Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Joseph D'Amico - President and Chief Operating Officer

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

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

Charles Edelstein - Co-Chief Executive Officer and Director

Jeremy Davis -

Analysts

Brandon Dobell - William Blair & Company L.L.C.

Michael Tarkan - FBR Capital Markets & Co.

Ariel Sokol - UBS Investment Bank

Paul Ginocchio - Deutsche Bank AG

Jerry Herman - Stifel, Nicolaus & Co., Inc.

Blair Mlnarik

Andrew Steinerman - JP Morgan Chase & Co

Jeffrey Silber - BMO Capital Markets U.S.

Kelly Flynn - Crédit Suisse AG

Peter Appert - Piper Jaffray Companies

Sara Gubins - BofA Merrill Lynch

James Samford - Citigroup Inc

Suzanne Stein - Morgan Stanley

Scott Schneeberger - Oppenheimer & Co. Inc.

Steven Bachman

Corey Greendale - First Analysis Securities Corporation

Trace Urdan - Signal Hill Capital Group LLC

Gary Bisbee - Barclays Capital

Apollo Group (APOL) F2Q11 Earnings Call March 29, 2011 8:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2011 Earnings Release Conference Call. [Operator Instructions] This conference call is being recorded today, March 29, 2011, 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 April 8, beginning approximately two hours after we conclude today. The replay number is 800-642-1687 or (706)645-9291, internationally. The conference ID for this replay is 47837838. I would now like to turn the call over to Jeremy Davis, Director of Investor Relations. Mr. Davis, go ahead, please.

Jeremy Davis

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

As we discuss our results today, unless otherwise noted, we will be comparing second quarter of fiscal 2011, which ended February 28, 2011, to the second quarter of fiscal 2010. 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 materially differ from any future results expressed or implied by such forward-looking statements. These factors are discussed under Risk Factors and elsewhere in the company's most recent 10-K and subsequent 10-Q reports filed with the SEC, and available on our website at www.apollogroup.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. Our press release, which contains financial and other quantitative information to be discussed today as well as the reconciliation of GAAP to non-GAAP measures is also available on our website. And with that, I'll turn the call over to Chas.

Charles Edelstein

Okay, thanks, Jeremy and good morning, everyone. Special thanks to those of you on the West Coast, who are up early with us this morning. I'd like to start off this morning with a brief overview of our business and how we're positioning ourselves within the higher education sector. Then Greg will talk a bit about the key initiatives we've been working on, and why we're excited about what we're seeing. And then Brian will cover the results from the quarter in more detail, and provide some commentary on our outlook for the business.

The past several quarters have been a time of considerable change within our sector. At Apollo, we set out a plan, starting a couple of years ago, to drive change within our organization and thereby, lead positive change in the higher education sector. These changes are focused on improving student outcomes, improving the student experience, and positioning our company for sustainable long-term growth, while reducing risks to the business.

These initiatives have contributed to lower enrollment in the second quarter, and we expect that trend to continue in the near term. However, importantly, we are seeing indications that these initiatives are having a positive impact on certain quality measures within our institutions. These indicators include a mix shift toward higher degree-level programs, as well as improving retention rates, following the initiation of our first year sequence program, which was launched last year.

We expect the declines in new enrollment that we're experiencing in 2011 to be felt more in our financial results in 2012, but we believe our initiatives represent the right thing to do for our students and for the long-term health of our business. Within the U.S., we believe our market opportunity is large and growing. Importantly though, we're focused on targeting that portion of the market, which we think we can most effectively serve with our offerings. We do this by trying to identify students who are willing to put in the effort to succeed, and who we believe are likely to benefit from our programs.

While it's difficult to pinpoint the exact size of the market, we believe University of Phoenix has a vital role to play in helping Americans remain globally competitive. There's a large mismatch between the supply and demand for higher education in this country, and traditional public and private schools lack the resources to meet that demand or address the need of many non-traditional students. There is increased competition for these students, but we believe we're well positioned to garner an attractive share of the millions of students comprising our targeted domestic market. As always, our primary focus remains on these domestic opportunities inherent at University of Phoenix. In addition, we continue to see strong demand for post secondary degrees internationally, and we intend to continue our pursuit of growth through international expansions.

Finally, on the regulatory front, I'd note that we continue an active dialogue with policymakers in Washington, which I would characterize as substantive and constructive. We've been working to ensure that we're compliant with rules that were finalized last fall, and we believe we could comply with each when they are scheduled to become effective in July. We don't yet have visibility into the timing or substance of final rules on gainful employment, but we're pleased with the seriousness with which the administration and Congress are approaching and evaluating the issue. Because we take our compliance responsibility very seriously, we're particularly pleased to have reported in February that University of Phoenix received an expedited final program review determination letter from the Department of Education related to the department's recent program review this past December. There were no significant adverse findings in the program review, and the department concluded the university has initiated or completed acceptable corrective actions with respect to each compliant item identified in the review, and each finding has been closed.

We remain vigilant in our determination to drive positive change throughout our institution, which is intended to further enhance the value of degrees conferred by our institutions to the many students who stand to benefit from our quality education and thereby, build long term shareholder value. And with that, I'll turn the call over to Greg.

Gregory Cappelli

All right, thanks, Chas. Good morning, everyone. During the second quarter, we continue to execute on the key strategic initiatives we've been talking about with you in recent quarters. As a reminder, some of these include changes in our admissions process and the way in which we evaluate and compensate our advisors, the implementation of University Orientation, refinements in our marketing strategy including investments in our Workforce Solutions group to build our corporate relationships, and enhancements in the areas of student protection, as well as ongoing investments in the student experience, including enhancements to our student platform. While some of these initiatives are having an adverse impact on our new enrollments, we are encouraged by some of the early indicators we're starting to see in the business. First, with respect to the changes in our admissions process and the way in which we evaluate and compensate our advisors. This continues to be a big, big undertaking. It'll take sometime for our Admissions Advisors and supporting staff to gain comfort and get acclimated to our new approach. As you know, we've eliminated the old performance evaluation and compensation system on September 1, 2010. This was absolutely the right thing to do, but it did create some uncertainty and disruption for our staff in the field. We've continued to enhance our coaching and training for advisors and managers regarding the competencies that we expect from them, and the new evaluation criteria that will be used for annual evaluations have now been rolled out to our employees in the field.

During the second quarter, we saw the year-over-year declines in Admissions Advisors productivity metrics begin to stabilize compared to the first quarter, and certain leading indicators have actually started to show some improvement. Although there's still much work to do, we hope to see additional progress as our advisors adjust to the new approach.

Also, as it relates to changes in our admissions process, a few months ago, we launched our new Visiting Student Center, in which prospective students can, at no charge, take various types of self assessment to help them identify potential areas for development prior to enrolling, and to help them explore the ways in which they learn fast, whether it be online or on ground in a campus-based setting. We've received good feedback from this tool from both advisors and students to this point.

Second, as you know, we rolled out University Orientation to all incoming students with fewer than 24 incoming credit hours. That started November 1. It's still too early to draw any long-term conclusions because only a handful of students who have gone through orientation after November 1 has had the opportunity to make it through their first courses, but the initial results continue to suggest that about 80% of those who go through orientation go on to enroll in the University of Phoenix, while approximately 20% opt out before taking on student debt, and generally leaving with a good impression and are appreciative of the opportunity. Since only a handful of students who went on to enroll have had an opportunity to complete the first classes, we only have preliminary data on retention, which is why we've opted to wait until next quarter to introduce a formal quantitative retention metric externally. However, we can't say that the preliminary data on first course completion for this group is up from prior level levels.

In addition to the changes that I just discussed in the area of admissions, and the implementation of the University Orientation, the refinements we've made over time to our marketing strategy are also helping us to better identify those students who we believe we can most effectively serve, and who have a better chance of succeeding in our programs. We've seen the cost associated with enrolling a new student increase as ad rates in both traditional and online media have increase in general and as a result of our decision to continue to invest in our long term branding strategies, which do not immediately benefit enrollments, but which we believe will benefit us in the long run. However, we continue to believe there are opportunities for us to improve our marketing efficiency over time.

It's too early to call any trends, but we've seen some signs again of stabilization in certain metrics, which include conversion rates, which has stabilized during the last quarter. Our marketing efforts are also helping us to meaningfully shift the mix of our enrollments towards bachelor level students, where we have more experience in serving these types of students. Bachelor students at the University of Phoenix generally retain better and they default less. We obviously still have some work to do in our masters and doctoral areas, but we are focusing resources on this area, and we remain committed to growing our graduate level programs over time. Each of these initiatives in the areas of admissions and marketing are directed to growing our business the right way by ensuring that those who come to us and choose to enroll are well informed. They are prepared and committed to do the work necessary to succeed. This, along with the introduction of student-centric tools and resources within our financial aid process, demonstrates our commitment to leading in the areas of compliance and student protections. One particular data point worth highlighting is the significant reduction in the number of internally escalated complaints from students, and the reduction in the possible compliance matters in our monitoring programs over just the last quarter. We believe our students recognize and appreciate the student center enhancements we're making throughout the admissions and financial aid process and beyond.

Finally, we're excited by the progress we're making with our investments in the student experience, including enhancements to our student learning platform. We recently launched our new academically-oriented social network. It's called Phoenix Connect to the School of Business. Last week, we expanded the rollout to the College of Education, and certain other schools with a very strong engagement and receptivity. Phoenix Connect is now rolled out to roughly 250,000 students or more than half of our total population. We've also added live chat functionality to Phoenix Connect to facilitate better communications between students, faculty and advisors. Also, we'll be launching our mobile learning application strategy within the next few weeks. And by the end of the current quarter, we'll be rolling out our enhancements to our new classroom learning platform, including the introduction of our first adaptive learning features to selective students and programs. We believe these enhancements to the classroom environment can further improve the student experience, and potentially help improve student outcomes, and make for the differentiating University of Phoenix from other institutions.

Before I conclude, I'd like to spend a moment to discuss our efforts to diversify internationally in Apollo Global. As you saw in today's release, during the second quarter, we recorded additional goodwill and intangible impairment charges for Apollo Global's BPP subsidiary, totaling $220 million, as a result of continued lower-than-expected enrollments for the Professional Training programs. Each of these business, which is heavily dependent on the strength of law and finance sectors in the U.K., is being impacted significantly adversely by the economic weakness in the U.K. And since the majority of programs are multi-year programs, so lower enrollments are expected to further impact growth in the Professional Training business for the next couple of years, resulting in a triggering event for an interim impairment test.

Despite the non-cash write down, we do remain very optimistic about the opportunity with BPP, and continue to believe that this will be an important and valuable part of Apollo Global going forward. When we acquired BPP, we saw it as a strategic part of global that could be expanded in the U.K. through the unique degree granting capability and then internationally throughout Europe. We believe this just as strongly today, and we'd like to note a few milestones. BPP's Test Prep business continues to expand its online offering, and is putting many of its programs online this year. The law school is launching its first online undergraduate degree in May, and the new business school welcomed its first MBA class in January. The school is now offering bachelor level degrees in banking and finance, with other offerings in the pipeline. Also, BPP was named the U.K.'s post-16 education provider of the year for 2011 by EducationInvestor magazine. The U.K. government is encouraging private sector growth in the U.K., post secondary education market, and looking for innovative cost-effective solutions to help meet the growing demand for higher education in the U.K., and BPP with Apollo support, we think is well placed as a leader in this sector.

As we continue our pursuit of growth, both domestically and internationally, we are pleased to welcome Tim Daniels, the former CEO of Wall Street Institute, who joined us in February as the new President of Apollo Global. Tim has deep international experience, which reflects our continued to broadening our educational options, and access for students on an international scale, and we truly look forward to his leadership at Apollo Global.

In summary, we've chosen to continue to make our strategic investments through this period of transition for the University of Phoenix, and we truly believe that they will enable us to once again move ahead to the head of the class in higher education. With that, let me turn the call over to Brian who will spend some time reviewing our financial performance in the quarter and provide some commentary on our outlook for the business.

Brian Swartz

Thanks, Greg, and good morning, everyone. I'd like to start by reviewing our second quarter financial results, update you on our 90/10 percentage and some CDR trend, and then I'll spend a few minutes on the outlook for the business. During the second quarter, revenue decreased 2%. The decrease was primarily the result of a 12% decline in Degreed Enrollment at the University of Phoenix to roughly 405,000 students, which was partially offset by selected tuition price increases, a mix shift towards higher degree-level students, and improved retention rate. New Degreed Enrollments for the University of Phoenix were down 45%, which was primarily driven by the implementation of our strategic initiatives. As a reminder, University Orientation impacts enrollment at the associate’s and bachelor’s levels, while the changes we've made for our admission functions effect enrollments at all degree levels, including our masters and doctoral programs.

Loss from continuing operations was $67 million or $0.47 per share compared to income of $103 million or $0.67 per share in the year-ago quarter. During the second quarter, we recorded additional goodwill and intangible impairment charges for Apollo Global's BPP subsidiary, totaling $220 million as a result of a lower-than-expected enrollment in the professional training programs. Excluding the impairment, as well as other items discussed in greater detail in the press release, income from continuing operations decreased 9% to $118 million. Our operating margin declined 140 basis points as a percentage of revenue, and our EPS was $0.83 per share, which is about flat with $0.84 in the prior year ago quarter.

Now I'll spend a minute discussing each of the expense categories. First, instructional student advisory increased 140 basis points as a percentage of revenue, as we continue to invest in the student experience, as well as make investments to enhance our curriculum, product development and delivery platform. Marketing increased 180 basis points as a percentage of revenue, due primarily to higher advertising cost, as you are seeing higher prices in both online and traditional media, and increased competition for higher-quality students.

Admissions advisory expenses declined 120 basis points as a percentage of revenue due to lower headcount during the quarter, resulting from both the reduction in force, which took place at the end of the first quarter, as well as proactive management of replacing, hiring for regular attrition. This decline was partially offset by slightly higher average wages. As we expected, our G&A was about $84 million, which represented an increase of 160 basis points as a percentage of revenue. The increase was primarily due to increased cost associated with significant investments we are making in our technology infrastructure, which we will continue to invest in during this period of transition. We also have some higher expenses associated with compliance and external affair activities, including charitable contributions.

Going forward, we believe second quarter G&A cost to be a good run rate, barring any unexpected legal or other cost. Bad debt was significantly lower again this quarter, both sequentially and year-over-year. Bad debt expense as a percentage of revenue was 4.3%, down 260 basis points from the prior year. The decrease was primarily attributable to the reductions in University of Phoenix gross accounts receivable as a result of lower new enrollments, which include the effect of the University Orientation initiative. We also continue to see some improvements in collection rates. As we noted last quarter, University of Phoenix is in the early stages of implementing several initiatives that could favorably impact bad debt expense in the future. We look forward to sharing the results of these initiatives with you in the coming quarters.

Depreciation and amortization increased 40 basis points as a percentage of revenue due to increased depreciation from computer equipment and software, partially offset by a decrease in amortization of intangible assets. Share-based compensation totaled $15 million in the second quarter, and we expect the total for the fiscal year to be about $70 million. Our effective tax rate in the second quarter was significantly impacted by the non-deductible goodwill impairment. Excluding the unusual items, our effective tax rate was 41.4%, and we expect that it will be about 42% for the third and fourth quarters of 2011. As always, the rate could change, depending upon the outcome of our state tax initiatives and the results of our foreign operations.

Turning briefly to the balance sheet and cash flows, we continue to maintain a well-capitalized balance sheet at February 28, 2011, and have unrestricted cash and cash equivalents in excess of $1 billion. Our outstanding debt decreased to $191 million versus $584 million at the end of last year. I also want to point out that we completed a sale leaseback transaction on our Riverpoint office complex in Phoenix last week. We sold the facility for $170 million, and concurrently leased the facility back for a 20-year term, with four five-year renewal options. We are taking steps to optimize the structure of our current real estate portfolio, and we will continue to execute on opportunities to improve our space utilization and market leasing terms.

Excluding Apollo Global, our day sales outstanding for the quarter decreased to 22 days from 30 days at the end of last fiscal year and the end of the second quarter of last year. The decline is primarily due to the lower University of Phoenix gross accounts receivable.

During the second quarter, our adjusted free cash flow increased to $46 million compared to a negative $38 million in the second quarter of last year, primarily as a result of two one-time payments in the prior year related to the Qui Tam lawsuit and an IRS tax dispute. As a reminder, we define adjusted free cash flow as cash flow from operations less CapEx and changes in restricted cash. Regarding capital expenditures, we no longer expect elevated levels of capital expenditures in 2011 as we have been able to identify opportunities to reduce our spending and as such, we now expect CapEx in 2011 to be roughly flat with 2010 levels.

During the second quarter, we utilized approximately $75 million in capital to repurchase 1.8 million shares of stock, an average price of about $43 per share. At the end of February of 2011, we have $525 million remaining available under our current share repurchase authorization. Before I discuss our business outlook, I'd like to update you on a couple of regulatory matters. First, I am pleased to share that the University of Phoenix has recently seen some slight improvement on its 90/10 percentage as a percentage of our cash-based revenue, coming from Title IV funds in the first half of 2011, is slightly lower than it was in the first half of 2010, which we attribute to lower mix of associate students compared to last year. We continue to work to lower our 90/10 percentage. We do not expect our 90/10 percentage for fiscal year 2011 net of a temporary rate provision to exceed 90%.

Also, as expected, we continue to see upward pressure on our cohort default rates for University of Phoenix. The draft two-year rate for the 2009 cohort was 19%, which increased from 12.9% for the 2008 cohort. We expect this upward pressure to continue due to continued challenging economic conditions, the growth in our associate program in recent years, and recent changes in how student loans are serviced. However, we think that our efforts to reduce the mix of associate students, the implementation of our orientation program and the implementation of other security and protection initiatives will favorably impact the rate over the long term. Based on the data currently available to us, we do not believe the 2010 cohort rate will exceed 25%.

Finally, I'd like to spend a minute and provide some commentary on our business outlook. Our business is in a transition, and we don't have perfect information. However, we believe that an improvement in retention rate, coupled with an eventual resumption of positive new enrollment growth will occur, which will return -- which will result in a return to growth in total enrollment and revenue. Our current enrollment trend in the third quarter suggests our new enrollment decline will be similar to the decline we have experienced in the first half of 2011. As a result of the decline in new enrollment during 2011, coupled with a large number of students who are graduating or otherwise leaving the university, we expect increasing declines in both total enrollment and revenue as we move through the remainder of 2011, and for both total enrollment and revenue growth rates to remain negative throughout 2012.

We do expect new enrollment to grow again in 2012, and also expect to achieve higher retention rates for those new students. As we move through the period of transition in our business, we intend to responsibly manage our cost structure to appropriately align it with the business results, while maintaining our high-quality standards. We will continue to make strategic investments for the long-term.

In total, we continue to believe we will end 2011 with an excess of $100 million run rate savings from 2010, largely driven by the combination of proactive management of our headcount and lower bad debt expense. Since the end of the fiscal year last August, we have managed our headcount down as of the end of the second quarter by approximately 8%, which as we previously discussed have been down 5% at the end of the first quarter. We will continue to manage headcount as needed to support our student and organizational needs. Given some of the investments we are making in the university and as a result of the relatively fixed cost nature, we expect negative operating leverage to weigh on our financial results as revenues decline -- increase in the next several quarters. Based on what we know today and the trends we expect for the future, primarily in the area of new enrollments, retention rates and cost controls, which can and will change, we offer the following outlook. This outlook does not reflect any impact from additional regulatory proposals such as gainful employment, which as you know is uncertain.

For fiscal 2011, revenue of $4.65 billion to $4.75 billion and operating income excluding any special charges of $1.15 billion to $1.2 billion. And for fiscal 2012, revenue of $4 billion to $4.25 billion, and operating income excluding any special items of $675 million to $800 million. Despite the implication of our initiatives on the near term financial results, we are confident that the changes we are making are in the best interest of the students and therefore, over the longer term, in the best interest of our shareholders. With that, I'll turn the call over to the operator, so we can take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Sara Gubins with Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch

Within your outlook, could you talk about when you're expecting a return to student start growth?

Brian Swartz

Yes, Sara, it's Brian. What we do expect is we do expect to return to growth in fiscal 2012 on new enrollments. We're not going to get any more specific in terms of which quarter, but we absolutely expect that to happen in 2012.

Sara Gubins - BofA Merrill Lynch

Okay. And then the expectation of similar kind of 40-ish percent student start declines in the third quarter, could you give us any sense of how much of that is due to the implementation of orientation? And how much is due to your other factors and just along with that last quarter, you talked about the impact of orientation on your student start decline, but I'm wondering if you could do the same for this second quarter?

Brian Swartz

As you know, Sara, there's lots of things that impact our new enrollments. Excluding the impact of the orientation, the numbers we reported, which were down about 45% for Q2, are kind of indicative of what we're seeing in the core business. So we're not going to break out the details of University Orientation versus the other impacts hitting new enrollments, but it's roughly in line.

Sara Gubins - BofA Merrill Lynch

Okay. And then just last quick question, on persistence, do you think -- I know that that's a combination of graduation and retention, do you think that we could do -- persistence levels improve as we -- and actually go up as we get to the end of fiscal year 2012?

Brian Swartz

Yes, I think throughout the end of the rest of this fiscal year and in 2012, you'll see more pressure on the persistence calculation as most -- as you and others calculate it. And it's a function of, obviously, students graduating, other students leaving the university and the lower new enrollments. So that's why as Greg mentioned in his comments, we plan on introducing a quantitative retention metric for the students that are currently enrolling next quarter.

Gregory Cappelli

And Sarah, we're much more focused on things that we can control and evaluate certainly the first course sequence, the number of students coming out of that period of time, as well as the average number of credits that the student is taking. And those are going to be some of the things we're going to be sharing with you next quarter.

Operator

Our next question comes from the line of Suzi Stein with Morgan Stanley.

Suzanne Stein - Morgan Stanley

I'm just curious, does the 2012 guidance for operating income assume any new cost-cutting initiatives? I guess what I'm getting is could that range be conservative if you look to get more aggressive in terms of preserving the margin? And also, do you see 2012 as the bottom?

Gregory Cappelli

Those are good questions, Suzi. And what I would say is that given the trends that we're seeing in the business right now, that's our best estimate of the range that we're looking in internally. Could that move around? Absolutely. One of the things we are most closely monitoring and focused on is retention. That's the primary reason why we're doing so many of the things we're doing to the institution and to the organization. And that, more than anything, could move that number meaningfully, one way or another. We're hoping that it impacts possibly. We're doing everything we can to that. But that's a reasonable range at this point, which we'll update you on in the next quarter.

Brian Swartz

Suzi, I just also would say there that, that U.S. about the expense cutting, and we specifically have included our high priority strategic initiative investments in that number. So you shouldn't think of the way we're managing that as reducing our investment that we think are important for the future. And so that number does include a significant investment in our growth initiatives.

Gregory Cappelli

And the other thing I'll end with here, Suzi, is on – whether it’s the bottom or not, the only thing we can really comment on there is six months ago, a year ago, we hadn't done the things that we've actually done now. I mean, in September, we made the change to the comp plan. That was a big deal in this organization. And we're feeling the impacts of it, but we're pleased with what we're seeing every week that goes on, it's just a major organizational change and it's going to take some time. Orientation wasn't rolled out and fully put in place. It is now. So some of these big things that we're doing were getting behind us. And everyday, we're getting more experienced with these new organizational methodologies. And hopefully, they will prove to be successful for us going forward. But some of the biggest areas of challenge we’ve put in place and are now doing the best we can to make them successful.

Suzanne Stein - Morgan Stanley

Okay. And just one more question, revenue per student seems to be holding up very well. Can you just talk about what the outlook is going forward there? Should we expect that to continue and move up?

Gregory Cappelli

Yes, what you're seeing there, Suzi, is obviously the effect of the increase in the tuition prices last summer. But also what you're seeing is just an increase in average attendance or the number of nights that a student attended during the quarter, which at least as a proxy for some of the positive retention comments or the positive retention rate comments that we made is showing up in that metric. So whether or not it continues to that level, we'll find out in future quarters, but that's an indicator of more comments around the retention rates.

Operator

Our next question comes from the line of Peter Appert with Piper Jaffray.

Peter Appert - Piper Jaffray Companies

Greg or Chas, you talked about the impact of increased competition and others in the industry as well. And I'm wondering should we think about this in the context of maybe permanently increased student acquisition cost and thinking beyond the transition in the business to fiscal '13 or 14, does it imply perhaps that a normalized level of operating margins in this business will be below what we've seen historically?

Gregory Cappelli

Peter, you're a little bit hard to hear. Sorry, I think I caught the bulk of your question in terms of the increase in expenses or requirements in student advertising. And honestly, there's been a number of things that impacted that year-over-year. That's going to move around, that metric, our team thinks. And if you think about what the sector has been through the past year and in terms of what needs to be done to overcome that, that's impacted it certainly. The negative media earlier this year was an issue. Certainly, the fact that just from an economic standpoint, there has been an increase just in cost across the board in terms of advertising in certain categories and areas. Education is one of them. So we expect that, that metric to continue to move around. Right now, it's obviously higher than it was a year ago. Is it permanent? That's hard to say, probably not. It's probably move with the economy to some extent. But we'll continue to monitor it, and there's a number of things that we're trying to do to improve our expenses in that area that we'll continue to focus on which one, is workforce solutions, and getting back to our leadership position, and working with corporations that we're starting to have some success with. And that drives referrals and other things that obviously are lower cost. Does that answer some of your question?

Peter Appert - Piper Jaffray Companies

Yes, that's very helpful. And then somewhat related to this, so you note the 700 reduction in admissions personnel. It seems somewhat counterintuitive in the context of declining enrollments that you would be cutting admissions personnel just in the sense might exacerbate the rate of decline, how do you think about that?

Joseph D'Amico

This is Joe D'Amico. The reduction, first of all, was not at all admissions. The 700, I think you said that was all admissions. Certainly, it was the majority, but not all. Secondly, the changes we made there were principally related to performance. So those were counselors that were not effective at the levels that we believe they should be any way. So but yes, it does have an effect and certainly, we look and monitor those metrics. But most importantly, we expect that counselors as a result of the change we had, had some impact on their productivity, and now that's coming back. So I think right now, given the level of new enrollments coming in that we're probably at the right levels of new enrollment counselors or enrollment counselors.

Peter Appert - Piper Jaffray Companies

And does the enrollment counselors -- they have to increase the enrollment growth rate or to drive growth in the enrollment numbers?

Joseph D'Amico

We expect that they will improve. As they get used to the new coaching and the new environment. So productivity will have an impact, as well as the number of people, yes.

Operator

Our next question comes from the line of Gary Bisbee with Barclays Capital.

Gary Bisbee - Barclays Capital

I guess first question, I guess, what gives you confidence to put out this forward outlook, should we read that as a sign that you do feel like you've got your hands around all these changes a bit more, or was this maybe an indication that the street numbers, particularly in '12 are way off, and you wanted to sort of get ahead of give more people more of a crutch going on here?

Brian Swartz

Gary, it's Brian. I mean, we were concerned that given the trends we've seen in 2011 and the first quarter, the second quarter, our comments on the third quarter new enrollments, we want to make sure we were clear with all of our investors on how those trends are going to flow through our financials over the course of the next year, year and a half. So that was our principal reason for doing it. In terms of how confident we are in these numbers, I mean they reflect the current trends in the business, as well as where we think those trends are going to go around new enrollment growth rates, retention rates, cost controls and other things. So they certainly anticipate a recovery to growth in 2012, particularly around new enrollments. And the fact that retention rates for those new students will be higher. And I think given the stabilization of some of the things we're seeing and some of the comments that Greg mentioned, we're comfortable of where our outlook is -- with this outlook.

Charles Edelstein

Yes, Gary, obviously, things are going to move around. We know that. But again, why not six months ago? Six months ago, we hadn't implemented orientation. We didn't have any data on it in terms of the big rollout. The initiative to put a new compensation program for enrollment advisors occurred September 1. There's just a lot of moving pieces there. The restructuring of some of the workforce. So again, some of that is behind us. Doesn't mean we're going to have perfect data, but we're doing the best to share our internal view with you at this point. And we'll try to make sure you know the sort of the certain key levers that can move and change things, and we'll just update you on those in terms of how they moved or what changed in the quarter.

Gary Bisbee - Barclays Capital

Okay, and then just a quick follow-up, you mentioned progress or maybe stabilization with the word used, productivity, conversion rates, any more color you can give there? And I guess what I'm really curious about, do you have any feedback from the admission force now that they're sort of in there, understand what their new comp plan and their new responsibilities would be, how they're thinking about it? Are people happy, is morale bad or are there some that are happy, some that are upset? How are you thinking about where you are right now there?

Gregory Cappelli

Sure, that's a great question. Well, first of all, we're very pleased with what we're seeing. The accounts of our productivity is coming back. The feedback from our people is very positive, actually. We do pulse surveys. So periodically, we send out a survey to a small sample of people, and we get their feedback. I'm very pleased with the way our people are reacting to the changes. They're very committed to the company, and they're very loyal. So far, so good.

Operator

Our next question comes from the line of James Samford with Citigroup.

James Samford - Citigroup Inc

Greg, I just wanted to touch on a few things. How do you think about the impact of the state budget shortfalls and increasing supply demand imbalances likely to result from that? I mean, I'm thinking in terms of reduced taxes, higher tuition rates at traditional colleges. At what point do you think the quality of University of Phoenix degree presents itself as a viable alternative to more traditional student?

Gregory Cappelli

I appreciate the question. We wrote a whole white paper on that subject this past summer, and published it. I mean over 40 states have cut funding significantly for higher education. And there are serious issues in terms of funding at a very bad time for higher education in this country when you have the majority of the labor force that doesn't have a bachelor's degree. So that's a concern. And we also know that a greater number of people are coming to college less prepared than they were 10 or 20 years ago. We have the data, probably speaking. So I do think that a couple of things, one, it's going to be incredibly important to make sure there's appropriate funding to the junior community college system in this country. Two, we're trying to focus on doing a better job in terms of making sure that we identify students that might not be appropriate for us in sending them to the appropriate junior community colleges around the country. And when they are prepared, when they've learned how to go to college to the extent they need to go to the University of Phoenix, to admit them to the University of Phoenix at that point, I think that you're going to see us continue to improve our reputation, the quality of our programs, a unique leadership position in the classroom of the future, which you're going to see pieces of rolled out throughout this entire fiscal year. So I believe we're going to have a real opportunity to be helpful to the country at the very time when we need to be helpful. I mean, this is a big and growing issue in terms of we're going to be competitive globally, which I believe strongly, again, is all laid out in the white paper. But it's a great question, and it's a big part of why we're doing the things we're doing, so we can be a very viable and high quality option for students in a nation that's cutting spending for higher education in a great number of states.

Operator

Our next question comes from the line of Ariel Sokol with UBS.

Ariel Sokol - UBS Investment Bank

So a couple of questions, the guidance in the fiscal year 2012 guidance, does that include price increases for complying with 90/10?

Brian Swartz

Yes, Ariel, it's Brian. It does include anticipated price increase, but nothing in connection with increases to affect our 90/10 percentage.

Gregory Cappelli

Yes, it certainly doesn't include something out of the ordinary or usual from the past.

Brian Swartz

Right.

Ariel Sokol - UBS Investment Bank

And so I think in the last conference call, you had mentioned that there would potentially maybe price increases for compliance to 90/10. It sounds like your 90/10 calculation is looking a little bit better, do you still anticipate that barring any change from Congress that you would have to increase prices to comply with 90/10?

Charles Edelstein

Ariel, it's Chas. I think what we said previously is that we don't want to do anything out of the ordinary if there was some sort of imperative if we have to, we would certainly consider it. But our outlook doesn't anticipate that. And as you mentioned, some of the trends we're seeing in 90/10 do look a little bit better.

Ariel Sokol - UBS Investment Bank

And then, I guess, the last one, with respect to exit interviews that you do with potential candidates for enrollments, to the extent that they might opt to enroll at an institution other than University of Phoenix, what are some of the attributes that they are referring to, given that the environment potentially is becoming increasingly competitive and specifically, are they -- to what extent are they looking at price relative to how they viewed price in the past?

Gregory Cappelli

Well, I think people are always looking at price. But they're also looking at value. And one of the things that we offer is a tremendous value to our students. And we've talked a little bit about the Visiting Student Center, and the changes we're making to our curriculum in Phoenix Connect, and this is a different university than our competition. And we aim to demonstrate that over time.

Operator

Our next question comes from the line of Trace Urdan with Signal Hill.

Trace Urdan - Signal Hill Capital Group LLC

Good morning, in the guidance that you offered, you suggested that you hadn't made any allowance specifically for gainful employment. And I'm wondering, aside from the general changes that you're making, which are obviously hoping to improve the outcomes overall, is there anything you're doing in terms of program-specific marketing or adjustments that would begin to nod in the direction of where we think gainful employment might end up?

Joseph D'Amico

Well, this is Joe, Trace. We, over time, have been looking at all of our programs again for value being delivered, and we're sensitive to how our programs relate to jobs. So over the course of the last few years, we've been calling out certain programs that we feel that were not up to our standards. And today, I think most of our programs are just fine in that regard.

Trace Urdan - Signal Hill Capital Group LLC

Okay. Fair enough, and then yes, go ahead, Greg.

Charles Edelstein

This is Chas. That isn't to say that we know exactly what gainful employment is going to be, or that there might not need to be adjustments, depending on what it comes out to. It's just that we're doing the right thing proactively regardless of what the rule is about to be.

Brian Swartz

Yes, and the other too, same applies.

Trace Urdan - Signal Hill Capital Group LLC

I understand. And the next question is you mentioned several changes in the platform, specifically around social media. I'm wondering if you could talk about the cost of those changes and how they were treated? Is that stuff that was capitalized and being amortized or is it expense as you go?

Brian Swartz

Yes, Trace, it's Brian. It's both on the cost side. So I mean there are aspects of that, that can be capitalized as part of the software development, accounting literature, and then there are other parts that are expense as well.

Trace Urdan - Signal Hill Capital Group LLC

Can we assume kind of a level amount of spending relative to those initiatives, or is there anything -- is there any kind of bullets caught that you can anticipate related to those changes?

Gregory Cappelli

Yes, Trace, good question. It's where a good chunk of the investment has been going. A lot of it is people cost, capitalizing. So we've been attracting some high-level talent in key areas that we need building the team around our professionals in this area. And so I think the run rate is something that we're not looking to change dramatically over time. And we're making those investments, if that's your question, is it sort of stable in that area? But we will continue to invest at the current run rate in technology and other areas around it in terms of the new classroom.

Brian Swartz

Yes, there's no expected step functions changes here, Trace.

Trace Urdan - Signal Hill Capital Group LLC

Understood. Last quick question, have you been contacted by the health committee about testifying in any future hearings that they may have planned?

Gregory Cappelli

We expect to be included and invited. But we have not yet formally been invited yet to any upcoming hearing.

Operator

Our next question comes from the line of Mike Tarkan with FBR.

Michael Tarkan - FBR Capital Markets & Co.

Good morning, guys. Given that you're still running with over $1 billion in cash, how are you guys looking at capital management at this point? I think buybacks were a little bit lighter this quarter. Is this a situation where you're kind of waiting for a little bit more clarity on gainful employment to be a little bit more aggressive?

Gregory Cappelli

Yes, I think there's a number of things that come into play there, including the timing of when our windows are opened and whatnot. But we said in the past that the buybacks are definitely part of the capital allocation plan at Apollo Group. We measure any of our capital investments on a pyramid-type structure. So we're looking in investments from highest to lowest return. And honestly, the single highest return we think we can drive right now are the improvements that we're making at the University of Phoenix, including things like the investments we just talked about with Trace and to the areas of technology and the classroom of the future and the academic platform. We're lucky to have some phenomenal leaders academically at University of Phoenix. So they're going to get the first cut in any investment we make. And then it sort of goes down from there. But definitely, with the cash we have on hand, share repurchases are a part of the future capital allocation plan, and we do take into consideration outside factors as well.

Operator

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

Paul Ginocchio - Deutsche Bank AG

If you annualize your February quarter cost clean, you got basically $3.4 billion of cost, and that's the midpoint plus or minus $75 million for your fiscal '12 guidance. So there's really no change in the cost structure over the next sort of 18 months. What am I missing, is it Apollo Global that's driving some incremental cost, or is it some of the investments that are going to offset some of the cost cuts you're talking about?

Brian Swartz

Yes, Paul, it's Brian. I mean, the comment that we've made around the reductions of $100 million from fiscal 2011 going into fiscal '12, it's really around -- the comments are surrounded around what we expect on a run rate savings basis, when we look at what we're forecasting for Q4 2011 versus Q4 of 2010. So there is seasonality, obviously, in the cost. You can't just take the total cost then annualize it for Q2 because they are variable cost in their around its faculty cost and others. So our comments around that are the Q4 numbers at the end of this year compared to the end of last year as we move in to fiscal '12. And we expect that to principally come from managing our headcount, which we've done so far to date in the first half of the year, as well as improvement in bad debt expense.

Paul Ginocchio - Deutsche Bank AG

Is there anything in '12 we should know about for Apollo Global? Is there losses that are increasing operating expenses?

Brian Swartz

There's nothing specific that I comment on about Apollo Global. I mean, it's obviously a part of the portfolio of all our businesses, but there's nothing explicit there that I could comment on right now.

Paul Ginocchio - Deutsche Bank AG

Then just last one, I know you guys have been working on your masters enrollment for a while, trying to jump start that. Can you just tell me where we are in the process, and do you still think you can get back to growth there, and when will that be?

Charles Edelstein

I wish I can give you a timeframe on that. That area is very competitive. There are traditional universities who play in that part of the online education. There's been increases in the number of universities that participate there. We certainly are -- we have some plans that we'll be executing on to differentiate ourselves in the masters area. Some of our programs like education, teachers are sort of uncertain in terms of their position. So we're seeing some impacts there. It's one that we haven't solved yet, but we continue to stay focused on it. And we hope to show some improvement here in the near term.

Gregory Cappelli

Yes, and we definitely intend to solve that and get back to being a leader in that area as well, Paul.

Paul Ginocchio - Deutsche Bank AG

If I could just follow-up on that, are teachers uncertain because the comments Arne Duncan made about paying them for their masters?

Gregory Cappelli

Well, they're uncertain about their roles with cutbacks at schools and cutbacks by the state. And so that's principally what I'm referring to.

Paul Ginocchio - Deutsche Bank AG

Okay, and the impact from incentive comp versus just competition, is there a way to parch that for Masters?

Gregory Cappelli

Not really.

Operator

Our next question comes from the line of Jeff Silber with BMO Capital Markets.

Jeffrey Silber - BMO Capital Markets U.S.

Just wanted to follow up on the starts trends both in the last quarter, and I guess the guidance for the current quarter. I know you're not parsing out by specific area, but it looks like things got a little bit worse over the past three months than what we heard on the last conference call. Was there anything specific that happened over that time?

Gregory Cappelli

Nothing specific. Maybe one thing that as we've looked at it, we had obviously a different structure in place moving into the first quarter, so that we didn't have leading into the first quarter, because we had changed our comp plans, changed our evaluations and the like. So there might have been some momentum carryover into the first quarter that may have helped. But I think as we said, we've seen some positive trends now with activity levels and other things. So we're feeling better about direction.

Charles Edelstein

Yes, it's hard to pinpoint exactly. I mean we have a number of initiatives whether it's orientation, whether it's the change in the comp plan or frankly, on the marketing front. And the continued sort of evolution of marketing for us and how we're trying to identify the most appropriate people even through the students that is, even through the lead process. So we're trying different things and evaluating different things and metrics, and that can cause things to move around. We've cut out a number of providers that we thought were not up to the standards that we need to have in terms of potential leads. So there's a lot of things moving around. And again, we think they're all good, and they're all going to lead to good things in the future. But to your point, it's hard to say while this was two or three percentage points different than last quarter, I mean, with the trend in the quarter. I wish we could be more helpful than that.

Jeffrey Silber - BMO Capital Markets U.S.

I understand. Greg, I'm not sure if it was you or Chas, but in the prepared remarks you talked a little bit about potential international expansion. Could you provide a little bit more color? Are there any specific areas that you're targeting in the near term?

Gregory Cappelli

Well, clearly, I mean, it's getting BPP right. I mean that's been a tough one in terms of what happened to the market there and the economy, and their base business, the test prep business. But there's also some great things sort of bubbling up as well that we need to make sure we execute on. We're excited about Tim Daniels and his team and his experience, and the folks that he's bringing in to help lead that division. But it's primarily, we're going to focus on that. We entered into that situation to make sure we could be a leader in the degree granting part of the business where there's a new opportunity in the U.K. and parts of Europe. Certainly, we're committed to Latin America, and we're actually seeing some good signs in terms of online programs and working adults, what we built and are our sort of planting the seeds there in Latin America, and we are seriously looking in evaluating opportunities in India as well.

Jeffrey Silber - BMO Capital Markets U.S.

Okay. Great. And Brian, just one quick one for you. What kind of bad debt expense is embedded in your guidance for both this year and next year?

Brian Swartz

Yes, Jeff, I mean, we're not going to be explicit line item by line item. But as my comments indicated, we've seen some positive, positive trends in the last couple of quarters in bad debt. And we hope to have that continue with some of the initiatives that the University of Phoenix is working into.

Operator

Our next question comes from the line of Kelly Flynn with Crédit Suisse.

Kelly Flynn - Crédit Suisse AG

I got a couple of quick questions. First one is with respect to, I guess, counter cyclicality, could you talk about if that's impacting starts at all? And then, how do you think about that as you talk about fiscal ‘12, seeing improvements in starts?

Charles Edelstein

Kelly, I'll take the first one. In terms of counter cyclicality, it's hard to put your finger exactly on what level might be common for counter cyclicality. It's certainly a possibility. I've seen regression analysis to different parts of employment, employment rates and temp rates like that. So it's probably having some impact. We haven't been able to quantify it. But that's certainly one of the factors that probably the sector is dealing with. And I'm sorry, what was the second part of your question?

Kelly Flynn - Crédit Suisse AG

Well, as just relates to fiscal 2012, I think, Brian said you guys are expecting starts to turn positive. I'm just wondering what you're assuming about counter cyclicality's impact at that point?

Gregory Cappelli

Well, the biggest -- I mean, we're going to be anniversary-ing some very significant downturn in the comparables year-over-year, number one. And Brian, did you want to add something?

Brian Swartz

No, I think that covers it, Kelly. I mean, we have our views of where that will go in 2012. We expect growth to be there and as Greg mentioned, once we hit Q1 of next year, the comp is depressed in the prior years.

Gregory Cappelli

And we're not assuming any major changes in the economy one way or the other from that.

Charles Edelstein

And we're hopeful that some of the significant investments that we're making will begin to pay off. We'll be through a season of orientation. We'll be through the year of the changes in the comp structure. We're just going to have more of this under our belt. And we're continuing to make improvements to the classroom of the future and the university in general. So we're hopeful along with that an easier comp that we're going to be able to so show some growth in 2012 on the new enrollment side.

Joseph D'Amico

Yes, hopeful, along, we're seeing some early indicators that we are in.

Kelly Flynn - Crédit Suisse AG

Okay, great. And then, the second one relates to the Pell Grant cuts that are being talked about. Can you just talk about how you are thinking about that? Is it safe to say that's not factored into the guidance? And then, do you expect that could have a negative impact or that those cuts could just be replaced by loans?

Gregory Cappelli

I think, I mean, all we can do is look at how we were doing pre the Pell Grant increases. And we were doing pretty well. I mean, as long as there is an availability for students to get access to loans and students know that the returns they're going to hopefully achieve on their degree in higher education, then we're hopeful that, that won't have a major impact in our business. Have we baked anything specifically in any percentage cut in Pell? No, we haven't, into the guidance.

Kelly Flynn - Crédit Suisse AG

Okay, great. Thanks. And finally, a different topic. Just on the CapEx, Brian, you mentioned that you no longer expect the big increase because you've identified savings elsewhere. Can you talk in more detail about, are you paring back on any investments you were planning on making, or is the I guess, sort of reduction in the guidance all coming from savings? And then, I don't want to be a pain, but I just want to give you a chance to address this. Someone asked about the buy back, you didn't buy back as much and then you're reducing your CapEx. This guidance, I just want to give you a chance to address the concern that you're starting to kind of not want to spend as much because of cash flow concerns.

Charles Edelstein

You know, Kelly, that's really not the way that we're approaching the business. I mean, we're fortunate to have an institution, the business model, we need to do in our toughest time, that's actually cash flow positive. We've got a very strong balance sheet. And again, what we're always evaluating, I would say that the bigger piece of it is in every quarter, there's a number of things going on with our business domestically, internationally. And we're identifying the best opportunities to use our capital, and we'll continue to do that. We've laid it out in the past. We've shown people the picture, the pyramid and how we evaluate whether it's share repurchases or investment opportunities. That's what we can tell you about that neither we're hoarding cash or expecting a big decline in cash flows. I mean we're giving you what we know about the business, and trying to be an open book about it.

Brian Swartz

Yes, Kelly, let me clarify a couple of things on the CapEx forecast too. I mean, we have not reduced that for our spending on CapEx as a result of concerns in 2012 or reducing investment into the business. Our strategic initiatives are clear, I know we talked about them, we are making those investments. We've actually reduced it for a couple of discrete items that I'll mention. We've actually been very successful on the procurement funds with pricing of some of the things we're buying, and as a result, those numbers have come down. The prices that we though we would have to spend on some of these projects are more favorable to do the good work of our procurement and sourcing teams. And then secondly, we've also opportunistically taken advantage of some leasing opportunities, where rates were very, very favorable and as a result, the dollars are showing up in the CapEx line on the statement of cash flows, but there are leases that are offsetting some of the actual dollars we would have to expend. But I want to be very clear, we have not reduced the CapEx because of our concerts or any current or future...

Gregory Cappelli

A lot of our investment flows right through the income statement.

Brian Swartz

Exactly. So I hope that helps to clarify those.

Operator

Our next question comes from the line of Andrew Steinerman with JPMorgan.

Andrew Steinerman - JP Morgan Chase & Co

Good morning. I know you're very specific and disciplined about hurdle rates on different forms of investments like acquisitions or share buyback. Are you implying or instilling that same discipline when you look at the culmination of all your technology investments? I hear social networking, classroom of the future, and I just want to know if that's kind of aggregated and really kind of beaten up and making sure that in the future that we'll get the type of returns that you would if you considered other types of investments.

Charles Edelstein

Yes, it's a great question, Andy. Thank you. We are intensely looking at understanding the returns for any investment we make into the University of Phoenix or otherwise. Part of that is technology, our future classroom, our social networking opportunities. There's a lot that goes into that. It's not just sort of creating a quick DCF [discounted cash flow] and sort of running through some future projection. If you think about it, you have to make assumptions on even things down to retentions. So it we're having presence with Phoenix Connect, we look at the early adoption and how quick it's been internally, and how much more time people are spending on the site and talking to each other and facilitating conversations and the quality of those conversations. To us, that has the opportunity to lead the higher retention, right? So you sort of have to look in a lot of different factors, including what can it mean academically? What can it mean for outcomes? What can that mean for our image going forward, if we make improvements in all of these areas? So yes, there is a pretty intense dialogue conversation and then process we go through for trying to understand an investment.

Joseph D'Amico

Absolutely. And I think, I mean, the results of this academic social network have not yet hit the financial statements, but we absolutely believe that they will. Even in terms of our overhead cost, because of self service, the issues that get resolved by the network as opposed to, for example, calling in to the call center here at the university, so we're seeing, in fact, did see a drop in calls in certain areas into our call center. So there's a whole lot of benefits that we haven't been all that specific about, but it's also a differentiator for us from all other universities, and that's very powerful.

Charles Edelstein

Andrew, as you can imagine, if you think about the return from investments like technology and other things that make our program more engaging, the most impactful thing is impact on retention, and that's the kind of thing that we look to understand specifically though.

Operator

Our next question comes from the line of Brandon Dobell with William Blair.

Brandon Dobell - William Blair & Company L.L.C.

I'll make this quick. Any color you can give us on what the sources of student inquiries look now compared to, let's say, six or nine months ago? Just from the changes you've made in terms of marketing your own kind of search capabilities, organic search, less lead aggregator reliance. Just want to get a sense of how much of a change there's been. And I guess, potentially on top of that, how much of a change you would expect to next year or so, some of these initiatives play out?

Joseph D'Amico

Well, this change has really been evolving, move from a very heavy reliance on the affiliate networks and in the sort of Internet leads to a very holistic approach to the marketplace with that balance. So the idea here is to strike a balance. I'm sure we'll always be using affiliates, but we're using the highest quality affiliates. Our brand advertising, which leads to inquiries into phoenix.edu. And then workforce solutions, which is our corporate relationship, which is our corporate relationships, which is a very key piece to where we see our future growth, and that's really in its infancy. But there's been really good signs in terms of receptivity and new corporations actually that signed up with the University of Phoenix as being one of its providers of education to their people. It's also a source of direct bill. So it helps with the 90/10. So Brandon, there's a whole sort of approach to this that we're looking for balance.

Brandon Dobell - William Blair & Company L.L.C.

Okay, and then final question for me, you mentioned last quarter, you'd seen some good, I guess, traction with helping students minimize the borrowing. How is that trend? Any quantitative metrics you can give us for how many students are not maxing out loans now compared to six or nine months ago? Or if you've got any kind of quantitative evidence that you've had a real impact on the students' borrowing needs?

Joseph D'Amico

Well, we're actually about to roll out another phase of the student borrowing calculator, as well as some other interesting student protections, let's say, around the total cost and the opportunity for returns on our student's investment. We're also focused on students borrowing glass, and that is one of the things that we talk about here all the time. So we're doing some things with technology, and with processes to help our students borrow less and be more knowledgeable and more effective in the way they do their financial planning. We're not really sharing quantitive information. We said our 90/10 is improving. I think that's a positive. You can see that in part from the fewer associates that are here enrolling. The associates, of course, borrow the most. So when you see that mix shift, you're seeing also a shift away from the 90/10, 90% level.

Operator

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

Corey Greendale - First Analysis Securities Corporation

I was hoping you might be able to just give us a little more help on modeling the impact of greater graduations as the next couple years progress. And specifically, whether a retention number that we can calculate, whether that will be negative, most likely throughout -- through fiscal 2012, or whether it goes positive at some point in that timeframe?

Brian Swartz

Yes, Corey. I mean, the way I suspect you calculate the persistence, the implied persistence, it will go negative into fiscal '12, because you don't have the specific numbers around graduation. But what we intend to do, as we talked about, is next quarter, provide you and all of our investors a quantitative metric around retention. It'll be different than a persistent count that you calculate, and it will be focused really on the new students coming into the university to give you a sense of how long they're staying with us. We have higher retention rates for the new students. You see it in the revenue per student, that question was asked, and we want to be little more transparent and provide you some quantitative metric around that. And right now, just a little bit too early to do that this quarter, because we just rolled out the University Orientation program November 1, but we intend to do that next quarter.

Corey Greendale - First Analysis Securities Corporation

Okay, and my next question is, one of the areas there's been some focus on in DC, it seems, is career placement. And I know, historically, University of Phoenix, I believe, hasn't really done that per se. I believe, largely, because you didn't want to be seen as competing with the employers who you want referring their employees to the University of Phoenix. But has there been any change in your philosophy about that, or any possibility of adding more kind of career services as a result of changes in your model or pressure from outside?

Gregory Cappelli

Well, certainly, things have changed. And today, it's all about jobs. So one of the things that we are focused on is our connection of education to jobs, and we have a number of things that I'm sure we'll talk about in the future in terms of how we're addressing that. But we're absolutely sensitive to that. We have some relationships with third parties that support, and we facilitate students finding jobs or getting new jobs. We're not in the placement business. But we have some ideas, and they're big ideas, and we're not prepared to share those with you yet.

Corey Greendale - First Analysis Securities Corporation

Okay, and one last quick one if I could just and so far as I think kind of signals from you guys are helpful on this front, when we look at the share repurchases that you did during the quarter, has anything materially deteriorated in terms of trends over the last few months? Or can we read your share repurchases in the 42, 43 range as a kind of valid indicator of your view of the long term value of the business?

Charles Edelstein

Actually, Corey, there's no hidden signaling of any type, given the timing or size of our share repurchases. As I said before, there's a number of factors that always are taking into consideration with all of our investments, and we're not trying to signal you one way or another. I think you'll continue to see them be part of our capital allocation strategy on board.

Operator

Our next question comes from the line of Robert Wetenhall with RBC Capital Markets.

Steven Bachman

Good morning, guys, this is Steve Bachman, in for Bob. I just had a question. You guys, were talking about seeing a positive inflection in starts by fiscal ‘12, but you did also mention that total enrollment continues to go negative. When do you think you might see some positive inflection in the total number under the stated assumption you guys have been giving for starts, retention and the productivity and admissions advisory?

Charles Edelstein

Well, in terms of an exact inflection point, that's hard to exactly call, right? The more data you have, the better you feel about it. As we said, there's some early indicators that we're looking at to what extent they will translate into improvements and starts. We're waiting to see that, and we'll report on that every quarter. But as we said, we're not calling the exact point in time, in which we by quarter, we think there'll be start growth and to what level. But we are giving you what we know at this point in terms of the activity levels that Joe described in detail and we talked about earlier.

Operator

And our next question comes from the line of Blair Mlnarik with Robert W. Baird.

Blair Mlnarik

A couple of questions on your approach to pricing. Can you talk? As you mentioned those price increases for this July, I guess, what are those and are those set in stone at this point, or would you need clarity on gainful employment to move forward? And I guess, is that in a kind of a normal increase range, or are you going to have to account for maybe consumer sensitivity to pricing in this environment?

Charles Edelstein

So for our historically, we look at pricing in the low to mid-single digits. And we don't have all the data around gainful employment yet or around complete information around any of the changes that could happen there. But historically, you've seen low to mid-single digit pricing increases within the University of Phoenix. That's what we can tell you at this point.

Blair Mlnarik

Okay, so nothing at this point in your guidance that assumes your normal pricing increase, I guess?

Charles Edelstein

No, as Brian said before, there's been nothing built in for either 90/10 or gainful employment or other things other than a reflection that there's some pricing built into it. Nothing that stands out of the ordinary.

Gregory Cappelli

Normal, normal price increases.

Blair Mlnarik

And one more follow-up, if you were to solely target compliance with 90/10, for example, how much would you have to raise tuition in a given year?

Gregory Cappelli

I mean, we haven't said anything quantitative yet. The only thing we've said in that regard is while we don't want to do anything unusual if we had to, we would look at the situation at the time and make a determination at that time. So since we're not in that situation, we haven't made such a determination.

Operator

Our next question comes from the line of Scott Schneeberger with Oppenheimer.

Scott Schneeberger - Oppenheimer & Co. Inc.

You mentioned last call about process reengineering beyond 2011, with regard to financial aid, student services, marketing, student inquiries and call center management. You touched on that little bit on this call, but just want to get an idea with regard to the fiscal ‘12 guidance, is that going to be a net positive or negative with regard to investment or return by the time '12 comes around?

Brian Swartz

Yes, Scott, we're working on those. Those are big process reengineering projects. Exactly when they come into play in fiscal '12 or beyond, we haven't been that explicit. But we absolutely expect that those are going to yield our ability most importantly to service students in a more seamless way, and provide them what they need with a focus on student service. And ultimately, it will make us more efficient as well internally, so we haven't. I'm aware on the comment exactly, is it in '12, is it beyond there, but we are still very excited about those initiatives.

Gregory Cappelli

And it's included in the forecast.

Scott Schneeberger - Oppenheimer & Co. Inc.

Okay, and then real quick, you mentioned lower student enrollment at BPP and at UNIACC. Could you just give us an update on Chile? Is that progressing just slightly below plan, or is there anything major there as is BPP?

Charles Edelstein

I'm sorry, was that -- did you just say it was on BPP or UNIACC?

Scott Schneeberger - Oppenheimer & Co. Inc.

No, I'm sorry -- in Chile, you mentioned that both BPP and Chile, lower student enrollment. Is it the degree of magnitude dramatic in Chile or is it just modest?

Charles Edelstein

Well, there was a program, a government program, which we mentioned in the past that we elected to move away from there, and that caused a disruption in what has been more consistent enrollment growth there. But at the same time, actually, Chile while it's small, is been an indication of what we could do successfully in terms of developing programs, leveraging off things that we've done at the University of Phoenix with Apollo Group, and implementing working adult in online programs. And probably we're seeing some real good things come out of that. It's still relatively small, but it's absolutely going in the right direction.

Operator

Our final question comes from the line of Jerry Herman with Stifel, Nicolaus.

Jerry Herman - Stifel, Nicolaus & Co., Inc.

The honor of being last. I'll be quick. Just a quick question, you guys mentioned advisory comp up, average compensation up. Can you give us an indication of just how much those average compensation costs are up? And is the 102 a reasonable run rate near term on that line item?

Brian Swartz

Yes, Jerry, we're not going to quantify the exact average that’s up, but it is up. I mean, we were going through a period of transition. We're treating our employees -- we want to treat very fairly. we want them to be motivated, so it is absolutely at the normal trend. In terms of where it goes in the future, that number, I mean, it's all based on the outlook that we said, again, we're not going to go line-item, the line items for each of the line items in our expense or in our income statements. But we're watching it very, very carefully, and doing right by our employees.

Gregory Cappelli

I would think that this is helpful. I would think about it as a normal rather than abnormal, going forward, in terms of how we think about the average compensation for both.

Operator

This concludes today's Q&A portion of the call. Mr. Greg Cappelli, I'll turn the call over to you.

Gregory Cappelli

Thank you. Just quickly, I want to thank our incredibly hard-working loyal employees for helping us through this mission this year. I want to thank all of our investors for your patience as we embark and go through an enormous transformation at the University of Phoenix. We're not making any excuses. This has been a very challenging year. But we're remaining absolutely committed to our mission of always trying to do the right thing for our students, certainly investing, enhancing the quality of the University of Phoenix experience. And most importantly, making sure that our over 600,000 University of Phoenix graduates who all work incredibly hard to achieve one of the live streams remain very proud of the University of Phoenix going forward. So with that, thank you for joining us, and we will talk to you soon.

Operator

And this concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Apollo Group's CEO Discusses F2Q11 Results - Earnings Call Transcript
This Transcript
All Transcripts