Apollo Group F2Q07 (Qtr End 2/28/07) Earnings Call Transcript

TRANSCRIPT SPONSOR

Apollo Group (APOL)
F2Q07 Earnings Call
May 22, 2007 8:30 am ET

Executives

John Sperling - Executive Chairman
Joe D'Amico - CFO
Brian Mueller - President
Greg Capelli - EVP for Global Strategy

Analysts

Sarah Gubins - Merrill Lynch
Mark Marostica - Piper Jaffray
Amy Junker - Robert Baird
Matt Litfin - William Blair & Co
Steven Barlow - Prudential Equity Group
Suzy Stein - Morgan Stanley
Mark Hughes - SunTrust
Gary Bisbee - Lehman Brothers
Jeff Silber - BMO Capital Markets
Jerry Herman - Stifel Nicolaus
Trace Urdan - Signal Hill Capital
John Emerich - Iron Works Capital
Corey Greendale - First Analysis
Brandon Dobell - Credit Suisse
Jennifer Childe - Bear Stearns
Ryan Mahoney - ThinkEquity

Presentation

Operator

Good morning, ladies and gentlemen. And welcome to the Apollo Group Incorporated Second Quarter Fiscal 2007 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and the instruction will follow at that time. Please refrain from entering into queue until those instructions are given (Operator Instructions).

As a reminder, ladies and gentlemen, this conference call is being recorded today, May 22, 2007, and may not be reproduced in whole or in part without permission from the Company. There will be a replay for this call available through June 5, 2007, beginning approximately two hours after we conclude today. The replay number is 1-800-642-1687, or 706-645-9291 internationally. The conference ID number for the replay is 9860734. Additionally, this call will be broadcast over the Internet and can be accessed via the Company's website at www.apollogrp.edu.

I would also like to remind you that this conference call may contain forward-looking statements with respect to the future performance of Apollo Group that involve risks and uncertainties. Various factors could cause the actual results of the company to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's 10-K report filed with the Securities and Exchange Commission. The Company does not undertake any obligation to update anyone with regard to the forward-looking statements made during this conference call.

I would now like to turn the call over to Dr. John Sperling, Acting Executive Chairman of Apollo Group. Dr. Sperling, go ahead, sir.

John Sperling

Thank you. Good morning and welcome. It's been some time since I opened the conference call. It's personally gratifying that today it will include very positive news. Because of the tireless work of large number of employees, Apollo can now put the stock option restatement behind us and our financial filings will be timely going forward.

Before I turn the call over to our management team to discuss the details I would like to thank all of our investors and employees for their patience while we work through our restatement process. I particularly want to thank our Chief Financial Officer Joe D'Amico; our new Chief Accounting Officer, Brian Swartz; the Company's entire accounting staff; our audit committee led by Ms. Sue Redmond; and the Special Committee whose collective labors can only be described as Herculean.

Joe D'Amico will begin today's presentation. Joe will discuss matters set forth in our 10-K, the significant progress we've made in corporate governance, and the highlight of our second quarter financials. Following Joe's report Brian Mueller, our President, will discuss our second quarter financial results and operations; and lastly, Greg Capelli, our Executive VP for Global Strategy and Assistant to the Chairman, will discuss Apollo's strategic plan.

I would like to add that due to Greg's prior work as a leading educational analyst with extensive experience within the investment community Brian and I have asked him to assume primary responsibility for communication with Wall Street.

I will now turn the presentation over to Joe D'Amico, Apollo's Chief Financial Officer.

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Joe D'Amico

Thank you, John. I'm very pleased to report that as of this morning, we are fully compliant with the SEC, having filed all of our delinquent reports, including our 10-Q for the third quarter of 2006, our 10-K for fiscal 2006, as well as our 10-Qs for the first and second quarters of fiscal 2007.

I do want to apologize that these documents were not available to you last night, as we had planned. With these filings, we believe we are now fully compliant with all NASDAQ rules. We have worked very hard over the last several months to get to this point and we are very pleased to be putting this investigation and restatement behind us.

Let me now step back and review the actions we have taken, what we've found, and then spend some time discussing the changes we've made to strengthen the organization from a financial and corporate governance perspective. The details of the findings, resulting restatements, and remedial actions can be found in the 10-K and 10-Q filings that I just mentioned. First let me review the process we undertook.

As you know, in June of 2006, Apollo's Board of Directors authorized a special committee to conduct an independent review of the company's historical practices related to stock option grants and the committee presented its findings in December of 2006 to the Board of Directors.

I joined Apollo in November of last year as the CFO and the person selected by the Board to oversee the restatement and governance issues. Since then I have focused my attention on getting the company back in compliance with its reporting obligations as well as implementing remedial actions to address the issues which were identified by the special committee. In addition, my finance team conducted our own thorough review, financial review to assess any reporting risk.

Based on the independent review conducted by the Board, as well as our internal review, we determined that 57 of 100 total grants made between 1994 and September of 2006 used incorrect measurement dates for accounting purposes. Importantly, neither we nor the special committee found that any of the grants were selected with the benefit of hindsight.

In addition, we identified four material weaknesses in internal controls over financial reporting. These weaknesses were as follows. One, the granting of stock options and the related recording and disclosure of share-based compensation. Two, accounting for bad debt expense and the related allowance for doubtful accounts. Three, the valuation of goodwill. And four, the accounting for tax liabilities under Internal Revenue Service Code Section 162-M.

We believe that we have made substantial progress in remediating these material weaknesses, and we do not believe they will repeat when we are required to reassess the effectiveness of our controls at the end of fiscal 2007.

And before I get into detail regarding our remediation progress, let me give you my perspective on our corporate governance as a former audit partner and consultant with more than three decades of experience dealing with similar complex issues.

We have significantly strengthened our governance and control environment since I came on board. Getting to this point was time consuming. However, the governance changes were embraced. There was no resistance to the proposed restatement and any adjustments from anyone in the organization.

I have learned that we have strong processes and operating controls in place, as well as good IT systems and people. Importantly, I can say with confidence from my personal experience here that there is no tone at the top issue. Said another way, I'm not aware of any undue pressure to achieve bottom line results.

The focus of senior management is on business operations, not worrying about short-term Wall Street estimates. Our priority is to report accounting results accurately, irrespective of the outcome. And last, the organization is committed to conducting its business ethically and with integrity.

I would like to highlight three ways in which Apollo has strengthened its organization and its corporate governance environment. Specifically there have been several changes and additions at the Board level. We have added management talent within the finance team and we have retained new outside counsel.

First, we have made several changes to the Board of Directors and we continue that process of looking for high quality independent Board candidates. Since last November, we have added two new independent directors to the Board and appointed a new audit Chairperson and a new compensation committee.

Additionally, both the audit and compensation committees revised and adopted new charters to reflect additional policies, procedures, and controls. Specifically, as it relates to the granting of stock options, only the compensation committee can grant stock options. Additionally, the grant process is managed directly under my supervision.

We believe our Board and underlying policies and procedures which support Board decision making are much stronger today, and we anticipate making further additions to the Board in the near future.

Second, we've hired additional management talent to strengthen the Apollo finance team. We're very pleased that we have been able to attract very high-caliber individuals with big four accounting firm backgrounds. First, as we announced last call, Brian Swartz has joined us as Vice President, Corporate Controller, and Chief Accounting Officer.

Brian has a very strong accounting and finance background and has been a tremendous support throughout the review and restatement process. In addition, we recently brought on a new Vice President, Controller of Accounting, Greg Iverson, and a Vice President of Tax, Scott Sinclair. Additionally, we have promoted Jeanette West to Treasurer.

Finally, we appointed a new Stock Option plan Administrator who reports directly to me. We also continue our search for an experienced and well-qualified person to serve as our General Counsel. We have undertaken a formal search process and hope to have someone on board soon in that role.

Finally, we have hired several world-class advisory firms to assist us. This includes Morgan, Lewis & Bockius as our SEC reporting, Stock Option, Tax, And Special Counsel. Morgan, Lewis has been a tremendous support in getting us to where we are today from the filing of all of our delinquent financial reports to improving our governance procedures.

Now let me address in more detail the four key areas relating to accounting restatement and adjustment. First is, stock options; we have recorded a cumulative pretax non-cash compensation expense of $53 million over the period from 1994 to 2005. Second, as of February 2007, we have accrued approximately $43 million, including penalties and interest for potential tax liabilities associated with deductions taken in prior periods under IRS code section 162(m).

Third is bad debt expense. Last quarter, we made an adjustment of $34 million to increase our allowance for doubtful accounts. After further review, we increased the allowance by $4 million to $38 million. Of note, $24 million of this amount relates to years prior to 2006. Based upon our current methodology, we believe our allowance for doubtful accounts is adequate and we will monitor and adjust this estimate based upon our future write-off experience.

Finally, in the fourth quarter of 2006, we recorded a non-cash adjustment of approximately $20 million for the impairment of goodwill related to our September 1997 acquisition of the College for Financial Planning.

Let's now turn to fiscal 2007 second quarter financials in more detail. Total consolidated revenues for Apollo Group for the second quarter of 2007 were approximately $609 million, or a 6.7% increase over the second quarter of 2006.

Turning to expenses. Overall, expenses for the second quarter of 2007 increased at a faster rate than the growth in revenues, increasing approximately 16%. This resulted in operating margin of 15.1% or 19.6% excluding share-based compensation and unusual charges, which ultimately resulted in $0.35 per diluted share for the second quarter of 2007, or $0.44 per diluted share excluding share-based compensation and unusual charges.

Turning to the balance sheet and cash flow, our liquidity remains very strong as of February 28, 2007. Our cash and marketable securities, excluding restricted cash, increased 22% to almost $500 million at February 28, 2007, compared to $409 million at August 31, 2006. This increase was driven primarily by cash flow from operations of $194 million, partially offset by $50 million of capital expenditures. It is important to note that $23 million of our capital expenditures are one-time in nature and represents the build out of our new corporate headquarters building in Phoenix, Arizona. We have entered into a sale/lease-back transaction to monetize our investment in this new building when complete in mid-2008. At that time we expect to exercise the sale and lease/back and will receive approximately $170 million in proceeds.

Net receivables were $196 million at February 28, 2007, compared to $161 million at August 31, 2006. And our DSOs, our days sales outstanding calculated based on the last 12 months revenue divided by gross student receivables increased from 33 days to 40 days. Most of this increase occurred during the second quarter. We are focused on this development and do not yet know where DSO will normalize.

We believe most of this increase is structural in nature due to a larger percentage of our students in our associates program. Bad debt expense as a percentage of revenue continues to trend upward and grew to 4.3% in the second quarter of 2007 versus 4.2% a year ago. We believe the allowance for doubtful accounts at February 28, 2007, is reasonable. And we will update you on DSO during our third quarter conference call.

Between February 28, 2007, and February 28, 2006, the deferred tuition revenue increased 8% to $146 million and student deposits increased 10% to $279 million. Deferred tuition increased primarily due to growth in revenues and enrollment and student deposits increased primarily due to the timing of students' financial aid disbursements, which are reflected as an increase in restricted cash as well.

With that, I will turn it over to Brian.

Brian Mueller

Thanks, Joe. I also would like to take a second to thank Joe and Brian Swartz and the entire accounting department for working as hard as they have over the last number of months to get the issues behind us. Thanks again.

Good morning, everyone. This morning I want to update you on our progress toward three financial and operating goals and specifically four broad strategic initiatives we have in place to achieve those goals. Before I do, I want to briefly discuss the new and expanded metrics that we disclosed in the press release yesterday. In an effort to improve our financial transparency and in response to many of your requests, we have now broken out degree-seeking revenues versus single course continuing education revenues. Additionally, we have provided revenue by degree type as well as new starts, also by degree type. Importantly, in yesterday's release, we have given historical numbers so that you can build your models appropriately.

Now let me address our goals and the progress made during the fiscal second quarter. We have committed to a long-term goal of generating mid to high single-digit annual domestic revenue growth and low double-digit annual operating income and free cash flow. We also expect to see enrollment growth in the high single digits. However, we believe this as well as revenue growth could be higher in the near term. Specifically, we expect to see improvement from our second quarter performance of 10.2% enrollment growth, 6.7% revenue growth, and operating margins before share-based compensation and unusual charges of 19.6%. Let me address each of these.

First, enrollment. We are pleased by second quarter results from an enrollment standpoint as we reported year-over-year growth of 10.2%. We bottomed out in enrollment growth in the third quarter of fiscal year 2006 at 3.3% and have been building ever since. As I indicated, we currently expect the fiscal third quarter enrollment gains to exceed second quarter growth.

Total enrollments reached nearly 298,000 due to an approximate 24% year-over-year increase in new starts and some improvement in retention rates. New starts of approximately 59,000 increased primarily because lead quality is improving. Our qualifying center is growing in effectiveness, conversion rates are up overall, and show rates from our ground counselors selling on-line have improved. In addition, retention rates in our associate degree programs are up slightly.

Second, revenue. Year-over-year revenue growth has gone from a low of 5.5% in the fourth quarter, of 2006, to 6.7% in second quarter of fiscal 2007. We are pleased by this positive trend.

As expected, the second quarter revenue growth lagged behind enrollment growth because there were two less weeks of attendance at the on-line campus in the second quarter of 2007 versus the second quarter of 2006 due to the holiday break schedule changes.

In addition, there is still a mix shift taking place because of strong enrollment growth at Axia and our inability to raise tuition at Axia for two-and-a-half years. The good news is, the mix shift is slowing down, and in May, we implemented a 10% increase in tuition at Axia, and as a result, we believe revenue growth will continue to improve in the third quarter.

Third, let me address our operating margin, which is at 19.6% before share-based compensation and unusual charges in the second quarter of 2007. This amount was disappointing but we believe this is a short-term problem and expect margins to increase over the next number of quarters.

The margin was depressed in the second quarter for the following reasons. One, lower revenue because of less weeks of attendance at the on-line campus. Two, we are still improving from an advertising perspective. Advertisement as a percent of revenue is up 3.2 percentage points versus prior year but it will come down.

The productivity of the 600 new enrollment counselors hired in the fourth quarter of 2006 is improving but they're still not at 100% effectiveness. We expect them to hit their stride by the first quarter of fiscal 2008. Enrollment counselor salaries as a percent of revenue are up 2 percentage points but they will also come down.

Finally, our employee compensation line increase is 1.8 percentage points as an academic and financial advisors hired to support the increased enrollment.

Let me now discuss in more detail the four strategies we are pursuing to achieve the three goals I just discussed. First, we plan to continue the innovative research that allows us to build on our already advanced curriculum, instructional delivery, on-line learning system, and support services to further drive increased student retention and success.

Because of the centralized approach we take to curriculum building and instructional practices, and because we have so many students studying on-line, which allows us a detailed look at all completed classes, we have a myriad of pilots going on to test changes that bring improvements to student learning and success.

We aren't going to share the specifics about the project because they are proprietary, but I think it is important for you to know that we are committed to increasing retention on an ongoing basis.

Our second initiative is to build and retain a sizable pool of on-line associate degree students and transfer them into UOP bachelors programs with little or no additional sales or marketing expense. This will expand our revenue stream over three to four years versus the historical two for at least a percentage of our students.

During the second quarter, our Associates degree student body grew by approximately 61%, which will significantly increased the number of Associate graduates and thus the number of potential student transfers in our Bachelors program.

While we continue to see slight increases in the transfer rate, we are still experiencing some decline in Bachelors enrollment. But as Associates degree transfers increase over time we believe that the Bachelors enrollment will start to grow again.

The third initiative is to continue to leverage our capability as a leader in marketing, advertising, lead generation; student recruitment and branding which will further drive enrollment growth and decrease expenses.

During the second quarter we made continued progress in this area. Currently, our advertising costs are higher than we would like but they are coming down and we expect them to improve further as a percentage of revenue in the third quarter. We continue to improve our intelligence around the lead generation process and concentrate our dollars spent with those suppliers that are providing the highest quality leads.

Additionally, conversion rates have improved because of increase in quality and we expect this trend to continue. The productivity of enrollment counselors have increased because of increased lead quality and because we have over half of our sales force offering multiple delivery models. Finally, our branding campaign continues to drive search activity to our website which is positive.

Our final initiative is to continue our organic growth internationally as well as domestically, consider strategic acquisitions internationally and domestically. Towards this effort we have opened International University of Phoenix call centers to grow the University of Phoenix programs abroad.

Specifically there's one in the Netherlands and also in Dubai. Additionally we are offering University of Phoenix programs in Spanish and are exploring other potential foreign language offerings as well. Finally, of course, we are taking a disciplined approach to looking at selected international acquisitions.

In summary, we believe these four primary strategies will drive enrollments and improve retention and ultimately allow us to achieve our long-term financial goals, which I outlined earlier in the call. We are optimistic about the outlook for the business particularly now that we have the options investigation and restatement process behind us.

I would like to thank the management team, staff, and faculty around the world for their tireless efforts during this time of transition. We look forward to updating you on continued progress in future calls. I have spent the last couple of months sharing my strategy with Greg Capelli.

He would now like to spend a minute giving you his thoughts on the strategy and then we will take your calls.

Greg Capelli

Thank you, Brian, and good morning to everybody. Just to spend a few minutes discussing all strategic plans, which has been refined over the last several months, as Brian said and then we'll open it up for questions.

Our mission at Apollo is to strengthen our position as a leading provider or high quality, accessible education for individuals around the world by affording strong returns for all of our stakeholders our students, our employees, and our investors. Our primary focus is providing the highest quality educational product and services for our students in order for them to maximize the benefit of their educational experience.

We believe that a superior educational experience combined with an engaged and energized faculty and employees should in turn enable our owners to achieve strong returns on their capital over time.

We have committed to a strategic plan with the support of our Board of Directors to best ensure the effective deployment of our resources and our capital. Our goal over time is to generate mid to high single digit annual domestic revenue growth and low double-digit annual operating income and free dash flow growth. Additionally we plan to supplement domestic growth with international expansion.

The four key building blocks of our strategic plan include first maximizing the value of our core existing operations. We understand that our core domestic operations are where the majority of our current and near term value creating opportunity resides and is the primary focus of our strategic plan. This includes enhancing and expanding our current product offering, improving student success rate and maximizing the leverage of our existing instruction.

Second, we're exploring opportunities to expand our footprint domestically and into attractive and rapidly growing international markets. There's a growing need for high quality flex secondary education in several key geographies around the world including places like China, Latin America, and India.

We think that we now have the capabilities and expertise that can be useful in providing these services beyond our current reach. Additionally, we plan to leverage our existing infrastructure to expand our virtual high school platform as we seek public school charter recognition in those 21 states currently allowing virtual charter schools.

We intend to further expand the platform into the remaining states through a private school model over time. And finally, we will continue to employ a disciplined approach to our capital structure and redeployment of our excess cash flow.

We'll continue to invest capital in our high return core domestic business and explore strategic and value creating global acquisition opportunities to enhance shareholder value.

With that we'd now like to turn it over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sarah Gubins with Merrill Lynch.

Sarah Gubins - Merrill Lynch

Hi, thank you. Good morning.

Brian Mueller

Good morning.

Sarah Gubins - Merrill Lynch

A couple of questions, and maybe I will just list them all out. First, can you talk about student start growth trends more recently now that we're getting towards the end of this quarter?

Second, you've talked in the past about a national pricing strategy, and I'm wondering if that's something that you're still planning on implementing?

Third, plans to hire a permanent CFO? And then fourth, you had discussed potentially doing a share buyback once the restatement was complete, and I'm wondering what plans are for that? Thank you.

Brian Mueller

I will start with the starts. Obviously, we've been working hard at what we're doing from a new enrollment standpoint, and it's paying off to be honest with you above our expectations. And so we feel good about the size of the market. We feel good about our current levels of success.

We're not giving guidance but we do expect the success that we experience to continue for the time being at least.

With regards to national pricing, we are taking a deliberate approach to that. We're not doing everything at once. We have implemented a change at Axia college we raised tuition by 10% on May 1st.

So, lot of students who are low credit hour students are going into that program which is -- kind of the beginning of a national pricing strategy. We will take some additional steps in that direction that would mainly raise tuition, not lower it, over the course of the next number of months.

So, we will work towards that goal of having a strategy where all students are under title for enrollment and therefore should have a positive impact on retention rates, but we'll do it in a way that is revenue-neutral at worst and possibly revenue supportive.

As far as the CEO, we do have a candidate that we are interviewing -- I'm sorry, CFO. We do have candidate that we are interviewing and Joe D'Amico will stay with us at least through the time that we've got somebody permanently. And then in terms of share buyback, Greg, why don't you talk about that.

Greg Capelli

Sure. What I'd say is we are considering all of our options for capital deployment and structure and that includes share repurchases.

Sarah Gubins - Merrill Lynch

Thanks very much.

Operator

Your next question comes from the line of Mark Marostica, Piper Jaffray.

Mark Marostica - Piper Jaffray

Thank you and good morning. First question relates to the advertising spend growth that we saw in the quarter and, Brian, you talked about the spike in advertising spending. I think you mentioned you also expected to moderate.

Could you give us a little more color why it jumped up so dramatically this quarter and why you think in your strategy it will continue to moderate?

Brian Mueller

Well, as a percent of revenue jumped, and there was a spike this quarter because revenues were much lower than we expected because of the holiday break, the students are there, as noted by a 10.2% increase in student enrollment.

If that continues, and we expect it to through the third quarter, then you would see, by virtue of higher revenues, a better percent of revenue from an advertising standpoint.

We also know, we're obviously watching it very carefully and have been, and we're very comfortable with the trends and comfortable that we will see improvement over the next number of quarters.

Mark Marostica - Piper Jaffray

So not to put words in your mouth, but as we look to the second half of the fiscal year should we expect selling and promotion as a percent of revenue to be below where it was in the first half or specifically the second quarter?

Brian Mueller

We definitely have -- overall there's definitely a positive trend in place, and if we can continue with the progress that we're making, there will be improvements.

Mark Marostica - Piper Jaffray

Great. I wonder if could you also comment on attrition in the quarter with bad debt ticking up just a bit, and then perhaps you can give us your sense of where you're comfortable with the bad debt percentage going forward?

Brian Mueller

Well, the bad debt as a percent of revenue is fairly close to where it was. The thing that we have to be very careful about is the days sales outstanding, which has gone up seven days.

There's definitely a little greater risk when you're growing your student body and part of that student body is around students who are first generation college goers and starting with not a lot of college experience.

We are learning a lot about them from an educational standpoint as well as a retention standpoint, so we will watch that very carefully. We will monitor it very carefully. And we will make sure that we work as hard as we can from an operational standpoint, so that we minimize the risk going forward.

Mark Marostica - Piper Jaffray

Then the last question, Brian, in the past you have talked about an operating margin goal in the 29% area. Curious if you could update us on that metric or goal? Thank you.

Brian Mueller

The big cut into the operating margin, the three big cuts are obviously number one, the 600 enrollment counselors. Number two, advertising expenses to support them. And then number three, the academic and financial advisors hired to support the new students, and that's the 90% of the reduction in margin quarter-over-quarter.

As the 600 enrollment counselors gain in productivity levels and get closer to operating at max, we will have the revenue to support the increased advertising spend even though we believe that the advertising spend can go down as we gather more intelligence.

And then, obviously, as we have the students and as we have the revenue, academic and financial advisors, which is like 1.7, 1.8%, that will also get more inline. So we expect because -- we know exactly what the three areas are, and because we're making steady progress in all three of those areas that we will return to operating margins that are better than what they are currently.

Mark Marostica - Piper Jaffray

Fair enough. Thank you.

Brian Mueller

Okay.

Operator

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

Amy Junker - Robert Baird

Good morning, just a couple of quick ones. First, on the $5.7 million in the unusual charges we calculated that equated to roughly $0.02 EPS. Let me know if that was wrong and so stock-based comp appears to be $0.07. I'm curious, why was that so high…

Brian Mueller

We lost you at the end.

Greg Capelli

Hello? Okay.

Operator

There was a problem with her line. You can come back into queue, ma'am.

Brian Mueller

The answer to your first question, the unusual items that is about $0.02 a share. And the stock-based comp of the $21.7 million in the second quarter really relates to modifications that we did to our stock option plans, which had an accounting charge under FAS 123R.

Operator

Your next question comes from the line of Matt Litfin with William Blair & Co.

Matt Litfin - William Blair & Co

Hi, good morning, and welcome, Greg. Wondering, why is Axia working so well here in enrollment terms? Specifically, my question, I guess is how much of that enrollment growth is coming from pure interest in that program versus the feeding of the University of Phoenix leads into Axia? Thanks.

Brian Mueller

The growth in the program is due primarily to the size of the market. With only 20% of Americans having baccalaureate degrees.

The biggest part of the market of those people who have graduated from high school and have not graduated from college, and with the middle class getting squeezed.

And with people not having the opportunity to pursue manufacturing and assembly careers, they're finding that higher education is important for them, and they're looking for a way to do it that doesn't involve two or three or four nights of attendance every single week for 16-week semesters.

So when we offer them a program on-line, and that can be integrated into their lifestyle in a way that others can't, the program grows, so that's not surprising to us.

The challenge, obviously, is to make sure that we understand those students and build for them instructional practices and support systems that allow them to increase and to graduate at higher levels. The thing that we -- one of the things that we're most encouraged about is that when a student does graduate from Axia college and transfer to the University of Phoenix, we are persisting at the University of Phoenix at the rate of 93%.

So we know if we can keep them in, we can do a very good job of educating them and preparing them to be successful as baccalaureate students.

Matt Litfin - William Blair & Co

Thanks. And if I could sneak another one in what are you seeing in terms of companies' tuition reimbursement benefit programs? What trends are happening there?

Brian Mueller

It's pretty much stable there. There hasn't been anything significant that's happened in that area. So really no significant change from our standpoint.

Matt Litfin - William Blair & Co

Thank you.

Operator

Your next question comes from the line of Steven Barlow with Prudential Equity Group.

Steven Barlow - Prudential Equity Group

In the past, Brian, you have given us a little bit of a time line on those Axia students getting into and persisting into UOP in terms of the percent that started in X quarter and have graduated and moved up, and I wonder if you could do that for us again, please.

Brian Mueller

We did give those numbers on a one-time basis because I wanted to give you some color on it. We talked about we wouldn't be sharing that information in the future for a number of reasons but the original numbers we gave you, is that 32% were graduating, and of those, 43% were transferring, of then of those 93% were persisting through with a baccalaureate program. Those numbers are all up slightly.

Steven Barlow - Prudential Equity Group

Okay. And then on the Bachelor's degree in general with the enrollments down is there an issue with people wanting to start at UOP in the their third year of their college, or how should we look at that side of the program and whether or not potentially you need to close some of the facilities?

Brian Mueller

No, I mean, the issues around leaving or graduating from Axia and going to the University of Phoenix, we figures there's 43% of them, of those that graduate transfer to University of Phoenix, that's a conservative number. That number is going to be higher than 43%, because there are certain financial aid requirements that have to be met and that requires students to sit out for a period of time sometime before they can start again, and some students just want to take a little bit of a rest before they go again.

So the 43% number is a number that we have, that we reported at the time. That was the number at the time that we reported it. Not all students will go immediately out into University of Phoenix. Like I said, some will take a break, some have to get their financial aid stuff in order, and for those reasons we expect that number to go up.

Steven Barlow - Prudential Equity Group

Okay. Lastly, for Joe, can you give us the CapEx plans for the rest of the year with and without the new headquarters building? Thank you.

Joe D'Amico

Yes. Hold on one second. For the entire year it will be around $90 to $110 million. The balance of the year is around $40 to $60 million.

Steven Barlow - Prudential Equity Group

And that includes the new building or not?

Joe D'Amico

It does. It includes the new building.

Steven Barlow - Prudential Equity Group

Thank you.

Operator

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

Suzy Stein - Morgan Stanley

Hi, congratulations on wrapping up the options back-dating issue. On that could there be any additional penalties, and have you accrued for any potential liabilities from the shareholder suit?

And separately, can you just -- you may have talked about this I'm having terrible interference on the line when you guys speak, but can you just talk about the ad spending? How much of it is locked up in long-term contracts like the stadium contract and how much of it can you control from quarter to quarter?

Brian Mueller

I guess we are not for the shareholders lawsuit.

Joe D'Amico

There's no reserve on the shareholders lawsuit. The only thing we've accrued is for the tax impacts or the potential tax impacts under 162-M, and we believe that that's a reasonable accrual at this point in time.

Brian Mueller

With regards to the advertising expenditures, there's a tremendous amount of flexibility there. So we're not tied up in really anything on a long-term basis except for the stadium contract, but that's less than 2% of our expenditures. So it's not material.

Suzy Stein - Morgan Stanley

Okay. So from quarter to quarter you can really balance growth and margins as you see fit?

Brian Mueller

Yes. As we increase -- as lead quality increases what we do is lower number of total leads and we work hard on decreasing the acquisition cost and second quarter is not really a good way to judge our progress because of the less amount of revenue that we have, but we are making progress in that area.

Suzy Stein - Morgan Stanley

Okay. Great. Thank you.

Operator

Your next question comes from the line of is Mark Hughes, SunTrust.

Mark Hughes - SunTrust

Thank you very much. How much of the increase in advertising came from the brand advertising that presumably should have a longer-term payoff?

Brian Mueller

There's a small percent. You know if we -- when look at it on a monthly basis we are spending in the vicinity of 10% of our advertising dollars on that branding activity. And certainly it is pure branding activity although I would say we believe it's having a positive impact on lead generation and student growth. It's driving a lot of traffic to our website.

Mark Hughes - SunTrust

Is that 10% proportion is that steady year-over-year? Up a little bit?

Brian Mueller

This is the first year that we've really done it. So we don’t…

Mark Hughes - SunTrust

Okay. That was definitely up. And then any early view on whether Axia, with the price increase there affecting start levels in May?

Brian Mueller

Whether it's affecting start levels in May?

Mark Hughes - SunTrust

Right. 10% increase in tuition. Is anybody balking at that, or trends steady?

Brian Mueller

No, thank you for asking that. No, because loan limits are raised on July 1, for level 1 and 2 students. And so students know as they go in if they're going to have enough title IV dollars to cover the cost of their tuition, so, no, it's not impacting new student starts.

Mark Hughes - SunTrust

Thank you.

Operator

Your next question comes from the line of Gary Bisbee from Lehman Brothers.

Gary Bisbee - Lehman Brothers

Good morning, guys, and Greg congrats on the new role.

Greg Capelli

Thanks, Gary.

Gary Bisbee - Lehman Brothers

I guess the big question I've got, you mentioned, Brian, in your remarks that the Axia retention rate has improved modestly, so, it sounds like maybe you're starting to make some progress there, but it's still, the graduation rate is at a pretty low level. Can you give us any sense, I'm not asking next quarter, but over the next 12 to 24 months, how much improvement you think you can get in that? Can that 32% go to 45, 50, or are we talking about a couple hundred basis points?

Brian Mueller

We're not really sure. But keep in mind that you have to look at graduation rates from an overall perspective. And when you look at it from the an overall perspective, evaluate it against the mission of the university our graduation rates really are really good.

If you look at it from a Doctoral standpoint they're greater than 65%. If you look at it from a Master's degree standpoint they're greater than 60%. If you look at it from a baccalaureate standpoint, meaning those people who transfer credits and come in at Bachelor's degree completers and they're above 50%. That 50% is very equivalent to what would exist at a state university for example.

Now if you go down to the Axia level and say it's 32% obviously lower than the 50% is at the Bachelor's level or a typical graduation rate at a state university but it's much higher than the average graduation rate, which is below 25% at a community college.

And so, one, it's acceptable in terms of overall university standards. Two, it's going to be -- it is a profitable endeavor for us and extremely good for the 32% who graduate. Can we get it to 50%? I don't know. Right now we're trying to focus on nudging it towards 35, 36, 37%. We study everything about the program on an ongoing basis, and we will keep trying to push it.

Gary Bisbee - Lehman Brothers

The follow-up question to that is you mentioned in your remarks that getting -- the success with starts at Axia and then increasingly matriculating up into UOP as they graduate would be a driver of Bachelor degree enrollment. Even if you get that say 40%, it still seems to me that that's not going to be a huge driver of Bachelor degree. And I guess come back to a question I've asked in past quarters, which is what has happened that's made it so much more challenging to go after the core 35-year-old student who for the last two decades drove the growth of the business in Bachelor degree completions? Any insight yet as to what's going on and why that's so difficult to grow?

Brian Mueller

Nothing has happened at all other than there's a lot -- there's large numbers. It's large numbers, and there is increased competition from the traditional universities, which has had some impact.

But first, I think if you look at it from, again, from an Axia college standpoint, even if the graduation rate tops out at 40%, the pool of those potential students is growing, and so I do believe that that will have an impact. We're modeling that. It will have an impact on baccalaureate growth. And then just the degree completers and us attracting them, we're working as hard at that as we ever have. The pool is big; the competition is a little tougher. We'll continue to work at it.

Gary Bisbee - Lehman Brothers

Okay, thanks. That's helpful. And then just one last one. The question earlier around share repurchases, I realize you may not have devised a plan so you don't want to say a lot but is there some point in the future that we should expect that you're going to be willing and ready to provide more details on exactly what the strategic plan is in terms of reinvesting the capital?

Greg Capelli

Gary, this is Greg. The answer to that is yes.

Gary Bisbee - Lehman Brothers

Any sense as to when that may be, or are you still early in the process?

Greg Capelli

We're in the process and you will be hearing about it in the future.

Gary Bisbee - Lehman Brothers

Okay. All right, thanks a lot.

Greg Capelli

Sure.

Operator

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

Jeff Silber - BMO Capital Markets

It's Jeff Silber. Had a question about the increase in pricing at Axia. I'm just curious, why 10%? Why not 5, why not 15? What kind of market research went into that? And also, if you can give us a little bit more color potentially on some of the pricing changes we may see over the next few months in some of the other programs.

Brian Mueller

The rationale for the price increase at Axia had to do with Title IV loan limit increases. We raised it to a level we thought was acceptable in the short run knowing that we want to leave some room for modest 2% to 3% increases in the next number of years. And so it definitely was done under the guidance of what the student can afford tomorrow. In terms of what we will do going forward with regards to national pricing we're keeping that pretty close to the vest. We will implement any changes over time and we'll kind of alert you to them as we do it.

Jeff Silber - BMO Capital Markets

Okay. Great, I think in past calls you have talked about a show rate being about, if I remember it correctly, about a 55%, 60% range. Can you give us an update on how that's gone?

Brian Mueller

Yeah, the show rate had to do with ground counselors selling on-line programs, which were new to them, and it did hurt us in the first quarter from an enrollment standpoint. It also hurt us somewhat in the fourth quarter.

We have improved a lot from that standpoint. They have done a tremendous job for the most part now the show rates around enrollment counselors putting students into on-line or Axia are equivalent to what our experienced people at on-line are producing, which has in part been responsible for why our new enrollments are up.

Jeff Silber - BMO Capital Markets

Okay, that’s good to hear. And just a follow-up on Amy's question. That $5.7 million charge, can you tell us exactly what that is? And also what kind of stock-based compensation expense should we expect going forward?

Joe D'Amico

Hold on one second. The unusual items includes $2.8 million that is related to the investigation, and $2.7 million, which is part of the adjustments made relating to stock compensation expense.

The Amy's question dealing with the $12 million plus, or the $21 million stock-based compensation expense and the prior year amounts relates to modifications that we made to options for terminated people who were vested but could not exercise their options. So that had an effect that we had to record.

In terms of what stock-based compensation expense is going forward, we have not yet determined those amounts as we've obviously just completed the restatement. So we're in process now of trying to now figure out with our reset measurement dates what compensation expense will be.

Jeff Silber - BMO Capital Markets

But again, nothing like what we saw this current quarter? There are a lot of one-time issues?

Joe D'Amico

There are one-time issues in this quarter, that's correct.

Jeff Silber - BMO Capital Markets

Okay, great. I'll let somebody else jump on. Thanks.

Operator

Your next question comes from the line of Jerry Herman with Stifel Nicolaus.

Jerry Herman - Stifel Nicolaus

Thanks, good morning. Joe, just a follow-up on that. Of the $21 million, how much of that was sort of the one-time to give us maybe some hope of a run rate on stock-based comp?

Joe D'Amico

Yes, it's the $12.1 million is the one-time piece, plus $2.7 that’s shown separately it's part of the one-time cost.

Jerry Herman - Stifel Nicolaus

Okay. And then, Brian, a question about Axia. Maybe, well, couple questions. Number one is can you give us, now that sort of the dust has settled, the cost of acquisition, can you give us sort of the difference in margin of Axia if it were a stand-alone business relative to the legacy UOP business?

Brian Mueller

The answer to that is we're working and modeling that carefully. I can tell that you that the acquisition costs are not greater. I can tell you that faculty expense is a little bit better because the class size is a little bit higher. Obviously bad debt is a little bit worse, so we're modeling that, and we may have some additional information for you on that in the future, but we're not ready to release it at this point.

Jerry Herman - Stifel Nicolaus

Okay. And should that still settle out at about 50%, i.e. Associate's be about 50% and Bachelor's be about 50%? Is that reasonable?

Brian Mueller

That's tough to say. Really, it depends upon the retention rates at Axia College and how good those get in the future.

Jerry Herman - Stifel Nicolaus

And then for students that don't graduate what would be the average amount of courses that they would take?

Brian Mueller

Very few. If students make it through the first four courses, they have a greater than 80% chance of graduating. So if you drop, typically it's in the first four quarters.

Jerry Herman - Stifel Nicolaus

Okay, great. And, just one final question with regard to the strategic plan. A, what do you guys present that to the Board? And B, with regard to any acquisitions, did you commit to making only accretive acquisitions, or what was sort of the posture with regard to acquisitions and the effect on EPS?

Greg Capelli

It's Greg. It's simply a refining for the Board, the long-term plan. And, two, any acquisitions, whether they were EPS, accretive or dilutive, would have to be long-term value creating.

Jerry Herman - Stifel Nicolaus

Okay. Thanks, guys.

Greg Capelli

Thank you.

Operator

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

Trace Urdan - Signal Hill Capital

Hey, good morning. Brian, I wanted to see if you could help us relate the prior targets that you had offered for 10% top-line growth and 29% margins to the new sort of Board approved goals that you've set.

With respect to the change in the top line, is that a recasting of your expectations around enrollment growth, around pricing? Can you speak to that?

And then maybe just a follow-up on Mark's question, because I didn't really think I heard you get to the answer there. Is there a timeframe for when you think you can get back to 29% margins, or is that still a target that you're holding up?

Brian Mueller

The high single-digit revenue growth is definitely a long-term indicator, as I indicated in my remarks, we expect, it is possible that it can be higher than that in the near term. Near term, I would say next 12 to 18 months. The high single digit is a long-term number. In terms of the 29% margin I think we are going to be reporting again in six weeks, and I think that will give you a real strong feeling for how close we are to that 29% margin.

Trace Urdan - Signal Hill Capital

That sounds promising. Then the other question I had related to, you've been focusing us on the sales and marketing spend as a percentage of revenue but I wonder, just in looking at absolute dollars, quite a bit more spending this quarter in absolute dollars than the prior quarter. Certainly another quarter worth of time and grade for the newly hired enrollment counselors but the absolute number of starts was lower than it was in the first quarter and even lower slightly than it was in the August quarter. And I wonder if you could help us understand that deceleration.

Brian Mueller

Yes, the second quarter new starts are always going to be lower than first quarter new starts. There's the cycle of September and October is really strong for all institutions in the first quarter. The second quarter, you're dealing with November-December, which puts you at a difficult time. But I think that the important thing is if you compare it to that same quarter prior year it was up 24%, and that's the most leading and most positive indicator.

Trace Urdan - Signal Hill Capital

Okay. But then just per the numbers you've given us, and I thank you for that actually, in 2006, the starts in the second quarter were higher than they were in the first quarter.

Brian Mueller

All right, let me -- starts in second quarter of '06?

Trace Urdan - Signal Hill Capital

Yes.

Brian Mueller

Were 47,000, starts in the first quarter were -- yes, they were slightly higher. There were a lot of; there were a lot of things that were going on at that time. That caused that to happen. So the environment now is more as it has been traditionally. If you go back and look three or four years -- five or six years typically first quarter is going to be greater than second quarter. '06 was an anomaly.

Trace Urdan - Signal Hill Capital

Okay. Finally, you've alluded to the fact I guess that bad debt numbers for Axia are slightly higher than they are for the company as a whole. I wonder if you could sort of quantify that for us at all.

Brian Mueller

We're not prepared to quantify that at this time. They are slightly higher, and that's kind of to be expected. Our goal and our role will be to operationalize and keep those things under control the best that we can.

Trace Urdan - Signal Hill Capital

Okay. Thank you.

Operator

Your next question comes from the line of John Emerich with Iron Works Capital.

John Emerich - Iron Works Capital

Thanks. At first Brian, I just want to applaud the new long-term strategic plan. Domestically I think it is absolutely the higher NPV option given the state of the world. Two quick questions. One, any guidance on tax rate, or do you need to work out the options expense question first? Just order of magnitude, I would be interested.

Joe D'Amico

I think you can look at effective tax rate to be consistent for the year.

John Emerich - Iron Works Capital

With what we just saw?

Joe D'Amico

Yes.

John Emerich - Iron Works Capital

Okay. Great. And I don't know if you will end up answering the stock option expense question this way, but other than FAS 123 expense, which is subjected to a lot of different variables, what's your philosophy on just the -- I'll call it dilution to the share count if you will, the number of options you think you issue every year relative to the existing fully diluted share count? That's really what I'm interested in.

Brian Mueller

Well, we have increased our availability under our stock option plan by 5 million shares. The Board is just -- Board and shareholders have approved that. That's about all I can tell you at this point.

John Emerich - Iron Works Capital

Thanks a lot.

Operator

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

Corey Greendale - First Analysis

First question is, you said just to clarify, Brian, on the improvement that you expect to see in margin, did you mean improvement from the Q2 level, or did you mean improvement from the year-ago level?

Brian Mueller

From the Q2 level.

Corey Greendale - First Analysis

Okay. And second question is just, given the disparity in the holiday calendar it looks like the, just the mathematical number, the revenue per student in the Bachelor's program was actually up about 3% year-over-year. What would have offset that hit from that change in the holiday calendar?

Brian Mueller

Tuition increase.

Corey Greendale - First Analysis

And what was the magnitude of that increase?

Brian Mueller

It varied across the country somewhere between 3% and 6%.

Corey Greendale - First Analysis

And when was that implemented?

Brian Mueller

July 1, of last year.

Corey Greendale - First Analysis

Okay. Thank you.

Operator

Your next question comes from the line of Brandon Dobell with Credit Suisse.

Brandon Dobell - Credit Suisse

Hi, thanks, good morning. A couple of quick ones. You guys have gone on more than an hour here. Brian, if you could talk about the efforts in retention, kind of where are you guys relative to your historical success rates, where are you relative to where you think you can get to. Just trying to put in some context of where we are in that game plan. Maybe, Greg, if you could speak to what the longer term capital needs are, I guess focus on domestic first since we have a longer term growth rate from that perspective. That would be great. Thanks.

Brian Mueller

At the Doctoral and Master's level, as well as at the degree completer baccalaureate level the retention rates are stable. They are not a lot better, nor are they worse than they have been over the last four or five years. At the Associate's level those students who are starting with very few credits, the retention rates are way up as opposed to where they were when we put those same students in the University of Phoenix program.

The problem is there's a lot more of them so the impact the overall retention rate can bring it down a little bit, but for that like student it's way up. So, again, it's just, we know that just by virtue of demographics and numbers there are more people that are in that category than the other category, and so we'll be recruiting them and just trying to continue to increase their retention rate.

Joe D'Amico

Brandon, just to answer your second question, we're certainly blessed with a model that generates more capital than we think we can possibly use right now domestically in our for our current organic growth. You can see Joe's comment about the $100 million range for CapEx this year.

That being said, that's our priority first and foremost is to look for opportunities to put capital to work domestically, not only into the educational products and services around that but related products as well. And then secondly, we think that we now have the capabilities to start to plant the seeds internationally. We're going to take obviously a careful approach to that as well. So I can't give you an answer on the amount of capital that would be deployed internationally but we're looking at it carefully.

Brandon Dobell - Credit Suisse

One final one. Maybe as you think about discounting, at least the philosophy around affordability, pricing, discounting across the different brands or different programs, maybe, Brian, if you could speak to, has there been any change in terms of how you guys think about that?

Do you think that discounting generates the wrong type of student or the right type of student, or how flexible do you think it will be going forward in terms of how you think about affordability issues?

Brian Mueller

We're not changing our thinking about that. It's really clear what's going on in the country economically, with the middle class getting squeezed. People don't have disposable income to spend for private school education but they understand its impact on their long-term career so they're willing to borrow the money at really good rates from a Title IV standpoint.

And so if you can build your operations to the point that you can be profitable and keep those tuition rates inside Title IV loan limits you're going to do positive things with regards to retention, which will offset maybe the 4 to 6% increases that we would have gotten in the past.

Brandon Dobell - Credit Suisse

Great. Thanks a lot.

Operator

Your next question comes from the line of Jennifer Childe with Bear Stearns.

Jennifer Childe - Bear Stearns

Thank you. Brian, I'm just confused why you're not getting more leverage off of your recent revenue increases. Where are the levers, and what's it going to take to get to generate gross margin expansion?

Brian Mueller

Well, the levers are in the three categories. They are in the 600 new enrollment counselors, they are in the advertising, and they are in the academic and financial advisors that we have hired to support those new students. Those are the three principal levers. You can throw in bad debt as a fourth lever but really the three levers are those.

And if the new enrollments continue even close to what they have been, and if the retention rates stay equivalent or get better, then you are going to have the students, and you are going to have the revenue and those expenditures as a percent are going to go down.

And so we've come through this period now of underinvestment in the past and we have gone through kind of an overinvestment period and we expect that to start to decline, and we think you will see some positive results from that standpoint in the third quarter.

Jennifer Childe - Bear Stearns

Do you foresee having to hire additional enrollment counselors or is that a student advisors?

Brian Mueller

Absolutely, but we're in a situation now where we can do that in relationship to the student growth. We were in a period of time where we had put the level of investment in advertising and the hiring of those people off for a two-year period, which put us behind the gun in terms of promoting growth.

And so we had to overinvest for a period of 12 to 18 months. We are now where we should be with all the metrics, and so going forward, yes, we'll hire more sales people, we'll hire more academic and financial advisor support people, but in relationship to where we see the leads going and the growth going.

Jennifer Childe - Bear Stearns

Okay, thanks. You didn't discuss your re-entry rates. Any change there?

Brian Mueller

We had that blip in the fourth quarter of last year but we're holding very steady and that's going well.

Jennifer Childe - Bear Stearns

Okay. And final question, as a percentage of your total, what percentage of leads were generated for Axia versus UOP?

Brian Mueller

In the 50% range.

Jennifer Childe - Bear Stearns

Thank you.

Operator

Your next question comes from line of Sarah Gubins with Merrill Lynch.

Sarah Gubins - Merrill Lynch

Thank you. I noticed in one of the filings that your Title IV certification application was submitted in March of this year. Is there any reason to think that this would be an issue? This is the certification with the Department of Education.

Brian Mueller

No.

Sarah Gubins - Merrill Lynch

Okay. And when do you expect to have that finalized?

Brian Mueller

The timing on that is, I think that's a couple months, but I can't tell you that for sure as we sit here.

Sarah Gubins - Merrill Lynch

Okay. And then I know you're not going into details about experimenting, but I'm wondering if you have tried or are planning on trying to do some Axia courses on ground. Is that something that you're experimenting with?

Brian Mueller

We're not going to give a lot of information around that. That's subsequently is fairly proprietary, but I think you just gave us a good idea. Or I should say I like your idea.

Sarah Gubins - Merrill Lynch

And then last question regarding pricing, for the Axia tuition increases, does that affect all students, or is it only incoming students?

Brian Mueller

All students.

Sarah Gubins - Merrill Lynch

Okay. Great. Thanks very much.

Brian Mueller

All right.

Operator

Your next question comes from the line of Gary Bisbee with Lehman Brothers.

Gary Bisbee - Lehman Brothers

Just two real quick financial follow-ups. When did you accrue for the $42 million in taxes?

Joe D'Amico

That accrual is done over time as part of the restatement.

Gary Bisbee - Lehman Brothers

Can you give us a sense as to when? Maybe I just haven't gotten through the volume of papers yet, but in the 10-K you broke out the various restatements up through fiscal '05. I think what I'm much more interested in is what was in '06 and what was in the first two quarters of '07. Can you either point to me where in the filings I'd find that or just give a quick synopsis? That would be great.

Joe D'Amico

Yes. You're not going to see it broken out that way in the quarters. It relates to the timing of deductions that we took and when the, if will you, when the reversal, when the IRS statute of limitations passes, then it reverses. So it's fairly complex accounting, and it's over time, but the fact is that we've accrued the tax, as well as interest and penalties over that period of time. And it shouldn't be an impact or big impact in Q1 and 2, on the rate.

Gary Bisbee - Lehman Brothers

Thank you.

Operator

Your next question comes from the line of Ryan Mahoney with ThinkEquity.

Ryan Mahoney - ThinkEquity

Hi. Thanks. I was wondering if you could comment on how conversion rates have trended between level 1 and 2 students and level 3 and 4 students.

Brian Mueller

Conversion rates for level 3 and 4 students are up slightly. Over the last two years conversion rates on level 1 and level 2 leads, I should have said, are up significantly. The Axia program has caused people to be attracted in ways that they weren't in the past, so that's really helped from a conversion standpoint overall.

Ryan Mahoney - ThinkEquity

Great. Thanks.

Operator

This concludes today's conference call. Thank you for your participation.

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