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Here’s the entire text of the Q&A from the Apollo Group's (ticker: APOL) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Apollo Group Incorporated - Q4 Fiscal 2005 Year End Earnings Conference Call

Question-and-Answer Session

[Operator]

Thank you ladies and gentleman. At this time we will be opening up the call for question and answer session. Please press the “*” and the number 1 on your touchtone phone if you would like to ask a question. If your question has been answered and you wish to withdraw your request you may do so by pressing “*” and then the number 2. If you are on a speakerphone please pick up your telephone handset before entering your request.

Q - Mark: Good morning.

A - Todd: Good Morning Mark.

Q - Mark: My question relates to the provision for bad debt and I am wondering if you can give us a little more color as to why that was up in the quarter?

A - Todd: Well. Yeah, Kenda will comment specifically to the numbers, but again as we said before there were a couple of changes that took place regarding, well basically management changes and in particular a campus was not applying the policies that we have normally regarding bad debt, and receivables and as a result there was a slight increase now. Since then we’ve corrected that and going forward as I said in our guidance call, we feel very comfortable that that will come back to the levels that it was at before. That may take several quarters but again the guidance that we have given for the fiscal year includes that as far as I’ve seen that get back to normal, but again we are looking for that to occur over several quarters not that it will have to occur in the first quarter, to create any change in the guidance.

Q - Mark: Thanks for the color Todd and then regarding your comment on lead flow and conversion rates being in check. I am wondering if you can give us some additional color on W16%IU online on those two points and then to add to that if you could just also comment on attrition within WIU online and then I will turn it over. Thanks.

A - Todd: Sure, we’ve been very encouraged by what we have seen as far as just lead flow in general, in particular if you look at some of the statistics and studies that are being done today and the population shift as far as from the baby boomers to the eco boom and the profile of a student and the type degree program that appeals to the student and that particular profile of a student, this is a program that is designed very much to help meet their educational needs, as well as structured in such a way that their personal financial situation and other thing that it is applicable. And as a result again when we originally designed that program I don’t think that was necessarily what we had in mind, so we found that there is overwhelmingly positive demand for that. And because of the academic structure, the credit hour cost for that program it is very appealing to students and as a result we do feel that is affecting the conversion rate in a positive way. So, going forward, I mean as we talked about it, it did have a slight impact on our revenue per student this last year, but going forward it’s going to allow us as an organization to better provide programs for the potential market that’s out there. And I think you then use that same approach and look at things on an international basis as we all know, there are very few countries that have the spending power that the United States has and the ability to design programs in such a way that you are able to deliver them in a more cost effective way and more affordable for the students. I really think it does position us extremely well going forward.

Q - Mark: And Todd or Kenda did you describe or release the year-over-year growth in bricks and mortar and online? I don’t know if I caught that.

A – Todd: In fact, I am glad you asked that question because I was asked that a couple of times this morning and I just differed to say that I am sure the question would come up here.

One of the things that, as a company, as things change, as the business is changing, we struggle internally how to present the data in a way that presents the most accurate picture of what’s going on. Just to follow the process over here a little bit, because I think it will help you understand. In the past when a student wants to find out about the programs, they may call one of many different numbers and that would make sense especially in the past because you were doing advertising in local market, television, radio, print, and then as it migrated more into direct now and then from there to now we are the majority, the vast majority of your leads are in the area of the internet.

And so what happens is you now have the ability to more accurately assess those leads and then send them to the more appropriate campus. But, unfortunately one of the weaknesses that we’ve had internally is that, that was not happening very well. Infact I believe one of the questions that we had on our last guidance call was, I think a person said they had called a campus and wanted to talk about an online program and the enrollment counselor there was not as helpful as they could be in directing them into that program. That is a fallout of this system that has served us very effectively in the past, but now again because of the majority of the leads being generated in this particular way, we need to change that process.

So, what I am leading up to is what I have talked about before but can shed a little more light on that. The best way to service students and in return have a more positive conversion rate and lower your acquisition cost is to make sure that the student is getting what it is he wants and so the process that we are working towards right now is that when a call comes in, it will be centralized through a call center that will basically be a screening center to then direct that lead to the appropriate enrollment counselor so that the student can again be served the most appropriately.

Now what that means, let me just give you an example. In the past the student would say call campus A and then they want to be interested in a collect net program or an online program but the enrollment counselor there may not feel prepared to be able to do that so they would probably try and have the student attend in campus. What we want to have happened now and we are starting that process is that when a call comes in, an assessment will be done for that particular student and then direct that lead to the more appropriate campus.

That is a long way to lead into this, but what that does is that it does change how you look at the enrollment count. For example I assume, if you were to say in Southern California they have been growing at 8% to 9% a year, and when they are put on this new process you would then see potentially that enrollment rate go as high as 12% or 13% or low as 5% or 6%. In reality they are still converting the same students at, we will hope a little percentage because it is a little more efficient process but the numbers for that particular campus will look a little obscured and so as we have started to do this, you do see the numbers all over the place except on a consolidated basis you see them very consistent.

And so back to your question… when we look at this we were struggling with a way to try and present that data and so the most appropriate number especially as we are now just starting this process is an overall number, an overall enrollment number. The second number that is helpful is just the online enrolment growth number, and so the plan is as we said in our last call is to look at an overall number which is what we presented in that press release which is this quarter just over 20% consolidated growth, online within the high 30s, on ground was in the mid to upper single digit range, and going forward I think we are going to see that continue to fluctuate a little bit, but the consolidated number will be very consistent and if anything we feel very good about the guidance that we have of a consolidated growth rate of 20% and an online growth rate of earlier in the year over 30% and then start to get down close to the actual 30% range as the year continues.

Q - Mark: Very good. Thanks for the color, Todd.

A - Todd: You betcha.

[Operator]

Howard Block - Bank of America Securities.

Q – Howard: Thank you operator. Good morning Todd and Kenda. Kenda you mentioned in the explanation around the selling and promotion growth in the quarter that there was actually a decrease in advertising, did you actually mean literally a decrease or a year-over-year just deceleration in the growth and advertising?

A - Kenda: It was a decrease in the percentage of revenue.

Q - Howard: I got you. Okay.

A - Kenda: So not a decrease in the Dollars.

Q - Howard: Okay. And then also the discounts in the quarter year-over-year change in the margin on that, was far less in this quarter books than the prior few quarters, I was just wondering if that is sort of setting a new ways to consider for discounting through ‘06 or was there any one time in the fourth quarter?

A – Kenda: Well. Actually the one time thing came in the second and third quarter which was the 4 for 3 promotion that online had offered where students took three consecutive classes and received fourth class free and we discounted that fourth class off in the second and third quarters. Just to give you a little color, the largest item within our discount is our military discount as we are serving the military students. So that is the largest portion of that, and that has stabilized somewhat over the last couple of quarters.

Q - Howard: Okay.

A - Kenda: As for as the other _____, you saw the improvement in the 4th quarter.

Q - Howard: Okay and then in terms of the discussion on differed revenue and student deposits, you said that most students are managing their own financial aid. Is that actually more aid that is title for percentage or just…?

A - Kenda: No. The way it works Howard is that when a student takes out student loan, their bank forwards the money to us. The student has the choice we cannot require them to leave those money’s on deposits as student deposits. The students have their choice as to whether or not they want to manage it themselves or leave it on deposits. So that’s why we have seen the increase per student deposit decline as more students are choosing to have us forward the money for them to manage and then they pay off.

Q - Howard: Okay, so this has absolutely nothing to do with title for percentage?

A - Kenda: No.

Q - Howard: Okay and then in terms of the University of Phoenix accounted for 86% of the tuition revenues in this quarter and I think it was in the 96% a year ago in the same quarter. Can you just help us sort of think about the lower percentage in the University of Phoenix and what’s that telling us about WIU’s contribution and so forth?

A - Todd: Sure. I guess if we look at it as a company and as I was saying earlier the best way for the long term success of Apollo Group is to make sure that the students are being matched with where they can be most academically successful. And as I was trying to explain earlier is this new program at WIU is a very, whether the program was UOP or WIU, it’s not that relevant to us as the design of the program is really matched more to the particular student and the student right now where your largest demand is coming from is this student who is a little bit younger and has fewer college credits from other institutions. And because of that, that program is extremely popular right now and just a little history of Apollo Group, that’s not unusual for us in that, there have been times when our graduate programs were more popular or some of our bachelors programs were more popular than others.

When, at one time the University of Phoenix had a credit hour requirement that required you to have 60 credit hours to get into the program. We changed that over the years and as we did that those became our more popular programs as well. The ones where you didn’t have a number credit hours required and so we are seeing that same thing happen now and the thing that I think internally why we are very excited about it, is that we look at just the statistics of the population in general in the United States and then when you go outside of the US as well, this is really where the demand for education is going to be coming, it’s also where there is the shortest supply of seats.

And I know you have heard me talk about this earlier but there was the study in California where they said the community college system is going to be short almost 400,000 seats. There was another study that showed the number of students growing in California to literally 8 million potential students. All these things and when you look at what’s making up this growth it is this particular part of the market. And so our ability to serve them adequately will have huge amount to do with Apollo’s ability to continue to grow in future.

So again we are very excited about most importantly the academic outcome of this program, we are secondly very encouraged by the amount of retention, again it is designed around that so the program is again not only academically but financially conducive to that type of student and to the profile of that student.

So, although as I said it was hit to revenue the past year because again when you are charging less for that credit hours you are going to expect that but going forward we now have had a year to kind of model that more successfully and so as I said, as we start our next budget year, we are already very pleased with how September turned out as for as our ability to model it and the retention of those students. Right now we are very encouraged by what we are seeing.

Q - Howard: Okay. I am sorry, just to wrap up on this as quickly as I can, that decrease in the percentage though, I think it translates into roughly about $15 million in terms of the change. So I guess, Kenda is that increase there? Is that the WIU Associates Degree Axia Students that we are talking about?

A - Kenda: The majority of this. Yes.

Q - Howard: Okay. So if those students, if you hadn’t put those students in that program then at least theoretically perhaps you could have described higher revenue per student number to those people in which case.

A - Kenda: That is exactly right.

Q - Howard: Okay. Thank You.

[Operator]: Chris Guetac - Morgan Stanley.

Q - Chris: Thanks good morning Todd and Kenda.

A - Todd: Good morning.

A – Kenda: Good morning.

Q - Chris: Kenda I wanted to follow up on your comments on margins, first to the gross margin, I guess if you back out the settlement charges in the fourth quarter of last year with proper litigation that the gross margin on a comfortable basis is down 150 basic points year-over-year. I have done that correctly. And I am wondering if that is the function of the make shift WIU online or just less leverage with a bit of decelerating top line or some other factor?

Q - Kenda: Well. Sure I am happy to talk about it. I mean, it’s really a combination with the WIU program because of the less revenue. That resulted in a little bit less gross margin on outlined items for the WIU online student, but it is also the increase in the _____ expense which I mentioned and then also with WIU part of the reason that the faculty pay is queued a little bit and why that’s increased is because of that WIU online program that’ where we are just starting the roll it out.

Q - Chris: Okay. Not that any kind of specific guidance, but the application going forward then it will still see moderate gross margin expansion or given these factors has gross margin speaks for the medium term?

A -Todd: No I think that as we extend before I do feel comfortable that we do expect a slight marginal increase, not a stabilization or decrease.

A - Kenda: And we tend to talk to the operating margin line Chris, not just we don’t provide guidance on the individual line item detail.

Q - Chris: Yeah fair enough. And then primarily looking down the G&A specifically, I think you mentioned a lower compensation cost, would it just to say lower bonus accrual or was actually reversal of a prior accrual?

A - Kenda: Right. There was lower bonus accrual and obviously the prior year was paid out during the current year.

Q - Chris: And would it be perfect as soon as the very low level here in the fourth quarter of ’05 was understandably low and going forward it will happen more normalized accrual?

A - Kenda: Well, it wasn’t a reversal in the fourth quarter.

Q - Chris: Right.

A - Kenda: So it was just a little overall lower for the year and we did not have as much bonus accrued in the fourth quarter of this year as we did in the previous year.

Q- Chris: Okay, great thanks.

[Operator]:

Greg Capelle - Credit Suisse First Boston.

Q - Greg: Hi, guys.

A - Todd: Hi Greg.

Q - Greg: I would like to just go back to the enrollment breakout for a little bit. I just wanted to be clear on that, so you are in the process of putting in this new screening system, is it already actually rolled out throughout the whole systems so there is one number where you call into and then can you give us any more specifics and actually if you’ve been testing it, what you’ve seen on the front of the conversation rates, is it helping, is it doing anything?

A - Todd: Sure. It is now just in the process of getting started the expectation will be that we almost have it fully implemented by the end of the half. So that gives you an idea of where we are with that. We have had, over the past we have done basically a couple of pilot programs where we have looked at the ability where there is cross-selling going on and the result is overwhelmingly positive. The combined conversion rate goes up significantly, the cost related or the cost of acquisition obviously then comes down. But what has been more exciting is the retention of those students goes up significantly. So if you start to, and if we don’t want to get ahead of ourselves, if you start to make certain assumptions that, that would continue through the entire systems as it takes place, it does have a significant decrease in our acquisition cost and an increase in our conversion rate. So, both of those things work very well you know for us going forward should we experience the same results.

Q - Greg: That factored into the guidance you gave out?

A - Todd: It does not Greg. We did not, based on last year, even though we are still $0.6 over our original guidance, for us that’s actually not a very good year. We tend to like to be beyond that and so this year we were much more conservative on how we budgeted and we did not put any of these effects in the guidance going forward.

Q - Greg: Okay and just on that same note, that I think just to understand your explanation. Is it more difficult for you because of that actually give projections on both the online and off-line, were you just not certain when those enrollments are going to be coming in?

A - Todd: I appreciate you asking that question because that is exactly what we are concerned about. Because using my example from earlier, there was a great amount of consistency in the past where say a 100 leads going to particular number and in enrollment counsel was working that set of leads. You would expect consistent patterns year over year.

But now what’s going to happen is you are introducing a new person into that whole process whose going to again end at look at the student and again by what they are saying and their background may be direct that in a different way and so we would expect that there wouldn’t be the consistency. Now having said that, that consistency should come back within four quarters because you then have had a year to do that and our expectation is that we would continue to do that the same way.

So that’s where as I said that I think the benefit will come and if people will be patient in the short term with the amount of data that’s available. Going forward our hope would be that we would able to give much more data as it relates to that relates to that but there is this period of time of inconsistency.

Another factor that you have to bring into play and although it has not happened yet is that as we continue to explore some of our international opportunities, there you will also have to look at those students in a different way because again they are not the same type of student here in a sense that you got a revenue for student that in many cases it’s a fourth or fifth of what it is here.

You are also not going to have a history of retention as well but, that’s why its’ so important I think in this point of time that as we would be appropriately have a number that reflects what’s going on inside the business verses just trying to stay consistent with the truth which is a process that is not going to be consistent at least through this transition.

Q - Greg: Okay you gave ranges on the numbers. I am assuming from upper 30s are you basically saying around sort of a 36% to 37% online and then somewhere around 8% offline is it fair?

A - Todd: I would say we are close to those numbers

Q - Greg: And then, are we actually going to get the exact total enrollment numbers from you guys at some point?

A - Todd: Well that is again, as we go through this process that is the goal to get to Greg. Absolutely, I think that we have to have that number but again till we go through the process of again learning how these students are, where they are going to go whether it’s online or on-ground.

Q - Greg: Todd, I just meant the combined total on these, you said over 20%, is there going be a total enrollment number given, because this is just a percentage, and I might have missed it, it was just a percentage?

A - Todd: Oh I haven’t answered your question yet, in fact I will have Kenda as we go through it, we’ll make sure we find out the exact number for you.

Q - Greg: Okay just one more quick one. Kenda on the free cash, you know what you said about the student appraisal and also the higher details for the next however many quarters, are you still thinking $550 million or above for the year in the free cash?

A - Kenda: Yeah I am. But for not this fiscal year, for fiscal ’06.

Q - Greg: Correct. Okay, thanks guys.

A - Todd: Thanks Greg.

[Operator]

Mark Hughes - SunTrust Robinson Humphrey

Q –Mark: Thank you very much. I was just wondering if you could talk more on the philosophy on why you are easing back on advertising, it’s certainly good for this quarter, it almost seems like a deliberate effort to slow growth a little bit is there something you are seeing in the market that makes you a little more hesitant to spend money?

A-Todd: I think it is a very good question to ask because the truth is really it is not that at all. What happens is that you still need a certain number of leads based on the number of enrollment counselors and the conversion rate that’s out there, but as your ability to buy those leads in a more efficient way so lower cost per lead or the type of lead you are getting is a better lead that is more a reflection of the end result versus the fact that you are just getting less leads. So I think that the really important answer here that you are asking is are you just getting less leads and the answer is no. If a particular source of lead, if that were to drop it would be only because the quality of the lead has increased therefore basically you don’t need as many to get the same number of new students. But yet we don’t know, you are not seeing less advertising going on that’s for sure.

Q - Mark: Yeah, why not more leads, more students kind of like four or five quarters ago?

A - Todd: Well again the last thing we want to do is to get more leads in our enrollments counselors hands than they are able to add quickly work with and so I think that is the reason, one reason not to go push that too much. The second is retention, if you are not retaining those students then why get them in the process but we certainly would have the possibility if we decided to do that of just certainly spending a lot more money getting more leads and getting more starts. But I don’t think that would be a good thing to do for the company right now because I think still our main focus is to make sure that we are putting the students in the right program and providing the right service to the student so that they will be successful in completing the program.

Q - Mark: Right, understood. How about the impact of energy prices, GAAP prices, have you got any feedback from students whether that has an effect on your campus enrollments attrition matter.

A - Todd: Yeah I am glad you are asking that question. There are two parts there, first I believe that there has been a slight impact on us because obviously especially on-ground students have to had to deal with that but if I think somebody we are looking at the value of education continues to increase domestically, internationally and I think everybody would agree with that.

Second thing, is that we all know that the supply of education is not despite some of the noise it got there about some of the more people getting into full profit area. The total number of seats in the area that we see which we reserve is not increasing that significantly so here you have the value increasing the supply not really growing to meet this increased demand. And now you got this issue of energy cost. The one school system, in our opinion that has the ability to be the least impacted by the shortage in energy cost is Apollo Group. We do that because of several reasons, one lets go to the on-ground, which is the most difficult.

We don’t have a particular large campus where people have to drive large distances infact if anything we as you know try and get small locations out as close to the students as possible. So, if they are going to have to drive we are certainly the most appropriate alternative. Second is online, I mean that is the absolute solution to any kind of problem when you are talking about increased transportation or energy cost. Third, we have introduced a new program that instead of going up 8% to 10%, which is more than national average _____ increase we have introduced a program that’s less expensive.

So, again I would love to say that we were doing those things because we were prophetic in what we saw coming, but that was not the case. It just is the fact that we’ve been fortunate in that our programs are the most well positioned for the population trends as well as some of the as you pointed out here in economic trend that exists right now. So we are not feeling the impact of it right now to the extent as others are and early indications of the year are what the rest of the year will be like and we are very optimistic.

Q -Mark: Thank you very much.

A-Todd: And Greg, just get to back to you that total number is just under 300,000.

A-Kenda: 307,400 was our total enrollment number at the end of August.

[Operator]

Gary Beazely - Lehman Brothers

Q – Gary: Hi guys, couple of questions, one of the things that I think people have been interested in and pretty focused on is the lower price at WIU, could you give us the big picture sense of your pricing strategy there and in particular I understand that most of these kids are coming in with very few credits, as they move through the system and maybe get past the 60 credit mark. So that it’s more comparable to the UOP student, does the pricing ratch it up, or are you planning to move that so that it will indeed be closer to what you are charging through your University of Phoenix?

A - Todd: Yeah. Well I think that the program is actually an associate level program which only goes through the Freshman and Sophomore year and so when they become a University of Phoenix student and become part of the bachelors program and then whatever that tuition rate is, it would obviously apply there and yes it is higher.

Q - Gary: So is that the plan right now that these students will have the option to matriculate into University of Phoenix once they have done their two years?

A -Todd: Yeah in fact the majority of the students that are in and the vast majority of the students that are in Axia right now are students who were interested in the University of Phoenix. Then again the student is given the option obviously of the two different programs with obviously a certain amount of information as to why maybe one program will be more appropriate for them and as a result they ended up in Axia and I know Brian sitting here, I would say over 90% you are planning on a Bachelor’s degree through the University of Phoenix. So that gives you a pretty good indication that they will end up at the University of Phoenix and complete their bachelor’s degree there.

Q - Gary: Okay. Next question it looks likes you opened seven new campuses this year and I thought that the plan had been more like 8 to 10. You didn’t enter Connecticut, which I think you got an approval for last quarter and we thought you might. Any comment on that and what did your first half look like?

A - Todd: Sure in fact just to give you an idea we had expected Mexico to be opened in the fourth quarter and that did not happen so that would have taken us to 8 which is what you referred to. We were also thinking that we would have possibly one other campus in Indiana as well and no slip into the first quarter of this fiscal year so instead of 8, or 9 last year we ended up with 7 but as you will see from the information we are giving now, where those play out.

In ’06 we are planning on 9 possibly 10 but in that 3 of those will be opened in the first quarter and those are _____ Indianapolis, Northwest of Indiana, and then Northwest area of Arkansas so again couple of them were bumped to the fourth due to just some operational issues ended up being in Q1. Q2 there is planed campuses in Nebraska, South Carolina, two more in that area in the second quarter including Washington DC 3rd quarter. And then Quarter 3 Madison and Harrisburg and then with just a little bit hope, we do believe that the possibilities of Connecticut and New York will also enter into that as well.

Q - Gary: Okay. Any sense where we are, I know you are still probably working on these number in the 10 K but where we are in terms of corporate reimbursement, it seemed like a couple of years ago, it was somewhere between 35% to 40% your total revenues and my sense is that they are dramatic growth volume has come in a little bit. But is that still somewhere around the third, a large part of revenue?

A -Todd: What we look at is we don’t look at the percentage of revenue as we do as a percentage of students because, it’s not a 100% accurate whether the student is giving a dollar amount say 2 or $3,000 a year or 100% reimbursement. But what has happened is that most recent count of the percentage of students that are getting reimbursement is still above 40%.

A - Kenda: Yeah. It was 50% last year and I don’t have the number yet for this year okay? But it was 50% last year.

A - Todd: Last number I looked was 45 or so, so it has not been a drastic decline.

Q - Gary: And then just one last question. I think on a call a month ago you commented that 3 or 400 of your 5000 admission reps were actively allowing and helping students choose what of the two online programs on the campus would be the best option for them, I understand you are pointing to roll that out further across the company. I guess two questions come out of that. Number one can you give any sense of timing as to how quickly you are going to allow all or more of your reps to do that? And number two, if we do continue to see a big mixture of course online can you give any sense to possibly shrinking the physical footprint that you have and maybe not number of campuses but actual space reset campuses to try to take advantage of the students continued preference for online.

A - Todd: Sure, to answer your first question, the thought on that as I said earlier is to roll out this process of having a centralized call center by the end of our first half and so that it although won’t be completely through the system many of the calls will be going through that and so that’s the timing as far as the roll out. Now and then your second question was… on the space? Yeah. I mean, the nice thing there is that and thank heavens unlike some schools and other universities where they own their facilities, we lease all of ours and it’s because I think we do know that it is an evolving process that is out there. And so going forward I think you will see less space. We actually are taking less space now just because of Flexnet we are on your instructional part of the space cost, that could potentially be reduced to as much as 60%. So what that amounts to is you are going to see us leasing less space in the future but not necessarily eliminating or closing down any thing that we currently have.

Q - Gary: Okay thank you

[Operator]

Bob Craig - Legg Mason)

Q - Bob : Good morning Todd and Kenda.

A – Todd and Kenda: Good morning Bob.

Q - Bob: Hi Todd, what do you envision ultimately as the University of Phoenix role in the younger, less experienced student market, I take it from the centralized call center that seems to facilitate the ultimate integration of Axia into the University of Phoenix is that the right way to look at it?

A - Todd: I think that’s a good way to look at it, I’d say that it’s a little early in the process to say that’s exactly what would happen but I think that it certainly has that potential and again I think it has to come back to really the kind of guiding principles for us, which is what is it that the student wants? And if again the University of Phoenix has stronger band for them, helps them in their ability, the proceed quality of that is something that helps them in their ability to get jobs and promotions and raises and things like that, then absolutely and I think that obviously this makes that a much easier segway, should that decision be made. I should not say that is the way to look at it but it is certainly a good way we look at.

Q -Bob: And how aggressively is the WIU Axia program being marketed, I mean what percentage of leads are coming in via WIU Axia versus University of Phoenix right now?

A - Todd: Very, in fact very, very little. I talked with Brian a couple of weeks ago, so I maybe a little outdated on a that. But no real direct advertising is being done for that at all. These were again leads that were being generated mostly through the University of Phoenix and through the old database and so really not aggressively at all. I think that there is a potential to do that going forward but again I think if you getting the leads that you need and you see the conversion rate up, you are hitting your budget as far as new enrollments, there is no need to be too aggressive in that area.

Q - Bob: Todd, you commented on that earlier, but is there any quantification, you can give so far WIU students persistence rates in the program, obviously way too early for completion rates? But in terms of persistence and/or your expectations of the migration rate of those students, you did mention a lot of those students are coming in to the rest of the bachelors programs to begin with.

A – Todd: I will qualify that I can’t give you exact information on either but early indications are that they are staying in longer. As you know we talked about this looking forward the big reasons that students drop out of not just the University of Phoenix but other universities as well as, they don’t have the funding to complete a year’s program and one of the things there is very appealing about Axia is that, that issue is not as big an issue because it’s less expensive and get through their own personal funding or through financial aid access. It’s not as big an issue so therefore the retention so far, looks much better. As far as quantifying it, that still is the moving target, I had said earlier 5% to 7% I believe is the number I used higher and certainly our feeling is that number is similar if not better, and as time goes on that’s when you really will start to see I think better retention.

Q - Bob: Last one Todd, what was the average tuition price increases in your programs in ‘05 and what do you plan on doing in that regard in ’06?

A - Todd: Absolutely, our average is just over 4% and those of you who follow this know that’s about half of what the national average is and going forward we don’t see really any plan change in that.

Q - Bob: There is less than that in University of Phoenix online, wasn’t it?

A - Todd: That’s correct, I believe it was 3% just above 3%.

Q - Bob: Okay you still think that’s likely in ’06.

A - Todd: That’s correct.

Q - Bob: Okay great thanks.

[Operator]

_____ Silver with Harris _____

Q - : Thanks. Just wanted to get back to the enrollment numbers, if I remember correctly on your call in September you said, you are going to disclose two separate numbers for historical enrollments, we’ve only gotten one as of August 31st, I was wondering if you give us the online enrollment for August 31st

A - Todd: Yeah. I don’t have an exact number just because of the fact that we are starting the segway) but I would definitely say it is in the mid to upper 30 range percent.

Q - : Okay and just moving back to the SG&A line item, what kind of I guess normalized SG&A should we be looking at in fiscal year ’06, I know it has kind of bounced around a little bit for the past few quarter?

A -Kenda: Are you talking about selling and promotional?

Q - : No G&A.

A - Kenda: Okay, I wasn’t sure which line you were talking about

Q - : Sorry about that.

A - Kenda: You know for the year G&A was 4.4% of revenue and that’s down from 4.9% I mean I would not anticipate that we are going to be able to get a significant amount of leverage of a number that’s already pretty low.

Q - : But it definitely would think it would be consistent?

A – Kenda: Yeah.

Q - : Okay and then since you brought selling and promotional, can we talk about that as well? I just wanted to know in terms of what the normalized numbers we should be looking…

A - Todd: Jeff whatever you would like to talk about.

A - Kenda: Well, we are at 21.5 % of revenue for the year and I would anticipate that it will be somewhere it will bounce on the quarters because our advertising is not as consistent as perhaps you guys would like but it’s the way we run the business and so you could probably in any given quarter see that slightly North of 22%, although frankly when I am looking at the budgets I am not quite expecting it to get that high, so lets just say 22% and it could be as low as 20%.

Q - : And then in terms of the number for the year, would it be down as a percentage of revenue in ‘06 versus ‘05 based on your guidance?

A - Kenda: I would guess it would be down slightly.

Q - : Okay thanks.

[Operator]

Sarah Gibbins - Merrill Lynch.

Q - Sarah: Hi good morning.

A - Todd: Good morning Sarah.

Q - Sarah: I had a question about the rollout of the lower credit program on ground.

A - Todd: Yes?

Q - Sarah: Can you review what your plans are for rolling that out on ground in 2006?

A- Todd : Yeah and again we are in the process of doing that now. Several campuses have already started that the goal as I mentioned earlier, we are hoping that you are able that do obviously more effectively in your larger campuses, but going forward we are planning to have every campus being able to offer that certainly by the end of this fiscal year, but with a little bit of luck most of them done by the end of the half as well.

Q - Sarah: And in terms of pricing do you plan to price the on-ground program similar to the online associate degree program or would it be priced more comparably to the traditionally URP program?

A- Todd : Actually in the middle and reason for that is that it is a little different model it’s not exactly the same as the online model. Just to maybe give you some average numbers if you are talking about say under $300 a credit hour for an Axia on the online program the lower credit hour program and say the regular on ground program of being say $350 a credit hour this would be more in the neighborhood of an average of $325. So you can see it’s right in the middle.

Q - Sarah: So in theory the pressure on average revenue per student that we saw for the end of this year probably going in to next year. When you are modeling are you assuming continued pressure on that given the roll out of the ongoing program as well.

A- Todd : That is exactly right. Yes, yes

Q - Sarah: Okay.

A- Todd : And so again let me just put a little color on that, we don’t want to have what happened in the last couple of quarters in the last fiscal year, where because of the popularity of that program it made our revenue models not as accurate as they have been in the past and so this year what we did is, we took the conservative view of that and so therefore again we don’t expect that same type of situation to occur.

Q - Sarah : Okay is it fair to assume that the average revenue per student is probably going to be down in the first half of the year but then flapped up in the second half. Is that what you are assuming?

A - Todd : I would think it’s a little early to tell. Yes simply because the real numbers of that new program started to fall into place in the third and fourth quarter.

Q - Sarah : Okay, and then the last quick questions could you give us an update on the Flexnet programs and any sense of how many students are currently enrolled in it and how it’s going?

A- Todd : Okay. Well the numbers just grew. We have the person responsible for that and it’s 20,400 students.

Q - Sarah : Okay, thanks very much.

[Operator]

Jennifer Kilby - Bergstrom

A - Todd: Hi, Jennifer.

Q - Jennifer: Hi. Todd could you clarify what you’ve experienced thus far in terms of the operating margin for the WIU online students. I think there has been some confusion about expectation versus what you have seen thus far.

A - Todd : I think the main, if you are going forward as a large percentage of these students are in place and a lot of your development that was going has also been spread out over more students. The margin for that student will be growing faster than the expected margin growth in the University of Phoenix student and in the early stages they were less profitable since because again you had fewer students and they have now become significantly more profitable than what they were. But going forward our feeling is very strong that they will have be higher margin of students and there are couple of things that I know, infact I have read somebody speech this morning commenting on this but then yes as you have a larger class size again because the academic model is structured differently, there is more contact hours with the faculty member and so therefore you can accommodate a larger class size, you would expect your margins to be a little bit better.

Q - Jennifer : But how about today?

A - Todd : Today, I would say again it’s hard to measure it accurately but the margin is a little bit more larger than a regular University of Phoenix student.

Q - Jennifer : From the on-ground?

A - Todd : That’s correct.

Q - Jennifer : Okay and what’s the average age of the WIU student.

A - Todd : 28.

Q - Jennifer : Thanks. Can you update us on Katrina and what you are saying?

A - Todd : Sure. Infact I also read another little matrix on that this morning, that if you look at just across the Board we have the Director of New Orleans, all of our Louisiana campuses in and we also had a regional VP. But right now of the three campuses that are located specifically in Louisiana, two of them are operating, the third one is not open yet and we are not sure when that will be operational.

What we’ve tried to do is those students who can, we try to get them into the other learning centers or the other campuses in Louisiana and those in New Orleans that we can reach to get into an online program if they would like to do that. The building itself in New Orleans is in relatively good shape. And going forward as I said before we built about $21 million revenue reduction for the impact of the on-ground effective, on-ground students and from Katrina and our hope is that obviously it won’t have to be as much of that.

Because going forward Bob just gave a note that their feeling is that they are hoping by the second half of the fiscal year that it will be up and running. There is a lot of obvious things that would have happened by then. As far as the impact indirectly, and this is the one I think there was some confusion from the one that was mentioned before. It’s hard to quantify the impact on online students and although yes they can’t physically attend the campus, there were many students who were affected that did not have access to any kind of telecommunication and the ability to access the program online.

Now those students obviously will come back sooner but the things still affecting their personal lives are having an influence and impact on that. Also those whose decisions are whether to go to school or not to go to school right now probably not the most important thing on their mind. So that’s why we put what we felt was a reasonable number in there, penny and quarter and then as I said as mentioned on the revenue side of that, our feeling is that it’s more than adequate and in the second half of the year there maybe a little bit of cushion built in there for us but again, I felt it was the most responsible thing to do to put a penny and quarter for that

Q - Jennifer: Do you have a sense of what percentage of the students from those three campuses have returned?

A - Todd : Just a minute, let me look at the notes here, I would say probably we have been able to get back into the system about 50% of those students to date….a little bit higher.. so maybe in the neighborhood of about 30% of the students will get back in the program.

Q - Jennifer: Okay, Thank you

[Operator]:

Trace _____ - Robert W Bayer

Q - Trace: Hi, Good morning.

A- Todd: Hi Trace.

Q - Trace: Hey, you kind of touched on this call but I just wanted to try to clarify this if I could. I think last call, you endorsed a number for Axia that was how it was actually in the 30,000 range and I suspected some people then looked at that and grew concerned at the underlying growth in the University of Phoenix online program was may be less than what they had anticipated. Is it fair to think of it that way or is it in fact a case that you did have those low credit hour students in University of Phoenix online a year ago, and now you are directing them to you what you think will be a more effective program?

A - Todd: That’s exactly right. What happened is as I said this with Brian earlier that well over 90% of the students that we are getting now are people who were interested in the University of Phoenix, they didn’t come to us because of their interest necessarily in Axia and so the assumption is that a large percentage, not all of them obviously, but a large percentage of those would have been in the University of Phoenix, so if we were saying that all of a sudden lead flow at University of Phoenix fell off, no that’s not the case at all, these weren’t University of Phoenix leads.

Q - Trace : Right, okay I thought that was the case, I just wanted to put a fine point on it. Kenda, just one more question for you, it’s looks as though the cash conversion of earning as dipped a little bit over the course of this year versus prior years, and it’s seems as though one of the drivers of that is kind of an increase in your restricted cash. I wonder if you could comment on that what’s driving that trend and what we could expect going forward?

A - Kenda: Restricted cash is a calculation based again on when student’s financial aid money comes in, but as I mentioned we moved that to investing so that it would not queue the operating cash flow numbers in the future, so we have made that move down, I think some of the confusion came within the second quarter where we were required to break out option rates securities, we restricted down into inventing so we had a portion of the restricted cash in operating and a portion in investing so now we have moved it all to investing.

Q - Trace: Okay, so, the increase is thereon a function of sort of mix of programs, so the growth of Axia or anything like that.

A - Kenda: No. That’s, not where it comes from.

Q - Trace : Alright. Thank you.

A - Todd: Thanks, operator we probably have time for just two more questions we are already over an hour so, go ahead.

[Operator]

Fray Callahan - Stanford Group

Q - Fray: Thank you guys, I just got one quick one question in here. Whenever you look at the question about energy and you said that you lease most of your buildings, so is it safe to assume that from a budgeting standpoint, you guys aren’t really impacted by the higher energy cost that will becoming through this winter?

A - Todd: Yeah, very, very little impact by that, and not only do we lease just some of our building, we lease all of our buildings. We even know that we have bought the land and built the building we do sell these back again it is a safer operating model and it is also consistent just philosophically that we are not in the real estate business, we are in the business making a convenient for our students when it comes to where their classroom is. So, yeah, I think very little impact there.

Q - Fray: Great, and then whenever I look at the average revenue per student in the fourth quarter I know there is some volatility in that number just due to seasonality and what not but it appears like I would have thought that it would have degraded more than it did actually and can you speak for that, is there an anomaly there, or I am just to doing bad math?

A - Todd: No I think that the potential is there but I think it is just goes to the strengthen our model, that as far as back to this point as far as value of education and the demand continues to increase. The downside is that if you look at it again, I am looking at macro trends in education, I think they are missing the course for the trees here, that the educational model which will be successful are the ones that can deliver the education in an economic way and still maintain the higher level of quality and customer service. And they have to be independent of technology development as well as economic issues like the energy crisis and so on and the cost of energy and we are just better positioned to deal with that and I think whether its luck or what, it just so happens that I think we are better positioned to take advantage of that, now whether we do or not will depend on our ability to execute but certainly the opportunity is there and it is probably from our point of view it is probably more promising than it has ever been.

Q - Fray: Okay and then just one final question, on the student to teacher ratio, did you provide that for the fourth quarter?

A - Todd: I did not, but I can just give you as general number. For on-ground it is still in the 15 to 1 range and it is coming up slightly, online is going up more significantly, we are in the neighborhood of about 13 to just under well… Kenda is telling me just under 13 .. so 12.5 to one on the online basis.

Q - Fray: Okay, thank you very much.

A - Todd: Thank you Fred

[Operator]

Richard - Jeffery’s and Company

Q - Richard: Great, Todd, I just wondering if you could just talk a little bit about may be the time for students coming to from a lead to a conversion, I know last year you spent about 5 million extra I think it was in the second quarter. Did you get any benefit from that in the most recent quarter and is that the reason may be the growth in selling and promotional is decreased or decelerated I should say?

A - Todd : I think that’s had a little impact on it. I mean when you are talking about the size of the company, and the amount of money we spend, you are talking about may be to benefit of couple of million dollars may be $1.5 million in this particular quarter but nothing overly significant. But we may then because of that be spending in the fourth quarter of this year that we just finished for the first and second quarters of this coming year. So it is hard to… as Kenda mentioned earlier, I thought she put it well, when it’s very difficult to tie each of the quarters specifically when it comes to advertising spending because it doesn’t lineup with your quarters. You do what you can and make sure you have enough quality leads to produce the start that you need but I would say it is a safe assumption to make obviously we were feeling some of that impact not a lot just because of the shear size anyway but certainly some in that percentage this quarter, this past quarter which is reported.

Q - Richard: Okay and what would be the average time from a lead to a start actually?

A - Todd: I would say we are probably in the neighborhood of about 90 days to about three months.

Q - Richard: Is there any difference between WIU and University of Phoenix on that front?

A - Todd: Right now it is the little shorter for Axia and again that, that would be consistent with introducing any new program, there is a little bit of a build up demand there.

Q - Richard: Okay, great thank you

[Operator]

Since there is no more time for questions Mr. Nelson please continue with any closing comments.

Todd: Okay well again just a couple of wrap up comments. We appreciate you joining us, I know we are looking forward to a very good year we are seeing out of the blocks, a little bit of conversion rates, our retention is a little higher, we have good things happening within just operationally with this migration to our call center and some of our new programs and so we are looking forward to a very good year and hope to have you join us in a few months from now. Thank you very much.

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