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Apollo Group Inc. (APOL)

F4Q07 Earnings Call

October 22, 2007, 5:00 PM ET

Executives

John G. Sperling - Acting Executive Chairman

Gregory W. Cappelli - Director and EVP

Joseph L. D'Amico - EVP and CFO

Brian E. Mueller - President and Director

Analysts

Mark Marostica - Piper Jaffray

Sara Gubins - Merrill Lynch

Edward OíConnor - JP Morgan

Trace Urdan - Signal Hill

Amy Junker - Robert W. Baird

Mark Hughes - SunTrust Robinson Humphrey

Jeffrey Silber - BMO Capital Markets

Gary Bisbee - Lehman Brothers

Jerry Herman - Stifel Nicolaus

Suzanne Stein - Morgan Stanley

Corey Greendale - First Analysis

Brandon Dobell - William Blair

Paul Beland - Citigroup Investment Research

Presentation

Operator

Good afternoon, ladies and gentlemen and welcome to Apollo Group Incorporated Fourth Quarter Fiscal 2007 Year-End Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Please refrain from entering the queue until those instructions are given. [Operator Instructions].

This conference call is scheduled for one hour and is being recorded today, October 22, 2007, and may not be reproduced in whole or in part without permission from the Company. There will be a replay of this call available through October 31, 2007, beginning approximately two hours after we conclude today. The replay number is 800-642-1687 or 706-645-9291 internationally. The conference ID for the replay is 19824133. Additionally, this call will be broadcast over the internet and can be assessed 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 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 please.

John G. Sperling - Acting Executive Chairman

Thank you. Good afternoon and thanks for joining us today to discuss Apollo Groupís fiscal fourth quarter and year-end results. We are very pleased with the financial and strategic progress we have made, and we continued to be excited about the future opportunities for the Company, including those in the international arena.

In addition to announcing our earnings today, we announced the formation of the Apollo Global, a joint venture with Carlyle Group. Carlyleís expertise and track record make them a great partner for our global expansion. I am very pleased that Carlyle has agreed to our partner to embark on global expansion opportunities. I would also like to acknowledge and thank our team here for the hard work they put into the development and the closing this deal, which Greg will elaborate on in more detail in a moment.

We also announced today the addition of Dr. Ann Kirschner to our Board of Directors effective November 1st, and is currently the University Dean of Macaulay Honors College of The City University of New York. She has a distinguish career as an innovator in higher education administration and management. And Apollo will benefit greatly from our unique blend of scholarly and business experience. We are very pleased that she has agreed to join. Additionally, we made some changes to two of the committees of the Board, which we believe strengthens our governance. First, Dr. Roy Herberger, when we announced to our last quarterís call, has joined the Board has now been appointed Chairman for the Compensation Committee. Additionally, George Zimmer will move to the Nominating Committee from the Compensation Committee. With these committee changes, we believe we have a very strong Board of Directors, help us guide manager to this next phase of growth.

I would also like to introduce and welcome Bob Moya, who recently joined Apollo as Senior Vice President and General Counsel. Bob joins us with many years of experience in Corporate and Securities Law, particularly expertise in Corporate Governance. His expertise will be a strong asset to our organization and an excellent compliment to our executive management team.

With that, I would like to turn the call over to Greg Cappelli, who will discuss Apollo Global in more detail. Joe D'Amico will then review the highlights of the fourth quarter and year-end financials, and Brian Mueller will update you on our operational progress and long-term strategy. Finally, we open the call to all of you for the questionsÖ we will open the call to your questions. Greg?

Gregory W. Cappelli - Director and Executive Vice President

Thanks, John. As just John mentioned, we are excited to be announcing the formation of Apollo Global being established for the purpose of pursuing investments in the international education services sector. We have evaluated a number of potential partners for this venture and chose Carlyle due to their deep industry and regulatory relationships, as well as their excellent track record in the successful corporate partnerships. The Carlyle Group is one of the worldís largest and most successful private equity firms, manages $76 billion in assets and has 500 professionals working out of offices in 21 countries.

Apollo Groups committed just over $800 million and will own 80.1% at the joint venture and Carlyle was committed up to $199 million and will on the remaining 19.9%. The JV will be consolidated subsidiary of Apollo Group. I will be Chairman of the Board of Apollo Global, which will consist of seven directors, two appointed by Carlyle and the remainder comprised to Apollo Global Management and Apollo Group Appointees.

The Initial board will include Brian Mueller, Peter Sperling, Roy Herberger, and Jeff Langenbach, who also will be serving as interim President of Apollo Global, where we conduct the search for someone to fill this Group permanently. Representing Carlyle will be Brooke Coburn, who is Managing Director and Co-Head of Carlyle Venture Partners, and Charlie Moore, our Managing Director on the U.S. Venture and Growth Capital team.

I will globally utilize the portfolio of core occupancies available within Apollo Group, while leveraging Carlyleís education services experience, industry and critical relationships, and strategic assets across the global education sector. Combining Carlyleís global footprint with our educational expertise and Apollo Groupís U.S. expertise will assist us in sourcing acquisitions, facilitate due diligence for new investment opportunities, and enhance the opportunity for organic growth.

Investments by Apollo Global will likely include a range of structures including minority investments, 50-50 partnerships, and controlling acquisitions. The decision to create Apollo Global was driven by the following factors. First, attractive demographics in economic growth in certain targeted and international markets, such as Latin American and Asia, strong foreign demand for and high value placed on the U.S. educational system, the ability to leverage our 30 plus years of experience in providing education services and transfer that experience to companies that are required or developed in foreign markets, increasing U.S. barriers to foreign students seeking entry the assisted study in the U.S., the opportunity to benefit from our leading technology platform by offering our online products and services in new markets, and by making this technology online delivery platform available to companies that we acquire. The opportunity to versify through the acquisition and development of new businesses and brands, and finally, a desire to mitigate economic and geographic risk associated withÖ primarily domestic business.

For the past few quarters, we have been reiterating our strategy to adjust Companyís capital structure and in our desire to deploy capital optimally, towards our objective of creating long-term value for our shareholders. Apollo Global will abide by the same discipline. All investments and funding are not only subject to prove by Apollo investments community, but also by Carlyle. On behalf of the entire management team, I want to emphasize that the formation of Apollo Global will not detract in the goals we have outlined this past year with respect to our high return core domestic business. We will continue to invest heavily in our large growing domestic market.

In addition, we continue to evaluate our optimal capital structure to achieve our goals, including the utilization of leverage is appropriate. And starting share repurchase, during the fourth quarter, we repurchased about 7 million shares for $437 million at a weighted average purchase price for about $61 per share. We received authorization from our Board to repurchase up to an additional 500 million of our Class A stock.

So, in summary, we are excited about the outlook for Apollo and we are thrilled to be announcing Apollo Global today, look forward to working with Carlyle and creating incremental long-term value for our shareholders.

With that, Iíll turn the call over to Joe.

Joseph L. D'Amico - Executive Vice President and Chief Financial Officer

Thank you, Greg. From our financial perspective, fiscal 2007 has been a year of building financial expertise and capabilities, including hiring of a strong international finance leader to go along with the comments, we just made on Carlyle and Apollo Global, whilst significantly strengthening our corporate governance and internal controls. As evidence of our improved controls, I am very pleased to report that each of the four material weaknesses identified in last yearís audit were re-mediated and we will report no material weaknesses in internal controls this year. We are entering fiscal 2008 as the Company poised for continued growth.

Now, let me review the Companyís financial results. For the fourth quarter, total consolidated revenues for Apollo Group were $714 million, a 14.2% increase over the fourth quarter of 2006. Additionally, we generated operating margin of 21.2%. This is an improvement when compared to our operating margin of 18.6% in the fourth quarter, a year ago. Excluding share-based compensation expense and special items of $19.7 million and $31.5 million in the fourth quarters of 2007 and 2006 respectively, our adjusted operating margin was 23.8%, up slightly from 23.6% in the fourth quarter of 2006.

Our special items generally include non-cash charges, such as goodwill impairments and cost related to the restatement of our financial statements. We have provided the detailed and reconciliation to our income statement of our special items in our press release. It is important to know that we do not expect there willÖ to be any special charges related to our stock option investigation in the future outside of potential related litigation settlements or litigation related expenses.

Net income for the fourth quarter was $103.2 million or $0.60 per diluted share as compared to net income of $75.7 million or $0.43 per diluted share a year ago. Excluding share-based compensation special items, we earned $0.67 per diluted share in the fourth quarter of 2007 as compared to $0.54 in the prior year. For the full year, the total consolidated revenues for the Apollo Group were $2.7 billion, a 9.9% increase over 2006 and net income was $408.8 million or $2.35 per diluted share as compared to net income of $414 8 million or $2.35 per diluted share in 2006. Excluding share-based compensation and special items, we earned $2.62 per diluted share in 2007 as compared to $2.61 in the prior year.

Our new degreed enrollments, which Brian will discuss in more detail, increased approximately 15.4% year-over-year. You will note, that we have corrected our new degree enrollments to adjust for errors and inconsistencies in the calculation with our previously reported definition, which we have not changed. To reiterate, and clarify our definition, new degreed enrollments include any student who graduated from one degree program and started a new degree program as well as students who have been out of attendance for greater than 12 months and returned to a program.

Degreed enrollments at the end of our quarterís were not affected by this correction since a student completing one program and entering a new program is only kind of degreed enrollments at the end of our quarterís were not affected by this correction since a student completing one program and entering a new program is only counted as one enrollment and returning students out of attendance for greater than 12 months were already included in degreed enrollments.

Turning to the balance sheet and our cash flow. As of August 31, 2007, our cash and marketable securities, excluding restricted cash totaled $393 million as compared to $409 million at August 31, 2006. During the year, we generated $591 million from cash flow from operations, which was reduced by $105 million of capital expenditures and $438 million in stock repurchases. We want to remind you that $43 million of the capital expenditures are one-time in nature and represent the build out of our new corporate headquarters building in Phoenix, Arizona.

As a reminder, we have entered into a sale and leaseback transaction to monetize our investment in this new building, when it is completed in the second half of fiscal 2008. At that time, we expect to exercise the sale and leaseback and will receive approximately $170 million in proceeds.

Gross student receivables were $282 million at August 31, 2007, compared to $214 million at August 31, 2006, and net receivables were $191 million at August 31, 2007 compared to $161 million at August 31, 2006. Our allowance for doubtful accounts increased to $100 million at August 31, 2007, from $65 million at August 31, 2006, in part, due to increase in our days sales outstanding to 38 days as of August 31, 2007 from 31 days as of August 31, 2006. We continue to believe our allowance for doubtful accounts is adequate and to put this in perspective, our allowance more than covers all receivables greater than 90 days.

During the fourth quarter, bad debt expense as a percent of revenue trended higher again. Bad debt expense as a percent of revenue was 5.2% this quarter versus 4.6% a year ago. As we have said previously bad debt is cost of our business due to the relatively open enrollment policy that we maintain at the associates level. We continue to believe that the real key to addressing our bad debt level is improving associate student retention, which is a major area of focus for us. However, we believe we can improve our execution of student account management, which coupled with improvements in retention. We hope to stabilize and bring down bad debt expenses as a percent of revenue over time.

Deferred tuition revenue increased 23% to $167 million and student deposits increased 29% to $328 million between August 31, 2006 and 2007. Deferred tuition revenue increased primarily due to growth in revenues and enrollment, and a greater amount of associatesí student who attended course as longer than our Bachelors or Master students. Student deposits increased primarily due to higher revenues and increased studentsí financial aid disbursements, due to the increases of level one and level two loan limits in July of 2007.

Before I turn the call over to Brian, I wanted to update you on the formal tender offer for employee stock options that was put in place on June 13, this year. As a reminder, we commence the tender offer to current employees, who are not executive officers to amend or replace certain incorrectly priced optionsÖ outstanding stock options stemming from our stock option investigation. The tender closed at midnight on July 12th, and the options were re-priced based on the closing price next day, which was $62.78. As a result, the total pay up was less than $1 million, which will be paid January 2008.

With that, I would like to turn the call over to Brian.

Brian E. Mueller - President and Director

Thanks, Joe. Fiscal year 2007 was a period of significantly investment for new Apollo Group and we are pleased with the progress we have made and are optimistic about the outlook.

Investments position us well for future growth and profitability. As I have stated previously, our strategic objectives are the following. One, mid to high single digit annual domestic revenue growth, and two, low double digit annual domestic operating profit and free cash flow growth. Yet we have stated that we believe, we could potentially exceed these objectives in the near-term.

In the fourth quarter, we did this in a very meaningful way, with revenue up 14.2% year-over-year and total enrollment growth of 11.1% year-over-year. As you know, over the last couple of years and particularly in a fourth quarter a year ago, weíve invested heavily in internet advertising, the branding campaign, increase in enrollment counselors and support staff product development and further development of our online learning capability, and in ensuring, we had the appropriate cooperate infrastructure to support our growth, which has resulted in higher G&A. Even though, these investments suppress margin in short run. They have proven to be the right initiatives for the business in the long run.

During the fourth quarter, we experienced a slightly increase in our operating margin versus a year ago, and believe, we are now in a position to continue making gradual improvement. Most importantly, as I just stated, revenue growth is exceeding our stated long-term goal of mid to high single digit growth.

Let me, review our progress towards each of our key objectives around enrollment. Revenue and margin growth, and update to you on some of the initiative we havenít placed to achieve these objectives. First, with regards to enrollment. As I mentioned, total enrollment in the fourth quarter increase 11.1% year-over-year, reaching a total of 313,700 students. As Joe indicated earlier, associate student enrollment increased 41% year-over-year, and importantly, the decline in Bachelor Students continues to slow, declining at only 1.4% year-over-year versus the 2.6% we experienced last quarter.

We started again a record 69,800 student, a 15.4% increase over the prior year. While overall, this is slower new start growth than last quarter. We know that the students are starting are better prepared and now persisting at higher rate. A year ago, we hired 600 new enrollment counselors and we were trading our on-ground counselors to sell our online delivery methodology.

As a result, we started a number of students who work as prepared as we would have liked. There are number of those students drop fairly quickly. This also produced an abnormally high of revenue for enrollment growth, which, Iíll speak to you in a moment.

As our enrollment counselors have become more experienced and have increased the training and have had increased training, we are seeing better prepaid students, and as a result, improved conversion and retention rate and overall the decline in cost for start. As for revenue, we grew revenues at 14.2% over the fourth quarter of the prior year to $714 million. We are very pleased with this number in a continued positive trend. Importantly, revenue growth surpassed enrollment growth for the first time since 2006. Revenue growth was driven by tuition increases particularly increase in our associates programs, which begin in May. As well as a partial quarter impact of selective tuition increases in other programs, which went into effect July 1.

Second, we continue to be impacted by a negative mix shift of the student body, but to a lesser degree each quarter. Third, retention continues to improve, particularly as a pool of Axia students graduate and transfer into our bachelors program. There was a dramatic increase of 21% in revenue per student at the associatesí level. This is also due to tuition increase we just mentioned as well as an increase in retention of those students. However, in this specific category, we were up against the relatively easy comp. And a result, we believe that going forward, revenue per students at the associates level will continue to increase versus prior quarters, but we will not beÖ likely be sustained at the same level we experienced this quarter.

Now, let me discuss the operating margin, excluding share based-compensation and special items. We generated margin of 23.8% in the fourth quarter, a slight increase from the 23.6% margin in the fourth quarter of prior year. Several factors led to this improvement. Instructional costs and services declined almost two percentage points to 45.8% of revenue from 48%... I am sorryÖ declined more that two percentage points from 45.8% revenue to 48% in the prior year quarter. The improvement was primarily due to additional leverage from our financial and academic counselors as enrollment and revenue continues to grow. Second, and at an increasing in percentage of our student body is online, we utilizing less space as a percent of revenue. These improvements were offsets somewhat by an increase in bad debt, which Joe mentioned earlier.

Selling and promotional expenses as a percent of revenue declined to 24.3% from 24.7% in the fourth quarter, a year ago. The effectiveness in advertising productivity continues to improve, resulting in our advertising spend declining 70 basis points as a percent of revenue versus the fourth quarter a year ago. This allowed us to hire additional enrollment counselors in anticipation of continued enrollment growth, while achieving a reduction in selling and promotional cost per start in the fourth quarter.

G&A expenses increased significantly. Excluding special items, G&A as percentage of sales would have been about 7.8%, which is 5.2% in the fourth quarter of fiscal ë06. The increase is due to necessary personal investments we made to strengthen the organization in two ways. First, we invested in the areas of finance, accounting, corporate governance, and IT, with IT being the most significant part of the increase.

These investments ensure we had the proper corporate infrastructure going forward. Second, we have invested in M&A, international and public relations in order to support long-term growth strategy of the Company. With respect to cost in general, Iíd like to assure you that we are exploring areas where we can leverage the buying power of our organization where we believe we have some opportunities, which we havenít in the past fully capitalized.

Let me touch on two of our most important strategic initiatives that contribute to the above results and which will drive our continuous success. One, as we continue to work on making improvement in curriculum, instructional strategies, our online learning system, and support services in order to drive increased student retention and success. Development of new programs and improving the curriculum in all our programs, our critical elements of driving the new involvement and increase retention. We rolled out 20 new programs in fiscal ë07, and we have 42 new programs in development to be rolled out over the next several quarters.

In addition, we recently announced approval from a higher running commission to offer our first doctor of philosophy degree, our first doctor of philosophy degrees through the school of advanced studies. The ability to confer PhDís as a substantial academic milestone and a further stamp of approval on academic excellence that exist at University of Phoenix.

Additionally, we continue to monitor the many pilot programs, we have in place to address retention. Last quarter, we indicated we were engaged in 18 pilot projects, all of which were designed to help us understand more about what contributes to the success of students across all levels that we teach. The programs are re-mediated to the use of faculty, tutorial services, curriculum adjustments, online learning experimentation and testing. Two of these pilots have been rolled out across all of our campuses and are becoming standard practice. There have been a few that were eliminated when we had determined they were not effective. The number of total retention pilot projects currently is above 18 and growing as our campus and regional managers continue to generate new ideas for us to evaluate. Retention continues to be a primary focus and we are optimistic about our ability to continue to make improvement.

The second key initiative is our focus on marketing, regeneration, and the costs associated with acquiring a student. We expect to continue to make progress in these areas, which was the primarily driver behind our pending acquisition of Aptimus. As many of you are aware about two years ago we entered into an agreement with advertising.com, which was the right decision at that time. We have been pleased with that relationship and make significant progress in improving the efficiency of our lead generating process.

During the past two years, we've also improved our own technical capabilities and have added expertise to our staff. That coupled with the expertise of Aptimus allows us to bring the management of our online marketing investments back in-house. Buying Aptimus will provide Apollo Group with a strong management team, proprietary technology, and scale. Owning Aptimus and its technology will provide Apollo with better control over its online brands and the flexibility to invest in significant innovation. Communicate effectively with prospective students and other constituencies online is the key to our business and being on the leading edge of digital media and internet marketing communications is very important to us.

Apolloís regeneration activities will transition in-house after the 1st of the year and our goals for the first six months are to ensure this is a smooth transition. We have reached an agreement with the executives of advertising.com for the transition and we have every incentive to ensure that this happen as they will remain partners of ours going forward.

Iíd like to address just a few other items before we take your questions. First many of you are have asked us over the last number of months whether the current situation with the credit markets will have an impact on the University of Phoenix. I think it is important to note that less than 4% of our revenues are derived from loans outside the title for loans programs. Although, there maybe indirect impact our ability to continue to grow should not be materially impacted by the current credit issues.

Second, I also want to touch on Carlyle agreement that we announced today and, which Greg discussed in detail. Partnerships puts us in an excellent position to explore strategic and value creating global acquisition opportunities. And importantly we will continue to invest capital in our high return core domestic business as well. Any investment must meet our discipline investment criteria as we remain committed to create a long-term value for our shareholders.

Finally, in conclusion I would like to say that 2007 was a year of investment and we are very pleased with our achievements and performance. Iíd like to take this opportunity to thanks all of our employees for their efforts and hard work in ë07. This was a year of great and positive change for Apollo Group. And we have asked our managers and staff throughout the country to be flexible and work diligently to execute these changes. Theyíve stepped up to the challenge and their contribution made us a successful year. Put us in a strong position for future growth.

And with that, Iíll turn the call over to the operator so we can take your questions.

Question and Answer

Operator

[Operator Instructions].

Your first question comes from the line of Mark Marostica with Piper Jaffray.

Mark Marostica - Piper Jaffray

Good afternoon, everyone.

John G. Sperling - Acting Executive Chairman

Good afternoon.

Mark Marostica - Piper Jaffray

My first question actually my only question I suppose relates to the big jump in G&A this quarter. Can you give us a sense if in fact any of the incremental items or more one-timish nature that impact only this quarter. And tied to that, give us some color as to what you think the current run rate of that item will be as a percentage of revenue or an absolute dollar? Thanks.

Joseph L. D'Amico - Executive Vice President and Chief Financial Officer

Yes, I wouldnít describe it as one-time. I would say that we were under invested in the areas of accounting and finance. And weíve made those adjustments we were under invested from a legal standpoint, weíve made that investment. The biggest change there was the 1% in terms of a stock-based compensation, and our investment in technology, part of our technical group is rightly appropriated in G&A. Thereís been a jump there. I wouldnít expect a decrease in that but as we move forward, I would expect that it will be somewhat similar to what we done from a space standpoint. We really have an eliminated space but we gained a percentage point here because as enrollments and revenue grew, we didnít have to grow that in relationship to those increases. I would expect the same thing what happened with G&A. I donít think it will be a 5.2 and I know that we wonít be as highest as we are today. We will have a budgetary meeting at the end of every quarter. Well watch those to the investments that we made very carefully. We will only add if itís absolutely necessary so that we hope as revenues grow the investments that we made to catch up wonít grow, our commitment with them and overtime weíll start moving that down. I donít know whether we would get the 5.2, but we wonít be as high as we are today.

Mark Marostica - Piper Jaffray

And jut a follow up on that point, you mentioned bad debt as a driver as well as the up tick in G&A, can you give us a sense of what your target levels of bad debt as a percentage of revenue are as you look to the coming quarters?

Joseph L. D'Amico - Executive Vice President and Chief Financial Officer

Yeah, thatísÖ I would say the same thing. We need to first stabilize it and some of the things that are going on, I think the increases into which in revenue per student Axia are pretty good indicator that we have the capability to increase retention levels today, which is the key driver to long-term decreasing bad debt that expense the percent of revenue. I think thatís an indicator that we are capable of doing it. We also know that there are certain campuses that we have out there, who have significant numbers of Axia college students and they are managing bad debt at the expense of revenue better than campuses especially in those new areas like in Northeast and the Midwest. So, I donít think bad debt as expense of revenue will get down to 2. I donít expect long-term for to be as high as it is today. I think it will moveÖ we will be focused on moving it down gradually and overtime get somewhere in the middle.

Operator

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

Sara Gubins - Merrill Lynch

Hi. Thank you. Good afternoon.

John G. Sperling - Acting Executive Chairman

Hi, Sara.

Sara Gubins - Merrill Lynch

The 800 million that you are putting into Apollo Global, can you talk about where thatís coming from and what the timing of putting it would be and also whether or not there are any incremental cost associated with setting up Apollo Global that we expect to see, saws in the income statement?

John G. Sperling - Acting Executive Chairman

Greg, why donít you take that and then Iíll add?

Gregory W. Cappelli - Director and Executive Vice President

Sure Sara. Those are commitments so those are not actually amount that have fund yet and that amount can come from a number of different areas as we talked about from the capital structure before how we are evaluating that, but also from our internal generated free cash flow, which you could see from our financial statement.

Sara Gubins - Merrill Lynch

Okay. So but the timing I am putting it in the argued decide to make an investment?

Gregory W. Cappelli - Director and Executive Vice President

Thatís right. Absolutely.

Sara Gubins - Merrill Lynch

Okay. And then any incremental cost, where we would see sure, before those investments were made?

Gregory W. Cappelli - Director and Executive Vice President

Well, just Brian add on please from my perspective, weíve already put team of people in place as we talked about before to cover areas like China, Brazil, Latin America, India and a M&A staff and part of those investments that what Brain was talking about in terms of adding to the G&A. So, I feel good that we have a good team in place, could there be additional investment as we go, going forward, absolutely but that will be commencement with the investments weíre making and the growth and returns we see within those investments.

Brian E. Mueller - President and Director

Yes, I guess, Iíd like to add that, I think the big difference between a Apollo Global and Apollo International is that we didnít do a very good job of leveraging, the Apollo Group and itís really substantial infrastructure from a technical standpoint and marketing sales standpoint etcetera. And we are going to do a better job of that with regards to Global or Apollo Global.

Sara Gubins - Merrill Lynch

Thank you. If I can seek an another follow-up, could you talk about as the trends over the course of the next year and whether or not youíre expecting any leverage in that line item?

Brian E. Mueller - President and Director

John?

John G. Sperling - Acting Executive Chairman

Yes. We are goingÖ we do expect that, we can, I mean, itísÖ when, in the industry wide you go from 18% and 19% to a highest 38%. And when you look at our company at lower 21%, a high of 29% obviously thereís a huge opportunity there. And when fast these things are changing on the internet, we do want to be on a leading edge and how we use that people to communicate to all of our constituencies and an eventually to be able to lower the cost. So like I said, our objective in the first six-month, is to make a smooth transition to make sure that we donít step backward which we have a lot of confidence that we will not and once we have made that happen, then we will start focusing on lowering that cost for acquisition, this is our goal to get back to where we were in a best absolutely. We wouldnít make any significant investment like this and we didnít think we can do that. But we will take it slow. We will make sure that in the course of the first six months, we are very happy with where things are going from our student acquisition standpoint both in terms of growth and cost, first of all do not step backward and then start making improvements.

Operator

Your next question comes from the line of Edward OíConnor with JP Morgan.

Edward OíConnor - JP Morgan

Hi, thank you very much. Just to be clear, does this new Apollo Global support Apollo International and does this $800 million kind of characterize your capital commitment in that growth market forÖ letís say the next three to five years?

Brian E. Mueller - President and Director

Go ahead, go ahead, Greg.

Gregory W. Cappelli - Director and Executive Vice President

It does supplant to Apollo International and the $800 million commitment is something that we felt appropriate to put on the table initially. So, we can sit here today and tell you how long itís going to take us to go to that capital. Weíve talked about on previous calls, we have a discipline for looking at investments and the return we expect to generate from those investments and will employ that same discipline internationally with Carlyle as our partner. So, weíd love to put capital to work if we think it isÖ itís going to be a great return for our shareholders. But again, as of right now, we canít tell you exactly how long it is going to take to go to that capital.

Edward OíConnor - JP Morgan

Great. Thank you very much.

Operator

[Operator Instructions]. Your next question comes from the line of Trace Urdan with Signal Hill.

Trace Urdan - Signal Hill

Hey, good afternoon. Brian, it has been a year since you gave us the magic numbers of 32, 43, and 93, and I am wondering if you guys might consider updating those numbers for the graduation rate for Axia and number of Axia students to continue on to pursue their BA and what retention is like for those student once they continue it UOP?

Brian E. Mueller - President and Director

Yes. The number we gave was 32, 43, and 93, 32% for finishing, 43% for transferring, 93% were persisting once they transferred. Those were conservative numbers, because it looks the first [inaudible]. Those numbers improved just because of time given and they are continuing to improve, but we are not giving those out.

Operator

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

Amy Junker - Robert W. Baird

Hi. Good afternoon. Can you talk a lit bit about the number of new programs that you are planning to add? How that splits between the associates, bachelors, masters, and doctorates? And I think you said you are adding 42 new programs this coming year, if thatís correct?

Brian E. Mueller - President and Director

Yes, the 42 are in development. They are coming in all four of those areas. Right now, there is probably a few more at the associates level than in the other areas, although, we believe there is a potential to grow in all the other areas. We are excited about this prospect, both from the standpoint of conversion of lease and also retention of students. The obvious advantage that we have is that we have the most scalable online program and when we look now at programs that, for example, would have the potential ofÖ maybe 5000 students in the country. In the past, when you spread those 5,000 over 100 plus campuses, you couldnít get the class size or instructor necessary to make them profitable local market, but as we take those more niche programs and as we develop them for online delivery only, we donít have the problems ofÖ in both class size and faculty depth. And so, we are enthused about our ability to do this in a way that we couldnít in the past, because the market is demonstrating such a willingness and desire to want to go to school online.

Operator

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

Mark Hughes - SunTrust Robinson Humphrey

Thank you very much. Any difference this quarter in the rate of students returning to the program after 12 months versus completely new students, and that any comment on starts in September and October?

Brian E. Mueller - President and Director

Iím the first one to know. There hasnít been change there really at all. On the second one, no, we're not giving guidance.

Operator

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

Jeffrey Silber - BMO Capital Markets

Thanks. I just wanted to drill down a little bit further into the Axia roman numbers. This is actually a two-part question. If I look at the new student enrollment in Axia, it was only slightly higher in absolute terms than it was in 3Q í07 and when I compare that to last yearís 3Q to 4Q, we saw a sequential jump. I was wondering was there anything in terms of timing of starts or anything going on there. And then the second part, Iím not sure Iím calculating this correctly, but if I look at the retention rate from 3Q to 4Q and compare that to last year, it looks like it got a little bit weaker in this year, again, 3Q to 4Q than it did last year. I was wondering if you could comment on both of those.

Brian E. Mueller - President and Director

Yes. In terms of the first question, thereís been no change from a timings standpoint. And so, there has been no change from a timing standpoint. As to the second one, Iím looking at those numbers now. Can you repeat that question again please?

Operator

Iím sorry, sir.

Brian E. Mueller - President and Director

Yes. Can you repeat that question again please?

Operator

One moment. Mr. Silber, your line is now open.

Jeffrey Silber - BMO Capital Markets

Okay. Thank you very much. I just was wondering on the second question, if I look sequentially going from 3Q í07 to 4Q í07, it looks like the number Axia students that you've retained was lower as a percentage when I compare that last year from 3Q í06 to 4Qí06? [Inaudible]

Brian E. Mueller - President and Director

Yes. We've notedÖ let me see if IÖ I think the difference there is that in Q4 í06 we had a period there where we hadÖwe recruited lots of Axia college students. It was our first time our ground base enrollment counselors were recruiting students and putting them into Axia. And they recruited a lot of them. But many of them did not stay in the program. And so, you have kind of a number there from a new start standpoint that looks greater than what it really was. When you look at Q4 í07, we made significant progress there. And so the total number of Axia college students started in the fourth quarter of í07 may not look like that percent wasÖ of increase was as great as the previous years, but total enrollments are reflected in the increase in revenue that we adjusted 14.2%. And so, what looks like more students in the fourth quarter of í06 really wasnít. Weíre retaining, weíre not starting to make students drop quickly, and therefore, the overall contribution to the enrollment number is greater.

Jeffrey Silber - BMO Capital Markets

Okay. I get it, better quality than quantity.

Brian E. Mueller - President and Director

Yes, and thatís the reason for the comment on increased revenue per Axia college student in the firstÖ fourth quarter of this year versus the fourth quarter of last year. There was a huge increase there. We are happy about the increase, but the increase was dueÖ a little bit to the fact that we had a lot of students who started in Axia fourth quarter of last year, but didnít stay.

Jeffrey Silber - BMO Capital Markets

All right. Great. I appreciate the color. Thanks.

Brian E. Mueller - President and Director

Okay.

Operator

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

Gary Bisbee - Lehman Brothers

Hi guys, good afternoon. The question is just taking a look at the starts growth here, it seems like, although, we donít have the data to really be able to know. But it seems like this year, you were up against pretty easy comps and that there was under spending early last year on marketing and it was a weak year for start. So, I know you are not giving guidance, but as we look forward into the next year, how should we think about the trend and start to growth rate. Is it going to converge fairly quickly with the trend you expect in total student growth? Or are we likely still to see a number where starts continueÖ can continue to exceed that number for a while?

Brian E. Mueller - President and Director

Well, again weíre not giving guidance, but I will tell you that the 15.4% number in the fourth quarter as compared to 20% plus in the third quarter and as compared to the number in the fourth quarter of the prior year was in part due to the fact that the quality got better. And so, that number in the fourth quarter as even compared to the second and third quarterÖ sort of second and third quarters of this year, I think you have to be fair. You have to look at that number and evaluate it from the standpoint of the improvement from a quality standpoint and I think you have to take a look at the relationship between that number and the revenue number of this year and compare those to prior quarters. And if we look at from that standpoint, I guess I will say that we are infused about the direction that we are going from both a new enrollment standpoint and a total enrollment standpoint, and its impact on retentionÖ I am sorryÖ impact on revenue.

Operator

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

Jerry Herman - Stifel Nicolaus

Thanks. Good afternoon everybody. Brian, question about the new program, the follow-up to one earlier. The 20 new programs that you talked about and as I understand sort of 5,000 potential in those programs is a rough target, could you may be giveÖ what sort of impact that had year-over-year on enrollment? And what the absolute number of programs there were at year-end?

Brian E. Mueller - President and Director

You can go to website and you can take a look at all the new programs we have started this year, they are out there. You can take a look at all the programs that we have in terms of those new programs and their contribution to enrollment. You can see slightly improved conversion rate on these. And there is number of factors, but we think one of the factors is giving students exactly what the program it is that they are looking for versus looking towards a program that might not fit their specific career goal. So, I think that is important, but I also think and can we know that there is a helping from retention standpoint. If you look atÖ when you look at more niche programs and you look at retention rate of students in those niche programs, because they are specifically related to the areas that people are working in or inspired to work in. Their retention rates are higher. Now how that could translate over the course of time and over the course of 40 new programs, as I figure that I can predict that, but there is enough of a trend there to know that we are moving in a right direction from that standpoint.

Operator

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

Suzanne Stein - Morgan Stanley

Hi. Can you give us an update on insight and also an estimate for rate CapEx?

Brian E. Mueller - President and Director

Yes, from insight standpoint, we are in three states and just got approved for another difficult area in California, which is the equivalent of state or more. We have more toÖ we are probably working with eight additional states with a goal of opening four new states during this year. We would love to startÖ I would sayÖ we are working with eight, we hope to open six. And so we would like to start the fall of next year with around 10 states. There are currently 23 states that have approved charged school legislation. There is significant investment going into insight this year, but we expect if we can be successful with those six new states that the revenues are going to jump pretty quickly.

Joseph L. D'Amico - Executive Vice President and Chief Financial Officer

On CapEx, I think if you look at our financials, you will see we spent about $61 million on CapEx, and we expect that number to be about the same if not a bit more.

Operator

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

Corey Greendale - First Analysis

Hi, good afternoon. Question on the new bachelors enrollment. Are youÖ can you give us some sense of how many of the new bachelors students who people whom articulated from Axia, and thought is not the exact number at least some qualitative commentary, and else if you give a sense of what the tax rate might be for ë08? Thanks.

Gregory W. Cappelli - Director and Executive Vice President

Yes, we are not giving out that information specifically. Although, I will tell you that there is some enthusiasm around this whole process because that pull Axia college students is rolling by the week and by the month and weÖ itís very much a priority to work with those students very closely. We know exactly how many students in the next three months will get to the 42 credit hour limitÖ our 42 credit hour amount, that is about when we begin working them very diligently to transition them to our back lawyer [ph] programs. We have a team of people in place who sold priority to do that. And so, I canít give you specific number, but I can tell you that part of bullishness about our strategy is that that number growing and we are working at number very hard.

Joseph L. D'Amico - Executive Vice President and Chief Financial Officer

On the effective tax rate, we donít have any information that would tell us it will be significantly different in the future at this point.

Operator

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

Brandon Dobell - William Blair

Hi, thanks. I wondering if I can get some I guess better detail or clarity on the careerÖ current kind of pricing strategy. Also you mentioned whatís going on with Axia. Just want to get an idea as you look out the next two, three, four quarters, year-over-year comparisons, the national pricing strategy, we are only with that, are you seeing if bill converge around the lower number or higher number? Or how much disparity you see across the network of campuses those kind of things, just give an idea where we are as you are trying to get all that staff squared away?

Brian E. Mueller - President and Director

We at the doctoral level, we have significant room, and we are away entitled for loan limits and we know that that you can expect towards the increases that are traditional between 3% and 6% at the doctoral level and we can do that for a lot of years. At the master degrees level, the same is true. Weíve got significant room to increase prices, we are way under the title 4 loan limits. And so, watching that at the masters level from the competitive standpoint is more of a factor than watching Title 4 loan limit. I will say that as you see, although, a bit of a reduction in revenue per student at the masters level, the reason for that is that there is growth in the education and nursing areas that we havenít completed captivated, but there is significant growth there. Those programs tend to be at lower attrition rates in our business and IT programs and as well as those student become increasing percentage of our overall masters students back trend it might continue a little bit. However, Iíll say that we have room thereÖ significant room to increase to what master degree level and will do that in the coming years.

There is some room at the associates level. And we will continue to experience small increases at the associates level. At the bachelors level, itís mixed bag. Some of our students are below Title 4 limits, some are above Title 4 loan limits and we continue to monitor both the conversion rate I believe and the retention rate of students can be whether they are above or below Title 4 loan limits and right now we are just collecting data. We are continuing to evaluate it. We like the overall trend from a gross standpoint, and from our retention, and therefore, revenue standpoint, and so we donít feel any strong need to do anything in the short-term. But we will continue to watch, we will continue to monitor, we continue to evaluate and keep it updating.

Operator

Your next question comes from the line of Paul Beland with Citigroup Investment Research.

Paul Beland - Citigroup Investment Research

Hi, thanks. Just a question on retention. I am calculating it down this quarter about 200 basis points year-over-year, but there were a lot of comments to improving retention. I just want to kind of tie that together.

Brian E. Mueller - President and Director

Yes, I am not sure how you calculate that, I have to look at your calculation and obviously canít do that today. I think there is something thatís not completely accurate there. I think the strongest indication that retention is not deteriorating, but in fact is improving is the fact that gap between enrollment growth and revenue is growing, and it was the reverse of that number of yearsÖ number of quarters ago. And so, as we see that number, in fact, in third quarter was we have bought that even, which was an indication retention was improving. But when we got the gap to be where it is the fourth quarter, we knew that what we were watching from a numeric standpoint actually turning it out to be true from a revenue standpoint. So, I think thatís the strongest indicator that in fact retention is improving in that security.

Operator

Your next question is a follow-up question from Sara Gubins with Merrill Lynch.

Sara Gubins - Merrill Lynch

Thank you. Spending andÖ sorryÖ selling and promotion question. You mentioned that you hired new enrollment advisors and I am just wondering if you can give us some sense of the magnitude of that. And then also whether or not you are planning on ramping up marketing spend trend market Axia will directly over time?

Brian E. Mueller - President and Director

From the standpoint of the enrollment counselor, yes, we areÖ one of the things that is encouraging to us is that if you look at our mature markets, California, Arizona, Colorado, and the Mexico et cetera, we are looking at a growth rate there. But if you look at where we are getting a lot of our growth now, if you areas where we have been, where our market is still pretty immature, our products are pretty immature in the marketplace. And so, Northeast and Midwest, areas we havenít been strong in past from our management standpoint. We strengthened the management there. We are starting to see significant increases, especially in those two areas and thatís where we had the opportunityÖ we added the enrollment counsels.

As I said before for the most part, the increase advertising spend and enrollment counselor hiring will be commensurate or at least fairly commensurate and with our goals from a growth standpoint. But if we seeÖ we continue to see that there are areas in the country where we are under represented and where we are not growing as fast as we are capable, we will make those investments, but I wouldnít expect that it would be to the extend that we had two year ago. The second one from an Axia college standpoint, we are still watching that very carefully, an Axia college student today because we havenít really done a lot of publicizing of that brand. It looks still pretty similar to the University of Phoenix student that we have always got on average 29 or 30 years old. So, they are maybe two or three years younger, but there are people who are working and going to school at the same time. They are just starting with fewer college credit so we can put in into different learning model and different price point.

At some point, and we are experimenting with it now, we will get more aggressive about offering those programs to high school graduatesÖ to high school seniors. We are getting some movement there now, and we know that there is a belief that there is a significant population of high school graduates who donít want to leave their current environment. They donít want to leave and go away to school. They need to stay home. They want to work in a family business or they want to take their part time job and turn into a full time job in Axia college would be a really good way for them to start their academic careers. And so, we are experimenting with that now, and over time, we will be more aggressive there.

Operator

Your next question is a follow-up question from Brandon Dobell with William Blair.

Brandon Dobell - William Blair

I kind of follow-up on the Axia question. Any sense on what kind of timeframe we should expect when you have got enough data to be more definitive about the matriculation rates where you feel comfortable saying this is the trend we can expect and this is how the model, the Axia matriculation trends into UOP.

Brian E. Mueller - President and Director

Well, itís not a matter for us not having the data, itís a matter of right now for us believing that Axia college and our strategy is veryÖ it is a strategy that has big dividends that can pay the dividends in the future, and we are really not wanting to give a lot information out to our competition. And so, itís not right now we donít have the data. Itís not that we are not tracking, we are following very carefully because itís very, very important to us. Itís just that we are not especiallyÖ we are not ready to give that out, because we donít want to the end of our competition

Operator

Thank you. I would now like to turn the call back over to management for closing remarks.

John G. Sperling - Acting Executive Chairman

Thank you very much for your participation. We appreciate the questions very much, and we are looking forward to our next quarterís call.

Operator

This concludes todayís conference call. Thank you for your participation.

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