Apollo Group's CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: Apollo Education (APOL)

Apollo Group (NASDAQ:APOL)

Q3 2011 Earnings Call

June 30, 2011 5:00 pm ET

Executives

Joseph D'Amico - President and Chief Operating Officer

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

Charles Edelstein - Co-Chief Executive Officer and Director

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

Unknown Executive -

Analysts

Robert Craig - Stifel, Nicolaus & Co., Inc.

Michael Tarkan - FBR Capital Markets & Co.

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

Ariel Sokol - UBS Investment Bank

Maria Karahalis - Goldman Sachs Group Inc.

Paul Ginocchio - Deutsche Bank AG

Peter Wahlstrom - Morningstar Inc.

Jeffrey Silber - BMO Capital Markets U.S.

Amy Junker - Robert W. Baird & Co. Incorporated

Andrew Steinerman - JP Morgan Chase & Co

Peter Appert - Piper Jaffray Companies

Kelly Flynn - Crédit Suisse AG

Sara Gubins - BofA Merrill Lynch

Arvind Bhatia - Sterne Agee & Leach Inc.

James Samford - Citigroup Inc

Suzanne Stein - Morgan Stanley

Scott Schneeberger - Oppenheimer & Co. Inc.

Corey Greendale - First Analysis Securities Corporation

Steven Bachman

Trace Urdan - Signal Hill Capital Group LLC

Gary Bisbee - Barclays Capital

Operator

Good afternoon, ladies and gentlemen, and welcome to the third quarter fiscal 2011 earnings release conference call. [Operator Instructions] This conference call is being recorded today, June 30, 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 July 8 beginning approximately 2 hours after we conclude today. The replay number is (800) 642-1687 or (706) 645-9291 internationally. The conference ID for the replay is 71264066. I would now like to turn the call over to Beth Coronelli, Vice President of Investor Relations. Mrs. Coronelli, go ahead please.

Unknown Executive

Thank you. Thank you for joining us today to discuss our third quarter results. I'm also pleased to have joined the Apollo Group team. Participating on the call are Greg Cappelli, co-Chief Executive Officer and Chairman of Apollo Global; Chas Edelstein, co-Chief Executive Officer; and Brian Swartz, Senior 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.

As we discuss our results today, unless otherwise noted, we will be comparing the third quarter of fiscal 2011, which ended May 31, 2011, to the third 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 condition, regulatory compliance and other matters regarding the business of Apollo Group that involve risks and uncertainties. Various factors could also cause actual results of the company to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed under Risk Factors and elsewhere in the company's most recent 10-K and subsequent 10-Q reports filed with the SEC and 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. Our press release, which contains financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP and non-GAAP measures, is also available on our website. With that, I will turn the call over to Greg.

Gregory Cappelli

All right. Thank you, Beth. Good afternoon, everyone. I'd also like to take this time to welcome Beth Coronelli to the Apollo family as our new head of Investor Relations working closely with Jeremy Davis, who many of you already know. We think they're going to make a great team together. I'm going to provide just a brief update on the progress we're making with our key strategic initiatives, and that will be followed by Brian Swartz. He'll cover the financial quarterly results and our business outlook. And then Chas will close with an update on the regulatory environment and comment on some of the opportunities we see going forward.

First, in the third quarter of fiscal 2011, we continued to execute on the key initiatives that we set forth to enhance and differentiate the Apollo Group and the University of Phoenix. Collectively, these initiatives, which span the entire student life cycle, from first point of contact until after graduation, are intended to elevate the student experience, enhance student protections and improve student outcomes. As you can see, new degree enrollment continues to be adversely impacted by the key initiatives we put in place this past year, down about 40% over the prior year. And while it's still early, we are pleased to report that we've seen some signs of stabilization within the leading indicators that drive new degree enrollment during the quarter. In addition, we've also seen meaningful improvement in several important metrics. Those include a continued favorable shift in the mix for our enrollments towards higher degree level students and an increase in student retention rates, which we'll talk about more in just a minute.

Our focus is on providing a world-class experience for our students. This starts with our efforts to better identify students we think, can most effectively serve -- we can serve, and that can succeed in our rigorous programs of study. We've tailored our message to elevate the brand of University of Phoenix by showcasing the real-life success stories of many of our graduates. These efforts, in combination with our admissions initiatives, have resulted in the continued mix -- shift in the mix of our enrollments towards higher degree level students. In the third quarter, the percentage in new degree enrollment in the bachelor and graduate level programs is up over 1,100 basis points over the past year while the percentage of total degree enrollments in those programs is up over 700 basis points. We've also begun to see some early but tangible signs of student coming in with more college experience, an indication of higher-quality students as the average number of transfer credits has begun to trend up.

Now, we continue to build traction among employers by investing in our Workforce Solutions group. Corporate relationships are strategically very important to the University of Phoenix. We're pleased that we've added hundreds of new corporate educational partners over the past year, linking education to careers and aligning early learning outcomes with student and employer needs. We're developing relationships with employers who recognize the importance of maintaining a skilled and educated workforce for their own competitiveness and who value the quality of our programs. It's simply amazing to think of the fact that today in the United States of America, there are currently about 3 million job openings across the country, which we believe is directly related to not having the skills necessary to fill these critical positions. Just think of the impact on our economy if we simply filled those jobs, including the impact it would have on our unemployment rate. Our programs are designed to help deliver skills that are relevant to addressing the needs of today's changing workforce.

In terms of our approach to admissions, we're committed to student-centric advertisement, supported by new coaching and training of our advisors and their managers -- excuse me, advisement. We have further aligned the evaluation process and the compensation of our admissions advisory teams to our students' success. This includes the elimination of all enrollment factors in their evaluation compensation as of September 1, 2010. During the third quarter, we began to see some improvement in admission advisors' effectiveness, which we think is a result of our ongoing training and mentoring efforts.

Also supporting our student-centric admissions approach, we rolled out our free 3-week University Orientation program on November 1, 2010. That's to ensure that students with limited prior college experience better understand the time and effort required to be successful in our programs prior to actually enrolling in the University. We've now had a meaningful number of students go through orientation and make it through their first couple of classes. Of those who start orientation, we continue to see about 80% actually enrolling in the University of Phoenix, while approximately 20% opt out before incurring any debt. What's important, we believe that students who opt out are generally leaving us with a positive experience. For students who went to the orientation and go on to enroll in the university, we continue to see first course completion rates that are several hundred basis points higher than prior year levels. This success can be attributed to the University Orientation, first year sequence and other student-centric initiatives. Brian will share some additional information on how we look at retention of our students in his comments.

Now, let me spend just a minute to update you on the investments we're making in our learning and data platforms to enhance our students' academic and classroom experience. As of this week, Phoenix Connect has now been launched to the entire university population, effectively connecting our students and faculty into the leading academically focused social network. Since beginning the rollout, the feedback has been extremely positive and performance metrics indicate increased engagement, communication and interconnectivity among the University of Phoenix community. Students using Phoenix Connect spent 25% more time on the student site on average. We're seeing students and faculty use Phoenix Connect to engage with other like-minded colleagues for support, professional networking, academic collaboration and socialization. Over 750 new student-run interest groups have been created in Phoenix Connect since the launch, covering topics from honor societies to local area groups.

And on April 24, we launched the University of Phoenix iPhone app through the iTunes for the iPhone, iPad and iTouch -- iPad Touch. It quickly rose to the number one most downloaded free educational app in the iTunes store the first week it was available. Two months later, it's been downloaded about 80,000 times and is driving over 40,000 users to the student site weekly. Data also shows that students are logging in twice as often as nonmobile users. In launching this app, we aim to add flexibility to our students' lives and complement our existing online learning systems, enabling students to participate in classroom discussions, submit assignments and check grades anywhere, anytime.

And lastly, once students complete their education, we've begun to engage our 645,000 alumni in ways that we simply haven't done previously. We're gearing up for Homecoming 2011, with 78 different alumni events across the country this fall. We've started to open alumni chapters and anticipate forming 30 chapters over the next 2 years. We're using social media, including LinkedIn and Facebook and our alumni magazine to keep alumni connected to us. And importantly, we recently launched the mentorship program that has already matched about 6,800 students with an alumni mentor, providing valuable networking connections and career advice.

Our alumni are one of our greatest competitive advantages and they are speaking proudly about the value of their education. In self-selected survey data responses from over 27,000 alumni participating in the 2011 alumni survey, 98% would hire a fellow University of Phoenix grad. 70% have recommended University of Phoenix in the last year alone.

In closing, we realize that we still have a lot of hard work in front of us to accomplish all of our important goals. We think we're making progress. We're excited about the opportunities to further differentiate the University of Phoenix, as well as the Apollo group. Our responsibility is to be a thought leader and an active participant in the dialogue around improving access to education in the nation, as well as globally. And we're focused on delivering a world-class experience at every stage of the student life cycle through the efforts we discussed, messaging and branding, admissions, financial aid, the classroom experience and even after graduation. We believe our actions will, over time, further elevate the brand and reputation of the university, improve retention and completion rates, reduce enterprise risk and position us for stable, long-term growth.

So with that, let me turn the call over to Brian.

Brian Swartz

Thanks, Greg and good afternoon, everyone. I'd like to start by reviewing our third quarter financial results, then I'll update you on our 90/10 trends, provide you with some information on a new retention metric and then I'll spend a few minutes on the outlook for the business.

During the third quarter, revenue decreased 8%. The decrease was primarily the result of a 16% decline in degree enrollment for the University of Phoenix to roughly 398,000 students, which was partially offset by selected tuition price increases and a favorable mix towards higher degree level students. New degree enrollments for the University of Phoenix were down just over 40% this quarter, primarily driven by the implementation of our strategic initiatives, along with increased competition. As a reminder, University Orientation impacts enrollments at the associate and bachelor's level, while the changes we've made to the admissions function are affecting enrollment at all degree levels, including our masters and doctoral programs.

Income from continuing operations was $212 million or $1.51 per share, compared to income of $177 million or $1.16 per share in the year ago quarter. During the third quarter, we recorded a $2 million pretax charge for post-judgment interest and future estimated legal costs related to a securities class action lawsuit and recorded a tax benefit of $10 million resulting from the resolution with the IRS regarding the deductibility of payments made to settle a lawsuit in fiscal year 2010. Excluding these items, as well as the other items mentioned -- excuse me, the other items in the prior year that are detailed in our press release, income from continuing operations decreased 23% to $204 million and our operating margin declined 500 basis points to 28.2%. Our EPS was $1.45 per share compared to $1.74 per share in 2010.

Now, I'll spend a few minutes discussing each of the expense categories. First, instructional and student advisory increased 410 basis points as a percentage of revenue as we continue to invest in the student experience, which resulted in higher compensation expense, as well as investments to enhance our curriculum, product development and delivery platform. Marketing increased 170 basis points as a percentage of revenue, due primarily to higher advertising costs, as we are seeing higher prices in both online and traditional media, and increased competition for higher quality students. Admissions advisory expense declined 60 basis points as a percentage of revenue, due to lower headcount during the quarter, resulting from both the reduction of force, which took place at the end of the first quarter, as well as proactive management of replacement hiring for regular attrition. This decline was partially offset by slightly higher average wages. G&A expense increased 150 basis points as a percentage of revenue, which was primarily due to increased costs associated with a significant investment we are making in technology infrastructure.

Bad debt expense was significantly lower again this quarter, both sequentially and year-over-year. Bad debt expense as a percentage of revenue was 3.2%, down 220 basis points from the prior year. The decrease was primarily attributable to reductions in University of Phoenix gross accounts receivable as a result of lower new enrollments, a mix shift towards higher degree level students and improved student retention, attributable in part, to the effect of our University Orientation initiative. We also continue to see improvement in collection rates, as a result of the initiatives we put in place to improve our collections process.

Depreciation and amortization increased 50 basis points as a percentage of revenue due to increased depreciation from information technology, network infrastructure and software, which was partially offset by a decrease in amortization of intangible assets. Share-based compensation totaled $20 million in the third quarter and we expect the total for the full year to be approximately $70 million. Our effective tax rate was 38% in the third quarter. Excluding the $10 million settlement with the IRS that I previously mentioned, our effective tax rate was 40.8% and we expect that it will be about 41% in the fourth quarter of 2011.

Turning briefly to the balance sheet and cash flows, we continue to maintain a well-capitalized balance sheet. At the end of the third quarter, we had unrestricted cash and cash equivalents in excess of $1.4 billion. This amount is $400 million higher than the end of the last quarter. The increase was primarily driven by 2 important transactions during the third quarter. First, the Department of Education released us from our cash collateralized $126 million letter of credit, which was previously required to be posted in connection with the findings in our February 2009 program review. And second, we received $169 million in proceeds from the sale leaseback of our principal office building in Phoenix. Excluding Apollo Global, our days sales outstanding for the quarter decreased to 23 days from 30 days at the end of both last year and the end of the third quarter in the prior year. The decline was primarily due to the lower University of Phoenix gross accounts receivable. During the third quarter, our adjusted free cash flow increased by 6% to $374 million compared to $355 million in the prior year, primarily as a result of the decrease in restricted cash from the release of the letter of credit I previously mentioned. As a reminder, we define adjusted free cash flow as cash flow from operations, less CapEx and changes in restricted cash. If we were to exclude the favorable benefit from the letter of credit, adjusted free cash flow in the third quarter would have decreased 30% to $248 million.

Regarding capital expenditures, we continue to anticipate CapEx in 2011 will be roughly flat with 2010 levels. During the third quarter, we utilized $167 million in capital to repurchase 4.1 million shares of stock at an average price of about $40 per share. We have approximately $358 million remaining under our current share repurchase authorization.

Before I discuss our business outlook, I'd like to cover 2 additional topics. First, I am pleased to share that through the third quarter of 2011, the 90/10 percentage for University of Phoenix, excluding any impact from the temporary relief provisions, is about 100 basis points lower than it was in the first 9 months of fiscal 2010. We attribute this reduction primarily to a lower mix of associate students. Based on the current trends, we believe our 90/10 percentage for fiscal 2011 will be lower than the prior year, which was 88%, excluding any temporary relief provisions. Also, and importantly, as of today, we do not expect our 90/10 percentage for fiscal 2012 to exceed 90%.

Second, as we said we would provide on our last call, we are now sharing with you an important new metric we believe is indicative of our retention rate trends at the University of Phoenix. We have been tracking a broader, more comprehensive metric based on the average credits earned per student or what we refer to as ACEPs. ACEPs measures the average number of credits earned by newly enrolled students over a defined period of time. We believe the most relevant indicator of early student success today is our 26-week ACEP metric for our undergraduate student population, which is where most of our initiatives are currently focused. By definition, this metric is reported 2 quarters in arrears. Our 26-week ACEP metric for our newly enrolled undergraduate students in the first quarter of fiscal 2011 versus the prior year, increased 12%. This improvement, which reflects student staying enrolled for a longer period of time, and thus successfully earning more credits, follows year-over-year increases in the 5% to 10% range for the previous quarters during fiscal 2010.

It is important to note that while we continue to see improvement in retention rate trends for students going through the University Orientation, there is a limited benefit in the current first quarter of 2011 results from our University Orientation program, as it was rolled out on November 1, 2010. The primary drivers for the year-over-year improvement were the implementation of student-centric initiatives, including first year sequence, which was rolled out in February 2010 and a favorable mix shift from Associate to Bachelor degree students. We hope to see additional improvement in the ACEPs metric in the future that will reflect retention gains as students go through our orientation program.

Finally, I'd like to spend a minute and provide some commentary on our business outlook. Our business continues to be in a period of transition. Our current new enrollment trends suggest that the year-over-year decline in our new enrollments for the fourth quarter will be similar to the decline we experienced in the third quarter of 2011. As Greg mentioned earlier, we are experiencing signs of stabilization within key leading indicators in new enrollment. Those leading indicators include increases in admission advisor efficiency and higher registration rates per advisor. As a result of the decline in new enrollments during 2011, coupled with a large number of students who are graduating or otherwise leaving the university, we continue to expect increasing declines in both total enrollment and revenue for the fourth quarter of 2011 and we expect that total enrollment and revenue growth rates will remain negative throughout 2012. We do expect new enrollments to grow again in 2012 and also expect to achieve higher retention rates for those new students.

As we move through this period of transition in our business, we continue to responsibly manage our cost structure to appropriately align it with the business results, while maintaining our high quality standards. We are continuing to make strategic investments for the long-term. In total, we remain on track to deliver approximately $100 million in run rate savings by the end of 2011, largely driven by the combination of proactive management of our headcount and lower bad debt expense. Since the end of our last fiscal year, we have managed our headcount down as of the end of the third quarter by approximately 11%. As a reminder, it was down 8% at the end of the second quarter and 5% at the end of the first quarter.

Based on our current view and anticipated future trends in new enrollments, retention rates and expenses, as well as this year's tuition price increase of approximately 3% to 5%, which goes into effect tomorrow, we are reaffirming our outlook for fiscal years 2011 and 2012 that we provided last quarter. 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 '12, revenue of $4 billion to $4.25 billion and operating income, excluding any special charges of $675 million to $800 million. And with that, let me turn the call over to Chas.

Charles Edelstein

Okay, thanks, Brian. I'd like to take a moment first to provide an update on the regulatory environment. As you're aware, the U.S. Department of Education this month made public the final regulations effective July 1, 2012, on metrics for determining whether an institution's academic programs prepare students for gainful employment. The regulation established 3 annual program-level metrics: debt repayment rate; debt to discretionary income ratio; and debt to total earnings ratio, with various consequences for failing to meet the standards for a single year, 2 out of 3 years or 3 out of 4 years.

We have targeted our degree programs to provide academic instruction that is relevant and valued in today's dynamic workforce. Importantly, we believe substantially all of our academic programs successfully prepare students for gainful employment as defined by the final gainful employment standard. We share the Department of Education's goal of ensuring students receive a quality education for their investment and we are fundamentally committed to providing appropriate student protections, including transparency, which supports informed decision-making. We're supportive of thoughtful and consistent policies and regulation which seek to protect students. We'll continue to work constructively with the administration and Congress to ensure that regulations apply to all institutions and do not unintentionally diminish access to higher education.

Our commitment to providing access to quality higher education is well aligned with President Obama's stated goal of producing a greater number of college graduates in order to once again have the highest rate of college attainment in the world. We just completed a 3-week city program with NBC's Education Nation Initiative in Los Angeles, Chicago and Philadelphia. We'll be finishing in New York in September to engage policy makers, thought leaders, educators and the public in a thoughtful dialogue about the issues confronting education in this country.

With 2/3 of the jobs being created today requiring some level of higher education and only approximately 1/3 of today's labor force having earned a bachelor's degree, there remains an enormous need for higher education. It will certainly be necessary to close the skills gap for the U.S. to remain globally competitive. We believe it will require the combined efforts of all types of institutions in order to meet the President's ambitious but achievable educational goal. We intend to continue to play a leadership role and being part of that solution.

Over the past several quarters, we've implemented significant changes within our organization and are pleased to see that those changes are beginning to have the intended favorable impact on both the mix of our student base and the retention rates of our students. As we move past this period of transition, here is what you can expect from us going forward: first, maintain our priority to differentiate University of Phoenix among students, alumni, employers and regulators by building upon our academic quality, providing a world-class student experience and aligning our programs with students' and employers' desired learning and life outcomes; and second, to focus on expanding Apollo Group in 2 primary areas. One is our Apollo global business, where we plan to continue our geographic expansion over time. The other area is our plan to increase the services we offer to sectors of higher education where we can help other institutions remain competitive by increasing their enrollments and/or their efficiencies through lowering their costs. We're already providing such services through our Institute for Professional Development subsidiary.

We're very excited by the opportunities we see before us, both domestically and globally, and we believe that the recent initiatives we put in place are not only in the best interest of our students but support our strategic goals of positioning our company for sustainable, long-term growth while reducing enterprise risk. We are grateful for the support we've enjoyed from our employees, our faculty, our students, our alumni and our shareholders as we work toward the realization of our important mission. With that, I'll turn the call over to the operator so that we can take your questions.

Question-and-Answer Session

Operator

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

Sara Gubins - BofA Merrill Lynch

A question about certain expectations for the fourth quarter. Given that you're starting to see some improvement in leading indicators and comparisons get a lot easier in the fourth quarter, I'm wondering why you wouldn't expect some improvement in this didn't start decline metric? And I'm wondering if that's an indication that you're seeing further deterioration in macro trends or is there something else going on there?

Joseph D'Amico

No, this is Joe, Sara. We're pleased with the progress we're making and we see, as we said earlier, that trends are improving but we want to see those come to fruition before we make any other comments on it.

Gregory Cappelli

One other thing I might add is, as we talked about in the past, we've put in some of our largest initiatives in the company's history in September and November. And it'll be important to see how things trend after anniversarying those dates. I'm sure you can understand.

Sara Gubins - BofA Merrill Lynch

Yes. Okay. On the cost side, it sounds like given your guidance, you are expecting absolute cost to come down versus the third quarter, and I want to confirm that. And maybe talk a bit more about the jump up in instructional and student advisory cost and where you think that might trend over time.

Brian Swartz

Yes, Sara. It's Brian. Just to be clear on the cost, the $100 million in run rate would compare fourth quarter of 2010 to the fourth quarter of 2011 and where we expect to be going as we enter fiscal 2012. So that's the right comparison, not sequentially. And it's principally being driven by lower compensation of overall -- those of the labor force, as well as reduce bad debt expense. So that's where those cost savings are coming as we enter fiscal '12. Your second question on the instructional cost advisory, a lot of that are just investments we continue to make, whether they're platform investments, IT investments, investments in curriculum, faculty. You know, very, very student-centric initiatives that we've been working on.

Sara Gubins - BofA Merrill Lynch

So should we consider that as sort of a normal run rate going forward?

Brian Swartz

Yes. I mean it's going to vary because of there's some variable costs there, like faculty as our revenue does. But generally speaking, the costs that are fixed in there will continue to persist into fiscal '12.

Operator

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

Gary Bisbee - Barclays Capital

I guess the first question, the Degreed Enrollment has fallen a lot more slowly than I guess I would've expected given the sharp start declines and the fact that it's been almost a year of those declines. I guess, Brian, you said that we should expect total enrollment to be down in fiscal '12. But would it be reasonable to expect that the pace of decline is going to accelerate substantially in the next few quarters versus what you just reported?

Brian Swartz

We're not going, I mean Gary, to talk about specific quarters, but I will address what I think is most important, is what we're seeing on the retention side of the equation and that's indicative of the improvement in ACEPs, which I'd talked about in the call. So retention is up. You can see that in our revenue per student as well, if you look at there. That's obviously helping the total enrollment. As we go into fiscal '12, there will be graduate students coming out of the student body, so we do expect it to go down. Whether it's at an increasing rate, we're not commenting on that as we go to fiscal '12. But generally speaking, we do expect that number to continue to come down as I mentioned.

Gary Bisbee - Barclays Capital

Okay, and then on the retention, are you seeing retention in like groups, meaning associates better than associates, 6 months or a year ago and bachelor, better than bachelor at that point? Or is it more of a the mix shift that's driving this improvement in retention?

Joseph D'Amico

I think it's both, Gary. It's both.

Gary Bisbee - Barclays Capital

And then just one last quick one. I think I heard you say, Greg, hundreds of employers that you signed up. Is that becoming a meaningful part of students or are you still really at the front end of this process trying to get these aligned?

Gregory Cappelli

I would categorize it this way. We've put a lot of focus. As you've heard us talk about over a year ago, our results there were not acceptable and we started to -- we've put some important pieces together in that division, some great leaders. And they have refocused the efforts there and we're pleased with the number and the type of corporations that we now have relationships with. And the goal there is to be enrolling more students that are right for the University Phoenix for us going forward. I think more of the focus has been on getting the right partners in place, and now it becomes the exercise of the enrollment. So does that answer your question?

Operator

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

Paul Ginocchio - Deutsche Bank AG

Just a question about your tuition price increase. Just wondered if you looked at your debt-to-income thresholds and whether you'll be able to maintain that price increase even in the face of potential program cuts? I think the Republicans have thrown $3,000 on the table versus the current $5,500. I just wondered if you're testing your tuition price increase versus that potential cut.

Brian Swartz

Paul, we're comfortable with the pricing that we put in place for this fiscal year. We evaluate that on many different levels every year and we look at a lot of different metrics to balance that out, including competitive and the value proposition that we're offering students. So, I don't know if that answers your question or not. But that's how we think about pricing.

Paul Ginocchio - Deutsche Bank AG

So if students were to take on more debt because the programs were reduced, do you still feel comfortable that you have enough headroom?

Brian Swartz

Well, it depends. We'll see ultimately what programs look like going forward. I know there's been some proposals out there but we don't ultimately know what the reduction's going to look like after this point. We'll evaluate when it comes up.

Paul Ginocchio - Deutsche Bank AG

And then just quickly on the nonprofit comment in the Q, increased competition. Can you talk about that a little bit?

Brian Swartz

Sure, absolutely. I think what we've said over the past year is there's been a number of factors that we've looked at in our business. One is what we're doing to it ourselves, right? The changes that we've made that we've clearly highlighted over the past year. The other is that we expect it and continue to see not-for-profits that are enrolling more students online as well, which I think has been the trend that's been going on for a number of years now. So, we're just pointing out that that's something that we deal with every day.

Paul Ginocchio - Deutsche Bank AG

Do you think that trend's accelerating or is it about the same as it's been?

Brian Swartz

I don't know if it's accelerating. I think we wake up everyday believing that there's good competition in higher education that we are focusing in our University to differentiate the University of Phoenix and what our capabilities are so that we stand out in higher education.

Operator

Your next question comes from the line of Ariel Sokol from UBS.

Ariel Sokol - UBS Investment Bank

I just want to follow-up on Paul's question regarding tuition price increases. Are they across the board or are they for specific programs? And I guess also, are you increasing tuition prices for online bachelor's completion programs as well?

Brian Swartz

With respect to the increases, they're not across the board. We look at it program-by-program and we look at it region-by-region. In some places, there's some price reductions. In other places, there's increases and in some places, the tuition is the same. And I didn't catch the second part?

Ariel Sokol - UBS Investment Bank

Specifically for online bachelor's completion programs.

Charles Edelstein

Again, we've had increases in the online bachelor's programs as well.

Ariel Sokol - UBS Investment Bank

Okay and maybe if we can drill down for a second. To the extent that it was commented that you guys look at the competitive environments, among other reasons, when you're increasing your tuition prices, maybe can you drill down a little bit and perhaps kind of elaborate on how you're thinking about the competitive environment in online and how you think pricing will impact starts on a go-forward basis and the elasticity of price I suppose?

Gregory Cappelli

I think it goes along the lines of what I said before. This is Greg, that this is a competitive industry that we operate in. We look back at history and think about where we might have had a competitive advantage in years past. Certainly one of the first to expand working adult and working learner programs in the country. One of the first to meaningfully put an online program in place and one of the first to do e-books in the '90s and now, we're looking at other ways to enhance our value propositions to students. And pricing will depend on that, if we can do that or not. As you've heard us say, we're looking at ways to enhance our programs through social media. We're investing in the classroom of the future. We're building adaptive learning. We're enhancing certain academic functions. So pricing will depend on the success of those things within the competitive set and all the other areas we look at data throughout the industry.

Ariel Sokol - UBS Investment Bank

I apologize, one last question then. Is it my understanding then that the company, at least for many of its programs, would intend to be a premium price relative to other -- not actually obviously cheaper but for online bachelor's completion.

Gregory Cappelli

I don't know that I would call that because that depends on the subset you're looking at a premium price or to whom? Obviously, with a relationship to the not-for-profit, you could look at in-state tuition, out-of-state tuition, which is significantly more for even the state schools, the private schools or just organizations within our subset or sector, the for-profits. We really don't look at it that way.

Charles Edelstein

I would say -- it's Chas -- that our strategy is to deliver premium value and to differentiate ourselves. And so the costs that we incurred doing that are part of our business strategy, but that's how we think about it.

Operator

Your next question comes from the line of Arvind Bhatia from Sterne Agee.

Arvind Bhatia - Sterne Agee & Leach Inc.

My question is on the benefit of the mix shift to higher level programs on your revenue per student. Obviously, you touched on the 3% to 5% pricing but just a mix shift and the benefit that you're getting on the revenue side, could you elaborate a little bit more on that given your projections for 2012?

Brian Swartz

Yes, let me try to provide some color on that. As we included in the revenue per student, I mean there's obviously the price increase component that Greg and Chas were referring to and then we have expected retention gains as a result of just student-centric initiatives, as well as the impact, the full impact of University Orientation if that develops through the student bodies. So both of those will positively impact revenue per student. It has, you can see that in the current numbers in recent quarters. And then we would expect that to continue to happen here in the future. Does that help?

Arvind Bhatia - Sterne Agee & Leach Inc.

Yes. I was just looking for ways to maybe quantify as we try to project the impact of the new degree enrollment trends on the overall enrollment, and then kind of segregate the pricing impact of the mix shift and the pricing increase, et cetera. And I guess we're all trying to figure out how to kind of segregate the different components.

Gregory Cappelli

Yes, you're asking to segregate of the average revenue per average student, how much is going to come from price and then retention and whatever else and we don't do that. We don't try to project that.

Arvind Bhatia - Sterne Agee & Leach Inc.

I guess one other question is on the media costs, you guys mentioned that in the 10-Q, rising media cost, I mean you guys talked about that in the past. Is there anything unusual there that's going on or is that just the continuing trend there?

Gregory Cappelli

You know, as long as I followed this industry for about 20 years now, I've seen those prices and the cost to acquire a student move. Sometimes dramatically in one direction or the other. Sometimes it just depends on the economy. We've got the auto players that are advertising now that weren't before. It can depend on search now. A number of competitive subset right now. A lot of folks are trying to enroll higher-quality students, as you know, as they define it. So there's a number of things. One thing we know for sure is that metric's going to move around. I think in our case, we don't just look at ultimately the cost to acquire a student. We look at the types of students we're trying to enroll. We're willing to certainly pay a higher cost to enroll a student that retains longer, right? We look at the economics of that student throughout their lifetime at the University of Phoenix or any of our universities. So there's a number of factors that go into it.

Arvind Bhatia - Sterne Agee & Leach Inc.

I think I'm just trying understand the competitive landscape causing a rise in media cost.

Gregory Cappelli

I'm sure that's a part of it. I'm sure that's a part of it. But that's what it is. It's a part of it. There's other factors in there as well and I think that metric will continue to move around.

Operator

Your next question comes from the line of Suzy Stein from Morgan Stanley.

Suzanne Stein - Morgan Stanley

You mentioned the $1.4 billion of cash and equivalents, which seems like a very big number. How should we expect you to play over the next few quarters? And can you talk about what you think a comfortable level of cash is?

Gregory Cappelli

Sure, I know that built up somewhat from the 2 items that Brian talked about this quarter. It's not our goal to keep large amounts of cash in the balance sheet. I will say that we evaluate all of our uses of capital the way we have in the past, using a pyramid-type structure. We've done about $420 million of share repurchases year-to-date and certainly the timing and the length of windows and whatnot can impact that. We're investing in the University of Phoenix as you've heard us say. Apollo Global, we continue to evaluate opportunities there. We are building a new business in the Apollo Education Services, which is going to require some capital. And then we'll continue to look at other ways to deploy that capital, whether it's through share repurchases or other ways as well. And I would probably also add that in a year of more uncertainty on the regulatory front that we've just been through, that we were all comfortable keeping a little bit more cash in the balance sheet than we normally would. But we're through more of that now. There's more certainty. So I think you can expect that we'll keep following the procedures that we have done in the past to use our capital. Again, we're trying to do our best to optimize the capital structure of the company.

Okay. And then discount as a percent of gross revenue was higher this quarter and since a while. Are you doing anything more with scholarships or can you just address that?

Charles Edelstein

Yes, we did run a promotion during the quarter that wasn't there in the prior quarter or the prior quarter of the prior year, Suzy. So it was a limited promotion, we do them frequently. It's just kind of a timing issue. But we're not doing a lot more of them in a broad-based way, but there was an incremental one this quarter.

Suzanne Stein - Morgan Stanley

Okay. And then can you just maybe comment on what you're seeing in Apollo Global as far as asset prices? I mean, are prices prohibited now in terms of making any big acquisitions there?

Charles Edelstein

I think it depends on where you are in the world. We've got a team now that's been evaluating, building relationships and evaluating whether it's a good fit for us in a number of different places throughout the world. I wouldn't use the term prohibited. If it's really a good fit for us for what we're trying to do and obviously, does the price make sense so that we can generate the returns that we need to for our shareholders. So what I would say is there's more opportunity in certain parts of the world where we're evaluating opportunities.

Brian Swartz

Suzy, just a quick thing. I think, actually, just to make sure I have the record right. I think the cap may have mentioned $167 million of capital repurchased shares year-to-date. That was quarter-to-date.

Brian Swartz

No. I said it's $420 million year-to-date.

Gregory Cappelli

Okay, got you.

Operator

Your next question comes from the line of Andrew Steinerman from JPMorgan.

Andrew Steinerman - JP Morgan Chase & Co

I wanted to follow-up on the quick comment about a higher level of graduating classes, which is a nice problem to have. But that will affect student persistence. Student persistence is quite -- it was up the way we calculate EBIT with the graduating classes. With the larger graduating classes coming, would student persistence continue to be up?

Brian Swartz

Yes, Andrew, it's Brian. It will depend how the retention course of those new students play out. I mean we've seen -- as you could see in the ACEPS measure at least for the first quarter of fiscal '11 year-over-year, took 12%. And that follows some pretty strong increases in each of the quarters during fiscal '10 as well. So exactly where it will come out in the way that you and I know others calculate persistence will really depend on how those retention curves look like for those incoming students.

Andrew Steinerman - JP Morgan Chase & Co

Right. That's not exactly what I was asking. I was asking how much more magnitude will the sizes of the graduating classes weigh on that number, not the point that you're making.

Brian Swartz

I understand. I don't have the exact size on those classes in front of me. We'll have to get back to you and try to give you more color on that. We're most -- realized that most graduating classes are something that are not as much in our control. Those are going to happen, hopefully, but the new enrollment is coming in. Our goal has been to obviously keep those students longer.

Operator

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

Trace Urdan - Signal Hill Capital Group LLC

At the risk of causing some eye-rolling, I was hoping that I might get you guys back to the ACEPS measure and I just want to make sure that I really understand what it is. First of all, maybe, on the numerator and the denominator, if you could explain that, Brian? And then the other thing I wondered was I had understood that in July, that the regulations were going to begin requiring you guys to provide more data with respect to things like drops and starts and so forth. And do I have that wrong and does this measure satisfy that requirement, if I'm right about that?

Brian Swartz

Yes, Trace, it's Brian. There's 2 questions there, but let me start with the second one because I think it's a little bit easier. The data that needs to be disclosed as part of the July 1 rules that were promulgated by the DOE in the last year is effective as of tomorrow and the date needs to be disclosed is driven by what was determined during that process. So we will be disclosing that data as required by tomorrow to prospective students and to existing students. That data is different in ACEPS. So ACEPS is a metric that we have been focused on, to your first question, internally and ACEPS really stands for average credits earned per student. So it's a way of measuring, really on a cohort basis. You take a group of students, talk about, to simplify it, take those students that started during the first quarter of fiscal '11 and we track those students over various defined periods of time. It can be 13 weeks, 26 weeks, 52 weeks and we look to see how many of those -- how many credits do those students earn, then we compare that to the prior year. So it's really a measurement of student success, how our students are progressing with this, how many are earning credits on average by cohort. It's a very clean picture of retention, so...

Trace Urdan - Signal Hill Capital Group LLC

And did you -- and the 12% improvement, did I hear you say that that was over a 26-week period?

Brian Swartz

Yes. So the metric that we've provided or talked about is a 26-week undergraduate. So it's all associates and bachelors for all students that started in our fiscal '11 first quarter. We've tracked those students, and we're now up in June and we have a number for that cohort, for that 90-day cohort. And that number of average credits earned from all of those students is 12% better than the number was one year earlier.

Trace Urdan - Signal Hill Capital Group LLC

Okay. And did someone ask previously whether you can tell whether associates or bachelors were more or less the driver of that number?

Brian Swartz

Yes, we're not breaking it down, associates and bachelor. I will tell you certainly the mix has helped that number for sure, but we're not breaking down the ACEPS by degree at that level.

Trace Urdan - Signal Hill Capital Group LLC

That's helpful. Brian, where will we see the data that you're going to disclose to students? Is that something that we would see on a website or is that something that only an actual applicant will be shown?

Brian Swartz

No. The data, I mean to answer your question.

Trace Urdan - Signal Hill Capital Group LLC

Back to the July 1 data.

Brian Swartz

What's that?

Trace Urdan - Signal Hill Capital Group LLC

I was back to the July 1 requirement data.

Brian Swartz

Yes, I know. I follow you. You'll be able to see it tomorrow, if you go I don't how far deeply we will go through the process, but they're disclosed as required by the rules and will be tomorrow.

Trace Urdan - Signal Hill Capital Group LLC

And then the last question I wanted to ask was that, Greg, I think in your preamble, the discussion you were making around -- the way you're talking about working with employers, the way you were talking about the responsibilities that you feel, the nature of the program being employment-oriented and being responsive to employers, you guys sound like you're getting awfully close to a place where you maybe are thinking of getting involved in the process of actually helping your graduates find employment. Is that something that you're thinking about? Am I off-bases there?

Gregory Cappelli

No. I would say we're not going to be -- we're not -- our plans are not to place students in the jobs. But certainly, we're living in a different world, I mean, we're 5 or 10 years ago and they need help. They need help preparing. They need help early on in the process of their education, so that they can understand who they are, what they really want to do, where they're trying to go, and how to present themselves in front of recruiters, how to build the skills necessary to interview well. There's just a number of different things that we're doing there. I'll have Joe add some color as well.

Joseph D'Amico

Trace, you're actually spot on. We have a small number, but we started relationships with corporations where they are looking at our students specifically. And we have set up processes. We're working with some third parties as well to help our students find employment if they so choose. So we're facilitating that. We're also looking at sort of career advice kinds of things. So we realize that the value to the education is connecting it to jobs and to careers. So linking our programs to careers, education and careers is one of our -- absolutely one of our thrusts.

Trace Urdan - Signal Hill Capital Group LLC

And then I know I said that was the last one, but one more short one. It sounds like the social networking is really taking off. I'm wondering if you are looking at potentially adding sort of additional functionality to that over time? And by that, I mean academic support. You mentioned that it was an academic social network, but I'm wondering if there's actually any sort of peer-to-peer tutoring that's being considered or are there any other bells and whistles that you can see yourself adding to that network over time?

Gregory Cappelli

Most definitely. It's amazing, sort of what these networks do. And so we've gotten a lot of ideas and we've already made enhancements and plan to continue to do that. So to make the experience for these students similar to real-life experience. That's what, we know there are so many people now connected in social networks and that's an important element and function of learning in our view, too.

Charles Edelstein

The feedback is good or bad, positive or negative, you learn so much from that and you can take that data and use it and incorporate it into making the process better.

Operator

Your next question comes from the line of James Samford from Citigroup.

James Samford - Citigroup Inc

Just wanted to dig into 2 things. One, the growth opportunities you talked about, both international and also touch on the IPD opportunity. On the international side, how do you prioritize sort of existing geographies versus new geographies? And also as far as a margin drag for 2012, is part of the drag a function of increasing international investments?

Gregory Cappelli

Look, this is Greg. I'm not forecasting what kinds of things will be done in terms of investments or acquisitions or whatever it is in global. To answer your first question, we have a President, Tim Daniels, who took over the leadership at global, who has already laid out a strategic plan for the future of global. Clearly, the priority initially, is to focus on BPP and our other assets that already exist within Apollo Global, to enhance them, to improve them, to grow them, to take advantage of their position within the world. Are there going to be other opportunities? Yes, there are. There are many countries with the same issues that we have here in the United States that have actually reached out to us, to try and figure out whether we're a good fit to help with their problems and hopefully solutions. So I think you can count on both. The priority is to make sure we're focused on what we have now and to improve them and to enhance them.

James Samford - Citigroup Inc

That's great, thanks. And on the IPD side of the business, I'm just wondering, has the environment changed to the point where traditional colleges are comfortable partnering with large private sector schools to be their sort of, I guess, outsource provider for some of these functions?

Gregory Cappelli

Well, on IPD, we do see a number of opportunities. I mean, whether that's in smaller liberal arts sorts of colleges or larger community colleges. We see opportunities where we can be helpful and people have reached out to us again to say, you have a lot of experience in this area, and you have some specific skills that are world-class given your history. Can you help us with those? So that's something that we'd like to do more of and we think it's very consistent with our mission, as well as provides opportunities for us to expand our services.

James Samford - Citigroup Inc

I assume budget constraints at the community college level are an interesting driver for that as well?

Gregory Cappelli

Well, that's why I mentioned that part of it is not just more student enrollments but also cost efficiencies that we can help with.

Operator

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

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

I'll follow on the previous question regarding the Services business and IPD. How have the rules changed to incentive compensation structures changed how you guys view that opportunity and have you had to make major changes in the contract structure or will you have to make changes and how does that impact how the customers deal with you guys?

Brian Swartz

Well, it depends on how you structure the contract, Brandon, with another organization. As the rule reads right now, it's difficult to do a revenue sharing type arrangement if you own a university, as well as want to provide services to other colleges and universities. We don't necessarily agree with that, but there are other ways to structure contracts and to deal with that as well. So for the time being, yes, we're focused on the rules, but we're looking forward to hopefully being able to do both. I think one of the things we think about is the goals that the administration and many people have outlined for improving educational outcomes in the country. The community colleges, for example, are a big part of that solution, and I think actually many universities and colleges in the country are part of the solution. We can do a lot from the investments we've made, the enhancements we've made, the data we have, what we've learned, how to educate working learners. We can help. We can help them improve their outcomes, cost efficiency, provide them with a great platform, technology, financial aid services, so they can be more efficient. And that's our goal really, is to help in that way. So we'll structure the contracts, however we need to. I think that's something that can evolve over time, but that's what we know right now.

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

And then maybe it's a question for you, Greg or Brian, but the thing about the fiscal '12, and the plan you laid out, how do we think about your assumptions for improving retention? Is it built into those numbers for revenue? I would imagine there is some sort of extrapolation of the recent trends in student retention you built in, but are we talking of continuing ramp up or kind of status quo based on how this quarter turned out? How do you think about those metrics?

Brian Swartz

Yes, Brandon, we have absolutely built in improvements in retention in the outlook. We did that when we provided last quarter. We reaffirmed the same outlook now. And we're pleased to see that certainly the ACEPS metric is up 12%, that's good. We expect to see improvements at least year-over-year. Now, whether or not they're accelerating or what pace, we're not getting to that level of detail in terms of what to bake in to those numbers. But it's important to note that there are improvements in retention in that outlook.

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

Okay, and then final question, I'm going to be combining some questions around the cost per start of the marketing recruiting costs relative to the improved retention. It sounds like you guys are still comfortable with what the lifetime ROI of the student would be just given how strong the retention is? Or are you concerned that the cost of recruitment these days is starting to chip away at that ROI? And then maybe any commentary on Axia versus Bachelors would be helpful as well.

Gregory Cappelli

Well, I think, overall, we are comfortable that the ROI is there for students to certainly realize, even in today's environment where there's the ROI to us and the ROI to the student. Are you talking about the ROI to us?

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

Yes, ROI to you, guys for sure.

Gregory Cappelli

I mean, certainly, if you go back to what I said before, that depends on the lifetime of the student with you. So if you're enrolling students and they're dropping out in 6 to 8 weeks, no. The ROI is not going to be there. But, as you know, our primary focus over the past year has been to put procedures in place, safeguards in place, not only for the student, but to ensure they understand what they're getting into so when they do enroll, hopefully they retain in a longer rate. And that's what we're pleased to see and that's why we wanted to try to provide some insight into that. We are seeing those things. The pace at which that continues or how long or what not, too early to tell. But as it stands right now, it is certainly going in the right direction. And from a financial impact perspective, you know, certainly the impact that retention has versus signing up a student that only stays a short period of time.

Operator

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

Kelly Flynn - Crédit Suisse AG

just a couple of quick ones. First one on the bad debt, that's been moving down so quickly. Kind of hard to keep up. So can you give us a sense of where you expect that will trend in the fourth quarter and then maybe where it will settle out and perhaps give a historical perspective on how you think about that, what it looks like before you added Axia? I went back in my model but it's not there.

Brian Swartz

Yes, well I mean, as you know, obviously it's come down dramatically. We're very pleased with that. I mean, there are lot of things -- obviously, the student mix shift is a big component of that, Kelly, which is wonderful. It's what we expected to see. And that's a good trend. The other thing we're doing is we're very focused on looking at our collections processes and how our counselors work with students to collect any outstanding accounts. And we are really working to optimize that process. And what I mean by that is if a student is interested to give you a little sense of what that means, if a student is really unhappy when they leave our University and they're upset for whatever reason it might be, we don't need to continue to make calls to follow-up with that student. They're probably not going to pay us particularly if they don't have the wherewithal to do it, whereas another student might just drop out, it's a little money, might actually have intentions of re-enrolling. It's how we treat those students in terms of our communications with them and talking to them and counseling them as former and current students is something we're getting into in a very deep way to change those collection process. And we think, over time, that will absolutely minimize the amount of bad debts in both expense and as a percentage of revenue. And most importantly is the right thing to do for students and want to treat people the right way, so there's a lot of those in terms of where exactly it's going to go next quarter, next year. We don't have any reason to believe it will go back up, particularly the student mix. However, it goes? Obviously, we'll see how effective we are with those initiatives.

Kelly Flynn - Crédit Suisse AG

Okay, that's helpful. And then the last question just on the Q4 starts guidance. I think Sara asked something similar, but I just wanted to revisit it. I'm getting a lot of questions on e-mail about it. I guess let me say it this way. If you go back and look at the seasonality of your business, historically, I think back to '06, there's always been a pretty big bump up in starts in the fourth quarter versus the third. But on the other hand, it looks like your third quarter starts were sort of seasonally stronger than they normally would be based on history. So I just want to make sure, were there any timing issues there with extra Mondays or any of that stuff you guys had talked about in the past? Or is there anything else going on there that would explain why you don't expect basically any sequential bump in Q4?

Gregory Cappelli

I don't think there was any timing differences in the Mondays and the like. Let me just point out one thing though to keep in mind. And that's August. August is the biggest part of enrollment for us. And so the way August goes is the way the quarter goes. We don't get a lot of visibility into that at this point. So that's another factor we need to think about.

Kelly Flynn - Crédit Suisse AG

Okay, and i guess it's also probably fair to say would be the orientation, a lot of those people who would normally be showing up in August wouldn't show up in the numbers in September?

Gregory Cappelli

Yes, you still have a year-over-year impact and we anniversary on November 1.

Charles Edelstein

It doesn't anniversary until November 1.

Operator

Your next question comes from the line of Amy Junker from Robert W. Baird.

Amy Junker - Robert W. Baird & Co. Incorporated

I'll try to keep it brief, I know it's late, but just circling back to the guidance, with the better persistence which it sounds like you would anticipate that in your guidance and much better bad debt, I guess I'm wondering why maintain the guidance? Did everything come in exactly as you anticipated or what are the offsets if those things were better than you had thought? Is it that the starts are not picking up as you had anticipated?

Brian Swartz

Yes, I think Amy, it's Brian, when we provided the outlook last quarter, it was for the full year fiscal '11 and full year '12. We didn't give anything specifically to Q3, just as a reminder. So we're very comfortable with where the guidance is for both fiscal '11 and '12. We have baked in improvements in retention and persistence, as you said, and we're reaffirming it at this point.

Amy Junker - Robert W. Baird & Co. Incorporated

Okay. And I guess the comment that you still expect starts to turn positive at some point in 2012, I'm just wondering if you anticipate having to hire any additional enrollment counselors at that point? And if they do, how far ahead of that do you need in order to meet demand or do you think you have the right number of people in place given your expectation?

Charles Edelstein

We certainly have -- I know our counselors, as we said earlier, the efficiency and their skills are really improving. And so we're seeing early signs of that. So we expect that, that will hopefully continue. And we'll look at and have been looking at what we need to do from a hiring perspective to be sure that we're able to meet the demands going forward.

Operator

Your next question comes from the line of Mike Tarkan from FBR.

Michael Tarkan - FBR Capital Markets & Co.

Just really quickly, do you have any color on the Department of Education's experimental sites initiative regarding student borrowing levels? Just wondering if that's something you guys are participating in. And then if so, do you think that would have any impact on '09/'10 in a meaningful way?

Brian Swartz

Yes, Mike. Well all programs are offered by the Department of Education, we do look at and we're optimistic that we'll be able to participate on it if it's offered very broadly to institutions. And so, I mean until it's rolled out, it's hard to comment more about it and what it looks like and exactly what it will do just to reiterate what my prepared remarks were, at least for 90/10 for fiscal '11 and fiscal '12, we do not expect to be above 90%.

Michael Tarkan - FBR Capital Markets & Co.

Great. I guess with the changes you're making in terms of orientation and maybe a little bit more selective recruiting, regarding 90/10, would you expect that fiscal '12 would be lower than fiscal '11 as well?

Brian Swartz

We're not commenting where it will be fiscal '12 but we don't expect it to be above 90%.

Operator

Your next question comes from the line of Maria Karahalis from Goldman Sachs.

Maria Karahalis - Goldman Sachs Group Inc.

Two quick questions. Want to follow-up related to bad debt expenses and student borrowing calculator and some other protections. For the students, can you give us an update on whether or not this is having any impact on the actual amount that students are borrowing?

Charles Edelstein

I don't have the data right at my fingertips, but we have seen with every release of those protections an improvement in -- or a lessening, if you will, of the borrowing of my students. And I believe that's still continuing. I haven't heard anything to the contrary. And plus again, we do that in the best interest of the students and it's very well-received. So I think it's still on track.

Maria Karahalis - Goldman Sachs Group Inc.

Okay. And the second question, which is unrelated, is do you have a target mix for associates, bachelors, masters or however it is that you think is the right way to think about it to where you'd like it to be?

Charles Edelstein

It's Chas. We don't have a target mix. But what we like to do when we think about our mission, which is to provide the quality education for students who can benefit from it. If we can find associates students who can benefit from the education, we're ready. We're delighted to serve them. So I think a lot of these positive changes that you've seen in some of these metrics that we're talking about here, whether it's bad debt or the 90/10, are being driven by that student mix. But it's not because we're targeting a specific ratio.

Operator

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

Peter Appert - Piper Jaffray Companies

Brian, just following up on what Trace was asking earlier in terms of understanding the ACEPS metric better. So you're measuring both retention and course load, correct? In terms of number of credits, as we look at this metric.

Charles Edelstein

Yes.

Peter Appert - Piper Jaffray Companies

So the 12%, it's hard to interpret what that means then. Is it possible to segregate the 2?

Charles Edelstein

Well, let me try to clarify what the 12% is and maybe that will help, Peter. So, if we had, and it's all illustrative, if 50,000 students started in our fiscal first quarter 2011, we let 26 weeks go by. We look at the total number of credits those 50,000 students earned at the end of this 26 weeks and we divide the 2 by each other and that gives us the metrics. And to the extent we're doubling up or taking more course loads, that I certainly would improve the metric. But the key what really is driving the metric is how many students are actually persisting to the very end of that 26-week period and actually earning credit. And then we take that number and we divide it by exactly the same thing in the prior year. So we look at the first quarter of fiscal 2010, follow those, whatever that number by then, 40,000 or 50,000 students or more, whatever the number is illustratively and we follow them for 26 weeks and do exactly the same calculation. So mechanically, that's how the calculation is calculated. And clearly, as I mentioned, course loads would impact it.

Peter Appert - Piper Jaffray Companies

But it's just the point that you think 12% really represents a true measure of underlying improvement in the student retention? Mostly impacted by course load?

Charles Edelstein

Yes. No, no. It's a measurement of retention. I mean, as you know, most of our students are working adults. They can only take so many courses at once. We're not seeing dramatic changes in the number of courses a student completes or can't complete for that matter. So there might be a little bit out of their but the majority of it is students that are earning credits. And you actually see that in our revenue per student as well, which is above historical price levels as well also driving it.

Operator

Your next question comes from the line of Bob Craig from Stifel Nicolaus.

Robert Craig - Stifel, Nicolaus & Co., Inc.

Guys just one quick question on revenue per student, given the inputs there and what influences that number, is it rational to continue to hold close to double-digit increases in revenue per student and trying to disaggregate the midpoint of your guidance in revenue both years is down a little double-digit percentage and trying to disaggregate between enrollment and RPS influences.

Brian Swartz

Bob, it's Brian, I mean we certainly hope it stays in the low double digits. The tuition increases is 3% to 5%, as Joe was talking about earlier. So if it holds up low double digits, then we are getting significant traction in retention and you'll see ACEPS go up and other things. So certainly we hope that happens and there's absolutely retention built into the outlook for our fiscal '12 guidance.

Operator

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

Jeffrey Silber - BMO Capital Markets U.S.

Another ACEPS question. Is there any rule of thumb you can share with us? A certain percentage? Increase in ACEPS? Yields? Certain percentage increase in margins or earnings?

Brian Swartz

No. I mean I don't have a metric, Jeff, that will help you with that. I mean, the point of providing the percentage was to really give you some visibility into what is happening with these students that we've currently enrolled and how are they retaining relative to students prior University Orientation and prior to some of the initiatives like first-year sequence. So they're in a direct correlation. It depends what level, it depends what program and a lot of things impact it.

Gregory Cappelli

It was one of the most pure metrics we could find to help you get some insight into what was happening there. And I'm sure, as you probably know, it's one of the things that has the greatest impact on the bottom line, if you will, probably in any university.

Jeffrey Silber - BMO Capital Markets U.S.

I understand that. I was hoping you guys might be able to quantify it a little bit. The second question actually goes back to Chas' comments on gainful employment. I want to make sure I understood what you said. Based on what you know now, if you think you can have to make any changes to any programs in the restructuring link, restructuring costs, where do you think pretty much your programs will all comply?

Brian Swartz

We think pretty much all our programs will all comply substantially, substantially all means there may be some small programs but for the most part, substantially all of them will comply.

Operator

Your next question comes from the line of Bob Wetenhall from RBC Capital Markets.

Steven Bachman

This is Steven Bachman in for Bob. A couple of quick questions for you. About the University Orientation program, the 80/20 split you mentioned between students that made it through and the 20 that dropped out prior, was that in line with what you expected and is that kind of a run rate for what you'd expect going forward?

Gregory Cappelli

The answer is yes and yes.

Steven Bachman

Okay, very easy. The second question I have is what's the trade-off between you guys mentioned investing into improving the student experience versus the trade-off of maybe trying to keep the cost structure a little more lean given that in this environment, you're contending with declining revenues and some negative sales leverage. I was curious by your thoughts on that.

Charles Edelstein

We're doing both. And we are, as we said at the beginning of the year, we are going to address the structure of the company depending upon where enrollment is. At the same time, we are not going to lose track of our long-term goals, which is to enhance the University of Phoenix, both economically, technologically and make other investments as well.

Brian Swartz

That's why we talked about the value strategy, that what we don't want to do is cut costs where related to services that our students need.

Operator

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

Corey Greendale - First Analysis Securities Corporation

I do have a couple. First question I had is I was hoping you could give us insight on your perspective on the use of the University of Phoenix brand in the market when you kind of look at the fact that on the one hand you guys are doing a bunch of things that one of the things should be enhancing perception. And the other hand, the negative media attention has been pretty relentless and is not letting up or differentiating among institutions. So what does your kind of data suggest is happening to perceptions of the brand?

Charles Edelstein

Let me step back just a second. So I think our brand, as well as many others in the for-profit space did take a hit over the past year. There was a lot of negative advertising, a lot of negative media, a lot of negative press that we've all had to deal with. But I disagree with you that it hasn't let up some. The mix of really negative statements that have been made and whatnot, you might be seeing it. We're not seeing as much certainly related to the University of Phoenix. I think what we've seen more of actually, is highlighting that some of the bold steps we took to try and stand out as leaders and to put an orientation in place. It's hard to explain in detail just what a process that is for a university our size, to make some of the changes we've made. But we've done them thinking for the best we can possibly bring to this university over the long term. And again, our goal is we know this is a competitive marketplace. We're not looking at just this year or next year. We believe that we have to stand out, that our university has to stand out in the industry. And if we do the things, if we continue to do the things that we've done, we continue to put the student protection, the processes, the investment into the university, you're going to see more over the next year, I'm confident that we will stand out. Now, will that be enough? Only time will tell. But our hope is that you'll see that our brand will improve with time and the results will speak for themselves. This is not a university where we want to have to sell people to come to University of Phoenix. We want students to be aware of and understand the value proposition that we're offering and come to the University of Phoenix.

Corey Greendale - First Analysis Securities Corporation

Okay, I appreciate that. And 2 quick regulatory ones and I may have missed these. But I thought originally you were expecting to get a response from HLC by now and the things they were looking at. From the Q, It sounds like it was delayed a little bit. Is there anything to that or that's just timing?

Charles Edelstein

I think what we said in the Q was mid-calendar year and so we don't have anything yet to update. So that's all that we know of right now.

Corey Greendale - First Analysis Securities Corporation

And I apologize if I missed this but did you comment at all in trends in fiscal '10 TDR's?

Brian Swartz

No.

Charles Edelstein

No, we did not.

Corey Greendale - First Analysis Securities Corporation

And will you?

Gregory Cappelli

Not now. Perhaps, in a future call.

Operator

Your next question comes from the line of Peter Wahlstrom from Morning Star.

Peter Wahlstrom - Morningstar Inc.

When you're talking about the selective tuition increases in the 3% to 5% range, can you help me think about the overall environment and are you finding that your peers are able to also raise tuitions and kind of like number, or is this a little bit more unique to University of Phoenix and given the economic conditions, as well as some of the increased competition that you're seeing from the higher degree level students?

Charles Edelstein

Well, our analysis of it is that we can increase the prices and we are seeing others increase prices, some substantially more than what we did. So we feel that the increases are competitive in line, if you will. We're trying to be modest in the increases in relation to the investments we're making for the benefit of the students.

Robert Craig - Stifel, Nicolaus & Co., Inc.

Very good. And just as a quick follow-up, and I realize that there are a lot of moving parts here. But at what point would you hope or expect the tuition increases to help offset some of the changes that you've been making to the operating expenses of the overall organization? Is that something you're looking at for fiscal 2012 or even well beyond? And again, I realize there are a lot of moving parts there.

Gregory Cappelli

I'm not sure I understand the question. Can you say it again?

Peter Wahlstrom - Morningstar Inc.

Sure. So when taking a look at tuition increases, you've made -- at what point would potentially tuition increases help to offset some of the higher competition costs, the higher instructional marketing costs and investments that you're making in the business? At what point, maybe asked another way, do you really lever your fixed costs?

Charles Edelstein

I think the tuition increases already are helping to offset some of the costs that we're incurring for the benefit of the students and with regard to the overall financials. It will depend much more on factors other than just the tuition increases. But enrollment levels and retention and all the things we've talked about.

Peter Wahlstrom - Morningstar Inc.

So that's just one component of many.

Charles Edelstein

That's right.

Operator

Your next question comes from the line of Scott Schneeberger from Oppenheimer.

Scott Schneeberger - Oppenheimer & Co. Inc.

Two quick ones. The first one is specifically the graduate level. How are you trending there with regards to penetrating the degree mix? Are you, I guess, specifically, are you where you thought you'd be right now and what are some headwinds of the successes you've had? Could you just elaborate there?

Charles Edelstein

You're talking about the Masters level, mostly and the PhD?

Scott Schneeberger - Oppenheimer & Co. Inc.

Exactly.

Charles Edelstein

Well, we're not where we want to be there. We're working hard on a whole lot of things. And in the past calls, we've indicated that we're not pleased with where we're at. But we keep working at it and we think over time, with all the things that we're doing, enhance the reputation and quality of things that we've been doing at the University, that we will get back to a point where we're pleased with the growth there.

Joseph D'Amico

I think it's fair to say that more of our focus has been put on fixing associates and focusing on bachelors as well. And that's where we have seen results.

Scott Schneeberger - Oppenheimer & Co. Inc.

And then on the BPP, can we just get a status update? How's the industry? How's the market there? How are the improvements coming along?

Brian Swartz

Yes, I said this upfront. Not sure if you heard this on the call, but obviously, the economy there is still impacting their base business, the P.E. business, where there's a lot of test prep and related work that's done. But we're pleased with the progress that we're making in the law school, business school. We continue to think that BPP is going to be a wonderful base for us in the U.K. It has a terrific management and university staff and our intention is to continue to invest in it to be the leader in the U.K. and beyond.

Operator

There are no further questions at this time. I'll turn the call back over to Chas Edelstein.

Charles Edelstein

Well, thanks, operator and thanks to everyone in the Apollo Group family for all your support. We appreciate it and we're going to work hard for you. Appreciate it. Bye.

Operator

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

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