMO Capital Markets

Thanks so much. I wanted to go back to the reg [ph] process. You mentioned that your change in compensation for your enrollment counselors would comply with the proposed rules. I know it’s a little bit too early to talk about gainful employment. I’m just curious on the other 12 issues that were mentioned in the NPRM, have you looked at those, is there going to be any impact on your business because of those proposals?

Greg Cappelli

Yes, Jeff, we have looked at those and we’re comfortable with those initiatives and we support many of the initiatives that are on the table. We’ve said publicly about gainful employment as it relates to public policy and what’s best for students. And again, I’ll just reiterate what we said about the compensation initiative. We started looking at the whole comp issue long before there was ever an initiative in Washington, frankly, from the many campus visits and sitting down with our employees and our students and our alumni and just understanding how we can turn the position into one that’s best for the student and we think that this is going to do that.

Brian Swartz

One thing I might add to that, I mentioned in my remarks on incentive compensation that the new counselor compensation plan we have in testing we do expect that it will be compliant to the proposed incentive comp rules now. So but there could be some other impacts where we might have to change some things structurally in our businesses, our IPD model for example, but it’s really too soon to say in terms of any of the other ones.

Jeff Silber – BMO Capital Markets

And just quickly through your Q, I noticed that WIU is now part of Apollo Global. Can you talk about the thought process that went behind that?

Greg Cappelli

Sure, Jeff. That’s been in the works for some time. WIU, well, it has domestic students. It’s also going to be focusing internationally going forward. There has been some wonderful addition to human capital and talent at WIU and they are really very involved with the whole global initiative. I know we didn’t spend a whole lot of time on Global this time. We’ll try to update you more on things that are happening there. But it was a nice fit. They are excited to be part of Global and you’ll be hearing more from them going forward.

Jeff Silber – BMO Capital Markets

All right. Great, thanks so much.

Greg Cappelli

You’re welcome.

Operator

Your next question comes from the line of Suzi Stein with Morgan Stanley. Your line is now open.

Suzi Stein – Morgan Stanley

Hi, can you address 90/10; do you expect to hit the 90% threshold in July of 2011 when the temporary relief expires? And I guess other than raising tuition, how are you guys thinking about dealing with this just given the over-borrowing problem?

Brian Swartz

Yes, Suzi, it’s Brian. I mean the trend is it continues to be negative. We don’t expect to have any problems with it this year, fiscal 2010. In terms of 2011, there’s a lot that could happen between now and then as you also know the temporary relief statutorily stops I think a month or two prior to the end of our fiscal year. So it’s certainly going to get closer.

We are working on a variety of initiatives to help control 90/10, part of it is, well, one of the items is, what Joe was referring to earlier around our corporate accounts and academic alliances with the employers and Joe made some remarks on that and we’re also looking to grow on non-degree and continuing to add programs and other things that would all benefit the 10 side of the equation.

Greg Cappelli

Yes, we’re putting more formality around that structure as well, Suzi, so we’re working on it hard.

Joe D’Amico

And we also put in place, as Chas has mentioned, our student borrowing calculator, call it a responsible borrowing calculator, where we’ve seen substantial reductions in the number of students who borrow the max, that in the past had borrowed the max under Title IV. And so, I think, as we continue to educate students on what it means to borrow money, which we also intend to do as part of our orientation program going at some point in the future. We think we can begin to have some impact on that will help 90/10. There isn’t a silver bullet; it’s a number of things that we’re doing. We also have some other ideas that we’re not prepared to talk about to address it. So we continue to work on it and we recognize we need to deal with it.

Suzi Stein – Morgan Stanley

And then just one kind of that nitpicky question. Can you just explain what the $5 million charge related to the state audit is?

Brian Swartz

We had an audit review by one of the state grant program that we participate in and so that is just some accrual we’ve made for some exposure we believe we may have under that program.

Suzi Stein – Morgan Stanley

All right, thank you.

Operator

Your last question comes from the line of Jerry Herman with Stifel Nicolaus. Your line is now open.

Jerry Herman – Stifel Nicolaus

Couple of questions guys, relating first to student funding. Is there any trend that the front end of the pipeline, Joe talked about alliances, the shift to bachelor’s’, maybe some of the effect of Orientation, are the students at the front-end of the pipeline funding themselves any differently? I realize that the trends are still negative, but new students in particular.

Joe D’Amico

We are seeing some trends with students borrowing less than the maximum under Title IV because of the protection we put in place, at least, to help students better understand what they really need to borrow and I think in this climate some students are actually trying to manage their debt levels.

Others, I think, use school quite frankly to be able to borrow as much as they can, because they have lots of other issues, life issues that they are dealing with. So this is another way for them to potentially get some funds, as well as their education. So other than that I don’t think we see any other trends. Private borrowing is basically non-existent, in our situation that continues to decline. It was never big to begin with.

Jerry Herman – Stifel Nicolaus

And then a question about the Orientation program if I might…

Joe D’Amico

Jerry, one other point. We are though seeing companies continuing to support their students in the curriculum. So as I said, we’ve been adding new corporations, who actually do provide the funding. So that’s through direct bill approach. So we are seeing that trend at least from our perspective to continue.

Jerry Herman – Stifel Nicolaus

And then on the Orientation program, it looks like that you’ll put a couple of hundred thousand students through that program next year. Would you expect the attrition to be comparable and you care to offer an absolute dollar amount of that investment overall?

Brian Swartz

I think maybe the way to think about that is, we will have less students that will ultimately be enrolled into the University, but the backside offset for that is my prepared remarks or comments about the retention rates and that’s really the key that we’ll have less students coming into the funnel, so to speak, but presumably students will persist at a much higher rate for those that get through. So I think that’s probably the best way to think about it. I don’t know if that answers your question. In terms of the total dollar amount, we are not prepared to give any specific numbers or comments on that.

Jerry Herman – Stifel Nicolaus

Then just one final question on with regard to CDRs. I know you are not offering any new information here, but can you just talk about the differential between CDRs and graduates versus overall, how significant that difference is if at all?

Brian Swartz

Not quantitatively, other than to say that they are much higher than what they are for graduates only.

Greg Cappelli

Graduates are much lower.

Jerry Herman – Stifel Nicolaus

Okay, great. That’s all I have.

Operator

Thank you. I’d like to turn the call back to Greg Cappelli for closing comments.

Greg Cappelli

Okay. Thank you all for being with us on the call today. We’re extremely focused on our long-term strategic goals, I hope that came through. We’re always going to try to do the right thing for the students and we know for sure that our long-term returns and to our shareholders are dependent on the returns of our students. So thank you again for joining us and we’ll talk to you all soon.

Operator

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

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Source: Apollo Group, Inc. F3Q10 (Qtr End 05/31/10) Earnings Call Transcript
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