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Apollo Group (NASDAQ:APOL)

Q3 2012 Earnings Call

June 25, 2012 5:00 pm ET

Executives

Beth Coronelli - Vice President of Investor Relations

Charles B. Edelstein - Co-Chief Executive Officer and Director

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

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

Joseph L. D'Amico - President

Analysts

Sara Gubins - BofA Merrill Lynch, Research Division

Suzanne E. Stein - Morgan Stanley, Research Division

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

Adrienne Colby - Deutsche Bank AG, Research Division

Gary E. Bisbee - Barclays Capital, Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

Jeffrey M. Silber - BMO Capital Markets U.S.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Peter Wahlstrom - Morningstar Inc., Research Division

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Operator

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2012 Earnings Release Conference Call. [Operator Instructions] This conference call is being recorded today, June 25, 2012, and may not be reproduced in whole or in part without permission from the company. There will be a replay of this call available through July 9, 2012, beginning approximately 2 hours after we conclude today. The replay number is (855) 859-2056 or (404) 537-3406 internationally. The conference ID for the replay is 83919479. I would now like to turn the call over to Beth Coronelli, Vice President of Investor Relations. Mrs. Coronelli, please go ahead.

Beth Coronelli

Thank you. Thank you for joining us today to discuss our third quarter results. Participating are Greg Cappelli, Co-Chief Executive Officer of Apollo Group and Chairman of Apollo Global; Chas Edelstein, Co-Chief Executive Officer; and Brian Schwartz, Senior Vice President and Chief Financial Officer. Our President, Joe D'Amico, is also here and will be available during the Q&A portion of the call. As we discuss our results today, unless noted otherwise, we'll be comparing the third quarter of fiscal 2012 ended May 31, 2012 to the third quarter of fiscal 2011.

I'd also like to remind you that this conference call may contain forward-looking statements with respect to future performance, financial condition, regulatory compliance and other matters regarding the business of Apollo Group that involve risks and uncertainties. Various factors could cause actual results of the company to be materially different from results expressed or implied by such forward-looking statements. These factors are discussed under risk factors and elsewhere in the company's most recent 10-K and subsequent 10-Q filed with the SEC and available on our website at www.apollogrp.edu. The company disclaims any obligation to update any forward-looking statements in this call.

Additionally during the call we may refer to non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. Our press release contains financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures is also available on our website. And now, I'll turn the call over to Chas.

Charles B. Edelstein

Okay. Thank you, Beth, and good afternoon, everybody. Greg and I would like to share details about our strategic efforts to differentiate University of Phoenix by Apollo Group and optimize our business, while improving service and enhancing the student experience. I'll share a brief overview of our results

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we will cover with more detail and he'll also provide commentary on our business outlook.

To provide a quick recap, for the third quarter we reported revenues of $1.13 billion, down approximately 9% year-over-year, with net income of $134 million. Our earnings per share was $1.13 or $1.20 per share excluding special items. We ended the quarter with total enrollment of roughly 346,000 students. New Degreed Enrollment for the quarter was 51,500, down 8% on a reported basis as compared to the third quarter of 2011 and down just 5.3% adjusting for available start dates.

Now on to my comments. Today, I'd like to highlight a couple of the areas of focus: the importance of providing a world-class education that connects to relevant careers, a key component of our differentiation efforts. And secondly, about our plans to optimize our business while increasing service and support to our students.

Our top priority is to help our students achieve their desired

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life outcomes. Whether students are unemployed or seeking to gain additional skills for their current positions, our value proposition is to help move to the next career level. This journey begins with providing tools, which increase a prospective candidate's understanding of his or her strengths and weaknesses. Incorporating an end-to-end approach throughout their academic experience, we're putting the tools in place to help our students better connect their academic path to their

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plans.

In April, after extensive research and testing, we launched the initial version of Phoenix Career Services. A cornerstone of this

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approach to support our student success is an interactive career portal. In the short time it's been in place, more than 25% of our students

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portal. We'll add new employers and features to the portal over the coming months, again, all designed to systematically connect students' career after

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through their higher education to their career objectives.

We're also building our employer relationships. We're enhancing

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our 730,000 plus alumni, with nearly 5,000 alumni participating in our career workshops since January.

We're also developing new relationships and building upon existing relationships with community colleges. As an example, we're co-hosting events and partner with community colleges and local employers, again, to help students better connect their education to their career goals. These relationships strengthen education. They build our brand with employers as they hire our graduates and with prospective students to identify University of Phoenix as the university

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to connect their academic and career goals.

Another important area of focus is our strategy to optimize our business. We're working to improve our structure and processes in order to enhance the student educational experience and outcomes while improving our cost efficiency. Significant effort is focused on several things. First, developing business processes that are more efficient and effective that deliver the best possible experience [ph] for our students; second, controlling costs in order to keep education affordable and accessible; and third, creating capital for investing in innovation to develop new and better ways to reach adult learners.

We're evaluating opportunities to reengineer business, to optimize our structure and increase cash flow for the long term. It's not just about cutting costs. We're looking at key touch points with our students with a commitment to make the experience

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as much as possible

Beth Coronelli

.

Chas, I understand we're having -- may not be able to hear clearly. If you can just hold on for just 1 minute.

Charles B. Edelstein

Okay, sure.

[Technical Difficulty]

Charles B. Edelstein

We'll just keep going with our efforts here and optimizing our business. We're evaluating opportunities to reengineer our business, to optimize our cost structure and increase cash flow for the long term. It's not just about cutting costs,

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key touch points with our students with a commitment to make the experience as seamless as possible. We've divided the work of this optimization project into 3 phases: [indiscernible], detailed design and implementation. We're currently in the design phase, and we believe that both the process benefits and cost

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from these projects are substantial.

This is a significant undertaking and while we've not committed to specific actions, we are reviewing every

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business. As we move into the implementation phase, we anticipate providing a more detailed update of our expectations during our next earnings call. We do

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some savings impact in 2013, but expect that the majority will be reflected in 2014.

Before I close, I want to update you on the gainful

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regulation. Lastly, the Department of Education previewed data with educational institutions. This information is anticipated to be released publicly tomorrow, following the calculation of the Gainful Employment Metrics for 2011 for each of the institutions covered programs. This data is for informational purposes only as the work that has regulatory implications is not expected until about a year from now.

We've done a preliminary evaluation of this recently released data and only one of University of Phoenix's over 100 programs failed on all 3 of the measures. Based on the analysis, all the programs at WIU meet at least one of the gainful employment tests. Therefore, taking into account what we received from the department, we continue to believe that substantially all of our

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programs currently prepare students for gainful employment as measured in the manner set forth in the final gainful employment regulations for purposes of continued eligibility

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federal student financial aid programs.

And with that, I'll turn the call over to Greg.

Gregory W. Cappelli

Thanks, Chas. And operator, we're still getting numerous notes that people are not able to hear us clearly. So I think what we're going to try to do is dial back in

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quickly in the next minute.

[Technical Difficulty]

Operator

Sorry for the interruption, all participants, the leaders are now back into the main conference.

Gregory W. Cappelli

Okay. Thank you, Chas. I'm sorry for one, I know the sound quality is not good. This is not on our end. This is with InterCall, and they are trying to get somebody to do something about it on their end. So we apologize for the sound quality. Hopefully they can fix this during the call.

I'm going to continue on with my remarks now. We've certainly grown and times have changed, and today we're squarely positioned in the spirit of our heritage and that's to innovate, to positively influence the future of higher education. I'm going to share with you updates on first, our initiatives to serve our students, providing tools to help them be successful academically and achieve their personal and professional goals; and then secondly, our efforts to deliver and communicate our value proposition; and finally, new development around our strategy to diversify Apollo Group.

First in serving our students, we're committed to being part of the solution to empower our country by providing access to affordable education and helping our students develop the skills they need to succeed. The American workforce is missing the education needed to compete in a global economy. We've dropped from a position of leadership in education to 16th globally. Our 15-year-olds rate 25th in math. We're seeing widespread skill shortages and need to provide accessible and quality education to close this gap and fill more than 3 million job openings today in America. There's also over 120 million jobs in America that are going to require some level of higher education by the year 2020.

While attracting the right students is important, trying to show that students in general are lacking the basic skills needed to succeed at the university level. This is one of the primary drivers impacting retention across the nation, as well as at the University of Phoenix. And we're committed, as part of our value proposition, to provide a blanket of support for our students as needed to help improve their long-term success and outcomes.

Here are some examples of what we're working on to help our students retain and succeed. Academically, our new learning platform is scheduled to be launched in the fall. We're designing courses incorporating adaptive learning into the curriculum, offering an individualized approach to learning. We're also exploring, incorporating opportunities to our accomplishment along the path to help our students remain inspired and motivated to keep studying.

Positively engaging a student over time is absolutely one of the keys to success in any education program. In our 3-week orientation program, we're piloting changes focused on feedback and experiences over the past year plus. We've taken into consideration the student's individual needs, including being able to demonstrate their ability to succeed at University of Phoenix without necessarily going through the full 3-week orientation program.

We're making some changes to content as well, adding career development tools and exploring opportunities to continually develop strong connections between faculty and students. We're also working to enhance our student services platform, and using new technology to improve the integration of our systems with a true 360-degree view of the student. This will allow us to more efficiently manage our interaction with a student through his or her entire journey. The goal is to make the process easy for our students to help free them up to focus on learning versus administrative functions.

As you know, a big focus for us is incorporating programs which connect education to careers. As an example, we've partnered with the American Hotel & Lodging Educational Institute where we're specifically designing a curriculum to help fill a market need for more revenue manager positions in the hospitality industry. In addition, together we're creating a talent development roundtable for the largest employers in the hospitality industry to share best practices.

To this end, we're also participating in a dialogue with the Aspen Institute to help set policy for the manufacturing industry as part of Aspen's manufacturing and society in the 21st Century initiative.

Connecting education to careers is at the forefront of our value proposition. As we focus on growing our universities around the world, it's important to understand our marketing efforts and how we think about our value proposition. Within this area, we're continually evaluating our -- the allocation of our marketing spend in channel mix. As we've discussed, we've made the decision to shift our mix further away from the affiliate channel and focus the use of this channel more strategically in our lead management process.

This requires discipline as it impacts the near-term predictability of our New Degreed Enrollments, but we continue to believe that making this shift is the right approach for the long-term health and success of our universities.

The mix shift within our digital market channel is being led by a newly hired leader who is developing and implementing our strategy in this space. Within the last month, we've also hired a new world-class creative agency in the U.S. and we're excited with some of the early work they've already done to help us eventually convey our innovations and our efforts to differentiate University of Phoenix.

We're realigning our marketing efforts, and I'd say pretty much across the board, including the redesign of our phoenix.edu website. You'll be seeing some of these changes late this summer and into the fall. Down the road, you'll also be seeing us collaborate with certain blue chip global companies to showcase our efforts to empower their human capital needs.

Before I turn the call over to Brian, I want to share an update on our efforts to leverage our capabilities, expand -- and to expand the reach of Apollo. At Apollo Global, we are seeing encouraging trends at a number of locations; one is the University of Latinoamericana or ULA, in Mexico and good early signs for intakes of the PPP university, college in the U.K.

Also this quarter, PPP for professional education was awarded the contract to deliver KPMG's National Association of Chartered Certified Accountants training program in the U.K. beginning in the fall of 2013. This is in addition to a number of exciting new contracts our PPP team has recently closed.

We're pleased to announce that we've hired a new CEO to lead our joint venture efforts in India, and I'm pleased with the leadership overall of Tim Daniels and his entire team at Apollo Global and remain excited about the positive impact Global can eventually have on Apollo Group over time.

And finally at Apollo Educational Services, we continue to implement our plan and are developing relationships with schools, other schools across the country. Diversification is an important cornerstone of our strategy, and we're pleased with the new developments this quarter.

And now, I'll turn the call over to Brian Schwartz, our Chief Financial Officer.

Brian L. Swartz

Thank you, Greg, and good afternoon, everyone. I'd like to start by reviewing our third quarter financial results, and then I'll spend a few minutes on our business outlook. During the third quarter, revenue decreased 9%. The decrease was primarily the result of a 13% decline in Degreed Enrollments at the University of Phoenix to roughly 346,000 students, which was partially offset by selective price increases.

For New Degreed Enrollment, we reported a year-over-year decline of 8%. Adjusting for available start dates, our New Degreed Enrollment decreased about 5%. There was one fewer Tuesday in the third quarter of 2012 compared to 2011, which impacted enrollments at the bachelor's and graduate levels.

For the fourth quarter, the number of start dates is comparable on a year-over-year basis. Revenue per student was up about 4%, reflecting increases due to price and mix, partially offset by a decrease in average length of attendance, primarily at the associate level.

For the third quarter, income from continuing operations was $134 million or $1.13 per share compared to income of $212 million or $1.51 per share in the year-ago quarter. Results for the third quarter of fiscal year '12 included the following 2 special items: first, restructuring and other charges of about $8 million associated with a series of activities to reengineer our business processes, while improving service to our students. These charges consisted principally of third-party consulting costs for services to identify and evaluate operating efficiencies. This amount also includes a charge at our Chile-based institution, UNIACC, for employee severance and other benefits associated with a reduction in force. The second component of these special items is a litigation charge of about $5 million, primarily related to a rejected settlement offer on a litigation matter.

Excluding these special items, as well as the other special items from the prior year, our operating margin declined 720 basis points to 21%. Income from continuing operations was about $142 million compared to $204 million in the prior year and EPS was $1.20 per share compared to $1.45 per share in the third quarter of 2011.

Next, I'd like to discuss our third quarter operating expenses. In instructional and student advisory, the increase resulted primarily from our various initiatives, including technology to more effectively support our students and enhance their educational outcomes. This was partially offset by lower faculty compensation and certain student advisory costs, which are more variable in nature, associated with lower total enrollment levels.

In marketing the decrease was principally due to a reduction in advertising spend, offset by costs associated with developing academic-related relationships with employers and community colleges.

For the first half of fiscal year 2012, advertising spend was down year-over-year. While we anticipate that advertising spend will be down on a full year basis, we do expect to increase spend in the fourth quarter, which is also a seasonally higher quarter for advertising. Admissions advisory decreased, primarily due to lower headcount associated with lower new enrollment levels.

G&A expense was essentially flat year-over-year. We currently anticipate fourth quarter G&A to be slightly higher than the third quarter. We are focused on identifying opportunities to reduce our G&A over time.

Our third quarter share-based compensation was $19 million. We expect our full year share-based compensation will be approximately $80 million.

Bad debt expense as a percentage of revenue was 3.1%, down 10 basis points in the prior year. We now expect our full year bad debt as a percentage of revenue to be slightly less than 2011 due to favorable collection rates.

Finally, depreciation and amortization increased, primarily due to higher intangible amortization associated with our acquisition of Carnegie Learning.

Our effective tax rate was 39.6% in the quarter. We anticipate our tax rate will be approximately 40% in the fourth quarter and 42% for the full year 2012.

Turning briefly to our balance sheet and cash flows. At the end of the third quarter, we had unrestricted cash and cash equivalents of $602 million. Our outstanding debt was $126 million versus $599 million at the end of last year as we repaid the borrowings under our $500 million credit facility. In the third quarter, we replaced this credit facility with a new 5-year $625 million revolving credit facility that expires in April of 2017.

Excluding Apollo Global, our days sales outstanding for the quarter was 20 days as compared to 23 days for the third quarter of last year.

For the third quarter of 2010 -- 2012, our free cash flow was $8 million as compared to $248 million in the prior year. Our free cash flow was negatively impacted in the current year by the $145 million settlement of our securities class action lawsuit as well as a decrease in operating income, partially offset by lower capital expenditures in the current quarter.

During the third quarter, we repurchased 9 million shares of stock for $329 million at an average price of about $36 per share. Subsequent to May 31, we repurchased another 500,000 shares for $15 million at about $32 per share. Year-to-date, we have repurchased about 18 million shares of stock for $751 million at about $43 per share. For your reference, assuming no additional share repurchases and using a share price consistent with today's closing price, our expected diluted share count is anticipated to be about 115 million shares for the fourth quarter.

Now I'd like to spend a minute to provide some commentary in our business outlook. Regarding new enrollments, we do believe fourth quarter will be negative on a year-over-year basis, especially given how robust the fourth quarter of 2011 was. We are early in what is a seasonally a back-end loaded quarter, August being a big month. While we are refraining from providing a specific year-over-year change estimate, our objective is to return to New Degreed Enrollment growth at some point in 2013.

Let me recap a number of initiatives that support our efforts to make this happen, all of which Greg and Chas discussed earlier. One, connecting education and careers and building relationships with employers; two, launching of the new learning and student services platforms; three, development of new relationship with community colleges; and four, our actions to shift our marketing efforts, including incorporating a targeted digital plan and partnering with a world-class creative agency to help elevate our content and co-branding ad with some of the nation's largest employers.

Based on our current view, our financial outlook for the fiscal year 2012 is net revenue of $4.2 billion to $4.3 billion and operating income of $700 million to $740 million. You'll note that we have increased and narrowed our outlook for operating income.

Our updated outlook reflects the impact of our ongoing focus on prudently managing our cost structure while continuing to invest in growth, as well as modest revenue favorability as reflected in the increase in the low end of the revenue range.

We plan to provide our financial outlook for fiscal year 2013 when we report our fiscal year 2012 fourth quarter results in October.

And with that, I'll turn the call back to Chas.

Charles B. Edelstein

Okay. Thanks, Brian. I'd like to close with a brief personal note today, as this will be my last call as one of the CEOs of our company. I'm deeply grateful to have had the opportunity to lead this company, along with Greg, for the last 4 years. While we've been through much change and certainly some turbulent times during this period, I'm gratified that we're on a strategic path, which I believe will lead to quality growth for the company and value-added solutions for our students. I'm also confident that we've put in place the talent with the capabilities to get us there. And I'm secure in the knowledge that Greg has the skills and the heart to lead the way.

So to our shareholders, our Chairman, our Board of Directors and particularly the people of Apollo, I extend my sincere thanks for the trust you've placed in me over these years. It's been an amazing privilege and the honor of a lifetime.

With that, I'd like to ask the operator to open the lines for questions. Operator?

Question-and-Answer Session

Operator

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

Sara Gubins - BofA Merrill Lynch, Research Division

I understand that August is a big month, so does -- it may be tough to tell, but I'm wondering if you think -- if we've seen the worst of the start declines on a comparable basis.

Gregory W. Cappelli

Worst of the start declines on a comparable basis?

Sara Gubins - BofA Merrill Lynch, Research Division

Meaning the negative 5% on an underlying basis in the third quarter and the second quarter.

Gregory W. Cappelli

Sara, we'd love to give you an answer on that. We're going to wait to see how, really, August comes in. As to draw any conclusions here, we continue to have some weeks that are quite good and inspiring and others that are -- could be better. So we're just going to continue to work away with everything we explained on the call, and hopefully things will continue to improve.

Sara Gubins - BofA Merrill Lynch, Research Division

And then secondly, we saw overall persistence levels come down for the first time in a while. We'd expected that because we -- I know you're seeing larger graduating classes coming through the system. Could you talk about how long that might last and continue to impact student persistence?

Brian L. Swartz

Yes. Sara, it's Brian. Yes, the third quarter persistence I think is, as the way you calculated, we're down about 160 basis points give or take, and most of that was due to higher grads and to a lesser degree, attrition. And over the long term, we certainly expect persistence to improve and moderate with the impact of the graduates. But in the shorter term, we do expect a downward trend in persistence to continue because of those higher grads and attrition. So exactly when it will turn around and what it looks like over the next several quarters, we need to play that out and see how it goes, but that's certainly our expectations going forward.

Operator

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

Suzanne E. Stein - Morgan Stanley, Research Division

I don't know how much detail you can give on this, but how much of the start volatility would you attribute to internal changes versus overall market demand or competition? And I guess in addition to that, just now that you've fully lapped the incentive comp changes, where do you think admissions productivity is relative to where it was before?

Gregory W. Cappelli

Suzie, this is Greg. I'll take the first part. I think it's -- obviously, it's a factor and a big factor of what we're experiencing in terms of the positioning, the changes and the direction that we are trying to point the University of Phoenix as part of the volatility within the enrollment of the University of Phoenix. There's other factors as well, I'm sure, inside and outside factors. Well it's a combination. And we're expecting, ultimately, for that positioning internally to pay dividends, not only for our students but our employees and certainly our shareholders as well going forward. Let me ask Joe to comment on your second question.

Joseph L. D'Amico

Yes. With respect to the enrollment counselor, adviser productivity, we're actually very pleased with the progress being made there. So we're making the progress. We're not back to where we were prior to all the changes, but we're approaching it.

Suzanne E. Stein - Morgan Stanley, Research Division

Okay. And I know you don't give specific numbers on this, but can you give us an idea of how much the, in terms of percentages, the starts coming from corporate partners has changed and kind of where you expect that to go?

Gregory W. Cappelli

That continues to -- it's still small as a percentage overall, but it continues to grow faster than the other pieces of the business and we're excited about it.

Operator

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

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

First question was the orientation alternatives that you had discussed previously and made mention, I think, earlier on the call, still on the pilot stage. Any feedback as to when those might be implemented or how those are progressing?

Gregory W. Cappelli

I'm sorry, did you say the changes in the orientation program?

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Alternatives that you're exploring, yes.

Gregory W. Cappelli

Yes, actually the pilots are going quite well and not only have many of us provided feedback for the management team that goes through these programs, but certainly a lot of feedback from the students, the faculty and great people within the University of Phoenix. So we wanted to get a good, solid year of data under our belt, 12 or 18 months. And you learn things as you go along. And I think we're going to be -- we are in the process of making those changes. You'll see that rolled out over the summer. Some of the pilots, we talked in the last conference call that we are certainly losing some quality students who would like to be able to demonstrate other ways that they have the capabilities to have success in the university. We didn't have -- really have that avenue for them, and we're testing and piloting some of those things and actually getting feedback that's quite good. So again, you'll see those getting rolled out in the not-too-distant future.

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Is there a point at which you guys are going to quantify the Workforce Solutions group and the impact it's having on your business?

Gregory W. Cappelli

Yes, we probably will. As I said before, it's probably the fastest-growing channel within the University of Phoenix. Barry Feierstein and his team have done such great work there. We continue to build the pipeline of really high-quality relationships with corporations of all sizes. And that relationship building process takes some time. But again, these are things that we didn't have in the past, and we're very serious about partnering because we know by listening to our corporate partners that they have a real need to sell their human capital issues, which we talked about before. There's a reason why there's 3 million jobs that aren't being filled in the country. We are trying to position ourselves squarely in the middle of that in understanding what they need and partnering with them to get it done.

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Can you categorize, Greg, what start growth is coming from that channel in any way?

Gregory W. Cappelli

Not yet. We're just not ready to give that out. But like I said, it would look better than anything else within the organization.

Operator

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

Corey Greendale - First Analysis Securities Corporation, Research Division

Couple of questions. So, Chas, during your remarks, you talked about some of these process redesign things you're doing. I just realized you're just in the design phase. But I was hoping you might be able to set expectations just a little bit on the cost side, if we should be expecting some sort of a meaningful number there in April 2013 on deposit before you get the benefit in '14.

Charles B. Edelstein

Well I think -- I know that some of my remarks were sort of kind of coming in and out because of the technical difficulties, but we do expect that more of the benefits will be seen in 2014 than 2013. But we will get some in 2013. And it's a significant program. There's dozens of workstreams going on and this is a real -- the level of this effort, the way we think about it is it really rises to the level of one of the strategic legs of the things that we're doing at the company.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. So in other words, do you expect it to be maybe a modest net positive, but a net positive in fiscal 2013?

Charles B. Edelstein

Well I'm not ready to quantify it, but we do think there will be some savings in 2013.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. Second question, this question may only matter for the next 24 hours or less, but thanks for the preview on gainful employment. I was wondering if you could tell us which of the 100 programs which have failed, how big that program is and just an expectation. Were there a bunch of programs that were really close to failing? Or was it mostly fine other than that one?

Charles B. Edelstein

Well, it's an associate program in the arts area. Do you have some -- any more color you want to add, Brian?

Brian L. Swartz

Yes. It's one of the -- I know it's one of the associate in arts programs. I don't recall the exact concentration or focus area. So I don't know that.

Corey Greendale - First Analysis Securities Corporation, Research Division

And in terms of -- can you just comment about that there are a lot of programs that might have been closed due to not hitting the metric?

Brian L. Swartz

We're actually still analyzing all that, so I don't know off the top of my head. I just know that's the only program that failed all 3 times.

Gregory W. Cappelli

The initial feedback from our group analyzing it was quite good and excited and optimistic about our programs.

Charles B. Edelstein

The preliminary data that we got last week was consistent with our expectations that we had run before getting the data in trying to estimate what it might be.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay. And just one other quick one for Brian, if I could. On the admissions advisory expense, it actually was down sequentially. Was there an additional headcount reduction in the quarter, or what drove that?

Brian L. Swartz

Yes. In the admissions advisory area, which is principally our enrollment advisers, we are -- that area of headcount, our team is managing down. They have done that sequentially. I think year-over-year headcount in that entire area is down about 10%. So we're managing that very carefully through attrition as a result of the levels of new enrollment.

Operator

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

Adrienne Colby - Deutsche Bank AG, Research Division

It's Adrienne Colby for Paul Ginocchio. I was wondering if following the implementation of new standards relating to misrepresentation, if there's a period where you made more significant changes to lead buying activity. I guess what I'm getting at is I'm wondering if you're expecting the cycle's changes in the flow season benefit to the new inquiry flow.

Gregory W. Cappelli

Well, we have been making changes all along. I mean for quite some time, we've been telling you about moving away from the affiliate network where a lot of the risk with respect to misrepresentations exists. And we've been working closely with our relationships there to ensure that they're doing the right things. And of course, we've added all the appropriate commentary on our website. So I don't think there's anything new going on in that regard. And obviously, some of these websites have done a much better job than others and we've made changes where we felt we needed to, meaning drop them where we thought we needed to that maybe had hastened the pace of some of that move through that -- in certain situations.

Adrienne Colby - Deutsche Bank AG, Research Division

If I could just sneak in another one. And it looks like the new enrollment trends were particularly weak in doctoral programs and also persistence was pretty soft there. I was just wondering if you could update us what's going on within the doctoral section.

Brian L. Swartz

Yes. It's nothing out of the ordinary that...

Gregory W. Cappelli

Might have been more graduations there, too.

Brian L. Swartz

Yes, there might have been more graduations. It's -- in total aggregate, it's just a small piece of the student body. I mean it's a very large program overall. But relative to other size, we're actually [indiscernible], so there's nothing unusual there that we're aware of.

Gregory W. Cappelli

There's a lot of great people focusing attention in that area and they've not run anything to our attention that would suggest that there's any significant problems that are causing slips in retention overall.

Operator

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

Gary E. Bisbee - Barclays Capital, Research Division

I guess the first question, I was a little surprised that the -- or marketing, excuse me, was down a little bit sequentially and down again year-over-year. I know you said it was down in the first half of the year, but I thought you'd indicated that you might increase that. So is that just that you don't have the new campaign that you'd talked about last quarter? Is there some reason, some other reason that you're not spending more? And I guess I wondered if it's a sign that maybe you aren't happy with the education outcomes, you're not going to spend up until you get more progress. Help me understand that thought, what you're doing there.

Joseph L. D'Amico

Sure. This is Joe. The focus right now is very strategic on our spend for marketing to ensure we're getting the right value for the dollars spent. And last year, we had some portion of our spend that related to thought leadership that we're not repeating this year. So there's some of that involved. I think our focus is on continuing to adjust the spend to where we think we'd get the greatest value. And part of it is the fact that we're coming out with a new ad campaign. We're doing some things with respect to our website, as Greg or Chas mentioned or maybe Brian. So there's some change going on there, which is also -- and one last thing is there's a little bit of timing here. So we actually thought our spend might be a little higher this quarter, some of that's slipping into the next quarter.

Gary E. Bisbee - Barclays Capital, Research Division

And can you give an update on new campaign? If you just hired an agency, should we expect that this is going to drag on and maybe doesn't get launched in the current -- in the fiscal fourth quarter? Or is it more likely to happen and help you in the first half of '13?

Joseph L. D'Amico

We will launch probably in the fall, September-ish time frame. We're still obviously working on the timing there. But there's obviously spend going on in that regard as we develop a new campaign, as we test it and the like.

Gregory W. Cappelli

There's been numerous focus groups, Gary, and just a new, refresh, innovative thought put around what we're doing, what we've been working on the past couple of years so hard, where we're going, what we're trying to achieve and just conveying that message.

Charles B. Edelstein

Lot of the ads today sound and seem very similar, and we need to step out and differentiate.

Gary E. Bisbee - Barclays Capital, Research Division

Are you willing at all to give a sense of how much you might spend up in the fourth quarter or how we should think just trend-wise over the next few quarters? I mean I'll state the obvious, but it's pretty hard to grow without actually investing more than you've done in the past in marketing or admissions, I think.

Gregory W. Cappelli

Well, that depends, that depends on the market environment like it has for years and years around you and how effective that spend is. So again, you can just blanket a market or you can be more strategic about it, try to attract the students you want to the specific programs in a little bit more surgical manner. I know you wanted to add a comment as well, Brian.

Brian L. Swartz

Yes. I mean, Gary, we're looking at -- the key is and that's what Greg and Joe alluded to, which is we want to be very strategic with the spend. There was some timing between Q3 and Q4 in terms of a push, in terms of when we thought we might get some capital deployed, which will happen in Q4. Q4 is seasonally a higher ad spend quarter for us as it is. So we certainly want to put the money to work if we can, but we're only going to do that if it's effective and it's in the right channel that we feel comfortable with. When you get the content behind us to do that, which we've talked about and we feel like we can deploy it and happen to be very effective, we'll absolutely do that.

Gary E. Bisbee - Barclays Capital, Research Division

And then just one last one. I think you said as part of the question about persistence that the attrition was up a bit. I noticed you didn't give that retention metric that you had given us the last 4 quarters. Was retention actually down? Or can you give us any color on that and how that might -- when you think about trending?

Brian L. Swartz

Yes. I think the metrics you might be referring to is that ACE for short, or average credit earned. And I think last quarter we had talked, Gary, that once we anniversaried some of the initiatives in fiscal '11, all those improvements are incremental year-over-year that we kind of phase out, not have -- the focus area for our retention and persistence conversation. So as I mentioned in my remarks, persistence -- overall, persistence as I believe, you calculate it, what, negative this quarter. Most of that was due to grads, some of it was due to attrition. And then in the near term here because of the grad impact, as well as just non-grad impacts on persistence, we do expect it to remain negative. And how quickly it bounces back and goes positive will be a function of a lot of moving parts that impact enrollment, including new enrollment and existing retention rates. So hopefully that gives you a little more color.

Gregory W. Cappelli

And it's probably going to bounce around some, but we are very focused on it. And we -- that is a major part of focus for us going forward at University of Phoenix. So if it for some reason deteriorates or doesn't look the way we want it to look, I will take steps to continue to try to move it in the right direction.

Operator

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

Peter P. Appert - Piper Jaffray Companies, Research Division

So Greg, can you give us any added color on volatility in regard to you're seeing, and I was thinking about specifically maybe by program or by geographies or any differentials you could talk about?

Gregory W. Cappelli

I mean there are some programs that certainly have attracted more students than others. And there's some programs that are retaining students better than others. I'm not prepared to go down a list, but we do look at that data, people at the university look at that data and that's part of us making sure that we're in the marketplace, understanding the needs of our students and certainly, from a Workforce Solutions perspective, the needs of companies and corporations around the country of where they -- their greatest needs are. So one thing I can assure you of is that we are out in the marketplace doing that to make sure we understand what's going on.

Peter P. Appert - Piper Jaffray Companies, Research Division

I guess I asked it more in the context of trying to understand if there were levers you could pull internally to give you better visibility around enrollment growth -- or start growth in terms of that knowledge.

Gregory W. Cappelli

There are certainly things we could do and levers we could pull if we wanted to manage enrollment growth more in any one given quarter. That's not the sole goal here. The sole goal is to build a great university, to enhance the reputation, to make sure that we're giving a great product to companies who are going to be hiring these graduates, and that's what we're focused on. We feel like if we do those things, enrollment will take care of itself in an industry that still has huge demands. But remember, as we talked about in the past, this is a competitive industry. The value proposition matters a lot, and that's what we're squarely focused on. We understand that we're either going to deliver something that people want, whether it's a consumer or a business or a corporation. And we need to make sure that we have the best product for what they're trying to buy, which in this case is a student that can do the job, an employee that can do the job.

Peter P. Appert - Piper Jaffray Companies, Research Division

And I know you've addressed this in prior quarters, Greg, but in terms of the competitive dynamics, anything new or interesting in terms of the evolution there? And related to that, and you guys have been pretty consistent in terms of the pricing and the price increases over time, what are your thoughts in terms of just pricing strategy going forward?

Gregory W. Cappelli

Beth, did we announce -- yes, we announced. We're right at about the CPI in terms of inflation, we are pouring, as you know, hundreds of millions of dollars into the platform, into the university, into the classroom. We built the first classroom without boundaries. We intend to replicate that in other locations in the U.S. We're putting a new LMS and platform out this fall. So yes, we've taken some relatively modest price increases. Where that goes, and you heard Chas say last quarter that we're not expecting to be able to take big price increases annually and what we wanted able to do is provide something that's affordable to our students. So that's where we are in our thinking right now. We analyze it every quarter, and we'll keep you updated on where we are with it. But the most recent piece of data there is we took a price increase for this coming year. But at the CPI

[Audio Gap]

which was about 3%. And that will go into effect July 1, up here.

Operator

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

Jeffrey M. Silber - BMO Capital Markets U.S.

Just kind of want to step back and take a look at the guidance that you've provided over the past few quarters. I know a lot of the changes are more on the operating income line than on the revenue line. But I'm just wondering, has the business changed so much that you don't necessarily have this type of visibility that you've had before?

Gregory W. Cappelli

We are making changes to the business, which makes it less visibility -- visible to us. As you well know, the external environment is still choppy. Hopefully, that will become more predictable in itself as we move forward. But those 2 things combined, yes, we're going through a period where it's going to be less visible for a period of time here.

Jeffrey M. Silber - BMO Capital Markets U.S.

Okay. I understand that. And switching gears a bit, just on the advertising side, do you see an increase in advertising rates as we head into the Olympics and the election season over the next few months?

Gregory W. Cappelli

We are seeing upward pressure on pricing.

Jeffrey M. Silber - BMO Capital Markets U.S.

And I'm assuming that's built into the guidance at least you've given for the fourth quarter?

Gregory W. Cappelli

Yes.

Operator

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

Kelly A. Flynn - Crédit Suisse AG, Research Division

A couple of questions. Going back to the orientation program changes, I know someone else already asked about that. But I just wanted to clarify whether or not those changes actually helped the third quarter starts at all and then how we should think about it for the fourth quarter. Should we assume it's kind of fully rolled out across the organization or still in a pilot mode for Q4?

Gregory W. Cappelli

No, Kelly. They did not help or change starts in the quarter. And I'm not even sure if those pilots will be ready in the fourth quarter, but I certainly would not expect anything from that enrollment-wise nor are we necessarily expecting a negative or a positive out of it. It's simply to understand if a student -- orientation is put in place to understand if the student has the -- not only the skills but the understanding of what it takes, the commitment to what it takes to get through our program. And all we're doing is we're trying to give them a couple of different ways to show that to us, depending upon who they are, what their background is, where they come from, so on and so forth. So we're actually listening to them, which is why we're trying to make some of these changes. But they -- I'm not certain they'll be ready for the fourth quarter, so -- and they -- and that probably will not.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay, great. And then just a follow-up related to the fourth quarter starts. And obviously you picked up a bit from having a comparable number of weeks year-over-year. Are there any, I guess, offsetting negatives that you would flag for us. I know you guys have talked a bit more recently about the bachelor starts and sort of a lagging impact from the orientation initiatives on bachelors. Could you talk specifically about that and whether or not there are any other kind of issues related to starts that we should be aware of as we think about modeling Q4?

Brian L. Swartz

Kelly, it's Brian. I mean the biggest one is the one you said and the one we highlighted on the call, which is the fact that the month of August is just seasonally a very big month for us. The second thing I'd at least point out and there's a little bit of uncertainty here too, we just don't know exactly how it will play out. But if you look at the calendar for the month of August in the prior year, there were 5 Mondays and Tuesdays in the month of August 2011. In the month of August 2012, there's 4 Mondays and Tuesdays. Now they've just been shifted to July, so July is the opposite year-over-year. So that's why the full quarters are the same. But because of that dynamic and just the shift in the calendar and the summer months and the back-end loading and the seasonality, it just -- it creates a difficult number to pinpoint at this point. So hopefully that provides you a couple of data points to think through the fourth quarter.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay. Just on the bachelors thing, sorry, were you agreeing with me that, that's an issue to consider? Or were you actually saying it was more just the August uncertainty that was an issue?

Brian L. Swartz

Yes. No, I think the -- I believe the bachelors things you might be referring to is that over time, our associates, as you know, we matriculate several students who graduate from our associates program into bachelors. That will put pressure on the bachelors' growth in future periods. But it's not expected to be substantial for the fourth quarter, if that's your question.

Operator

Your next question comes from the line of Jeff Meuler from Baird.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

In terms of still being in the planning phase around implementing the academic and process improvement changes, did the timing of that change? And I guess I'm asking because I thought back in January when you took down the top end of your operating income guidance that you cited that during the second half you're going to be implementing that. Just wondering if the timing changed and if that's in part what drove some of the upside this quarter.

Brian L. Swartz

Yes, Jeff. No, when we took it down, we did incorporate in the outlook the operating income outlook at the time, an appropriate estimate to start that work. The timing, with respect to the project, the 3 phases that Chas referred to in his remarks, suddenly we're right on track in terms of where we want to be with that. As Chas indicated, we're kind of in the second phase, which is the detailed planning phase that we're in now. And we expect over the course of the next month or 2 to finalize that, and then move into implementation. So I would expect that on our October call, we'll provide even more details about that and including quantitative details and impact to fiscal '13 and '14.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Okay. And this was just a follow-up on that same topic from Corey, but how much upfront investment through the P&L are you planning through these investments that will eventually generate the savings?

Charles B. Edelstein

It's going to be -- the investments that are associated with this will be a mix of -- through the P&L and there'll be some capital investments as well. So that's part of what's being identified in this design phase that we're in right now. So the specifics of those numbers aren't available at this point.

Brian L. Swartz

Just to be clear, on the costs that are in the restructuring line on this quarter, so there's no confusion, is really the cost to do the planning and design. It's the third-party cost, the consulting firm that we've hired. As I mentioned, there was about $8 million of restructuring charges, about $4 million that relates to this third-party cost and the balance relates to the actions that we took down in Chile at our UNIACC operation.

Operator

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

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

This is Jeff for Andrew. 90/10 certainly remains an open issue for the broader sector. How have you been trending in recent quarters? Were directionally do you think you might be for 2012?

Brian L. Swartz

Yes. For fiscal '12, for the end of this year, which obviously we'll report in October, we do not expect to be above 90. We -- there are obviously things out there that could impact it. But for this fiscal year, we do not expect to be above the 90% for fiscal fourth.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

How about compared to 2011?

Brian L. Swartz

We haven't quantified the impact in terms of how it's trending. It's not trending unfavorable relative to last year through the third quarter, but it could move around. It's not significantly favorable either. It's kind of -- it's more or less the same.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Okay. And then adaptive learning, it maybe a little bit too early to assess, but can you just give us a few moments on where you are in that effort?

Brian L. Swartz

I'm sorry?

Gregory W. Cappelli

Adaptive learning?

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Adaptive learning.

Charles B. Edelstein

We actually have a workstream where we're adapting the adaptive learning platform to our curriculum, and that's proceeding very well. And we're enthused about some of the tests that we've done as we've seen better outcomes for our students as a result of those students who use the tools. And so that's being built into our at least one of our math programs, I think at the end of the fourth quarter. And then we're also looking at adapting the platform to other courses over time.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Okay. And following on just on the marketing question, the starts, can you share with us the percentage of students coming from the military?

Gregory W. Cappelli

No. As we've said before, we do not give out specifics on where exactly students are in programs throughout the University.

Operator

Your next question comes from the line of Peter Wahlstrom from MorningStar.

Peter Wahlstrom - Morningstar Inc., Research Division

You talked a little bit about building relationships with community colleges and partnering and doing co-host events. I was wondering if this is a situation where Apollo is displacing perhaps another proprietary institution or is this something more that's new to the marketplace.

Charles B. Edelstein

The way we think about it is it's expanding the nature of the relationships that we've had in the past. Most of the relationships we've had with community colleges in the past relate to the accepting of credit -- direct transfer of credits and articulation agreements, that sort of relationship. And that was one example that I was putting forth of the types, of the way we think about the relationships now, which are broader in a strategic way. We think with the community colleges that we've signed these newer agreements with, there's I think almost 90 of them that we've signed these newer agreements, where there are things like these co-hosted events. So that was just one example of a number of things that we're doing to better connect with the community colleges and deepen those relationships.

Peter Wahlstrom - Morningstar Inc., Research Division

Understood. And circling quickly back to the advertising agency, can you provide a bit more info about the timing of this -- the agency change and perhaps what prompted this? And is there any significance to the timing of the new campaign launch in September, which is a little bit after kind of the back-to-school season? Or how does that impact University of Phoenix?

Charles B. Edelstein

The timing was close with the expiration of the prior arrangement. The launch of the new advertising, unfortunately, is tied to when we selected the agency and the like, and we certainly would love to move that up. And there will be actually some things that we'll do in market prior to the launching of the TV ad campaign. The other things happening and are happening actually, as we speak, in terms of advertising on the digital side, on radio and the like. So there are a number of things going on. So it won't be like all of a sudden, there's a brand new campaign and then you see it everywhere. There will be some foreshadowing of it over time in the fourth quarter, probably in the later -- latter part of the fourth quarter. It won't benefit unfortunately the fourth quarter, though. Hopefully, it will begin to impact 2013, though.

Operator

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

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Just following up on that question. I get the sense that a lot of the marketing spend around -- on the marketing line was a lot of the corporate alliances over the first half. And it seems like we're coming into a period of elevated marketing with the new ad agency and the election season. Will there be a tapering percentage-wise of mix there in corporate lines or should we expect, into the first half of fiscal '13, very elevated marketing?

Gregory W. Cappelli

When you say very elevated marketing, I'm assuming you're assuming that we're going to be putting more and more money into marketing depending upon the external environment, was that your question?

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Yes. And with still elevated corporate alliance spending, I guess that's the question, is that going to taper off as...

Gregory W. Cappelli

It's going to depend. I mean we'll evaluate the external environment with the things that we're trying to align and do internally, right, and take that message out and its importance. And then we'll look at ROI in everything that we're doing.

Charles B. Edelstein

Can I add on that? The corporate marketing effort is a fairly stable effort. It's -- there's some growth to it, but we have a team in place now and that team is pretty close to full strength, and the relationships and the number of relationships have grown dramatically. So now we're taking that whole effort to the next level, and these relationships as well, like the community college relationships, are not just sign a contract and get a discount and away we go. These are deeper, thoughtful, strategic relationships with many of the partners, especially the larger ones who also have an interest in hiring our students. And so we are developing some very good and different, we think, relationships with these folks. The ad spend is sort of -- that's where you get a little more variability. I'm sure we'll be doing a TV launch and the like, so that may impact spend. But we're looking at all of this very strategically and trying, by the way, also to get to the right mix. So we optimize basically the interworkings, because these are all dependent on each other, interdependent on each other, digital marketing, local marketing, TV, radio and our corporate alliances. So it's all very connected.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

And just on the competitive front, anything interesting out of the nonprofits or other of your direct peers? Just anything unique you're seeing. Or do you think everyone's in the same environment and acting similarly?

Gregory W. Cappelli

I don't think there's anything new to report there from last quarter.

Operator

Your next question comes from the line of Trace Urdan from Wells Fargo Securities.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Greg, I think last quarter, you had characterized the pressure on starts as being fundamentally about the inquiry flow. And the conversions, although they weren't what you had hoped they would be, were trending in a positive direction year-over-year. And then I think show rates were a little bit weaker on a year-over-year basis. I'm wondering if that pattern is still the case as you look at the May quarter.

Gregory W. Cappelli

Yes, Trace. I'll ask Joe to comment on that.

Joseph L. D'Amico

Yes. I think the -- what we're seeing in that area is consistency in terms of the number of folks that make inquiries. We need to get more of those inquiries to convert into new enrollments, and we're working on all those aspects to do that.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

And then I was hoping to kind of ask a bigger picture question, Greg, about the virtues of driving your own enrollments versus using aggregators and having more consistency. Is this fundamentally about being at risk on the misrepresentation side? Or is there something that you've determined that's different about the quality of the students? Do you have some data about their ability to persist long term? What's really behind that? What's driving that trade-off and making it acceptable to you?

Gregory W. Cappelli

Absolutely, we do. We have -- well first of all, the regulatory piece is something that we're driving, right? We're going to ensure that if we're going to deal with a vendor that they're going to be in compliance. And there are some that we needed to step away from as we learn more about them. But honestly, when a student comes directly to us in any form, whether it's through a referral, whether it's directly to phoenix.edu, they have more information and they convert at much higher rates and frankly, their retention is higher as well. And that's -- there's nothing new there. We've been experiencing that for a long period of time. And I think that from our perspective, you need tools and you need capability to drive more students directly to whether it's phoenix.edu or in some part, the university. It's a sophisticated part of the operation, I mean, with how technology and marketing has evolved. We've needed to upgrade in that area and we've been doing that and we expect to see results there as we go forward. But we absolutely want to drive students more directly to the University of Phoenix rather than that get a student through a third party that tells them about the university.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

And do you think that as you gain experience in that area and improve execution that, that drives consistency? Or is this -- is the volatility just -- it's just a fact of life or a fact of life in this market environment?

Joseph L. D'Amico

This is Joe, Trace. My view, and I think that the team agrees with this, is that we're actually going to end up with more consistency over time and that we're going through this sort of shakeout period. In the past, say 4 or 5 years ago, it was very easy to predict and quite frankly, if we wanted to increase enrollments, we would spend more money with the affiliates, and we could predict and tell how many new enrollments we would get from that. Whether they would retain or not, big question and so on as we've all kind of seen. There's a more thoughtful purchase -- or customer out there, we believe, more sophisticated. And we believe with the efforts with corporations, we're going to create an environment where hopefully we're the best value offered; therefore, the price. And also, the way we think about education I think has actually endeared many of these corporations to us because they -- we are solving a problem for them. And they believe that. And we have students that they understand are going through a very rigorous program of a diverse nature, and we can deliver actually very good workers to them. And we're focused on solving that problem -- their problems in term of skill sets that they're looking for and the like. So we're building very deep relationships. And then I think as we differentiate the university from our competition, that it's going to make an impact as well. So in the long run, I think we have the best strategy, the right strategy. In the short run, we can't predict as well as we'd like to.

Gregory W. Cappelli

And, Trace, the only other thing is, and I'll just stay on this that -- I mean we use -- we are using what we think are some of the best affiliates. And we'll continue to use them, and they're doing a great job for us. But we're looking for students that are going to work hard and retain at the university and want to be here, and that's where we're going.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Last question, if I could. As you're really thinking -- getting ready to launch a new marketing campaign, it strikes me that the product and the student varies really significantly when you look across the range from associates through masters students. And I'm wondering if either the approach with affiliates or the approach with the marketing messages in the market need to vary in your minds in terms of how you're communicating with those different audiences.

Gregory W. Cappelli

You will feel that when you see the University of Phoenix being advertised or talked about in the future.

Operator

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

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Brian, just real quick on your ARPS comments, I think in your prepared remarks. I just want to understand if we could revisit that for a second, especially I guess in the context of other companies in the space offering retention scholarships or -- and kind of front end scholarships, should we think about any change in plans there for you guys in terms of discounting your scholarships given how the marketing campaign is rolling out, how retention's been, those kinds of things?

Gregory W. Cappelli

Brandon, this is Greg. If I understand your question right, are you asking if we're going to be introducing any new large discounting mechanisms, scholarships? Is that what you're getting at?

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Yes. Two-part question. Have you guys piloted anything in terms of certain programs or anything? Or as you think about the impact of the value proposition on retention, is that one thing that you would look at or no?

Gregory W. Cappelli

So let me just -- and I said this last quarter as well, our teams, we've asked them to make sure they understand the markets by a market-by-market basis and by program, how effective we are from a pricing perspective, what the value proposition is and its impact on students. So we're looking at this market by market, program by program. This is not just for us, hey let's go cut some price or let's just introduce a bunch of scholarships. We wouldn't be piloting anything like that, but we are looking at various markets and programs to see if there is a need for us to price differently in any one specific program, and that could be through a scholarship or could be through a price reduction. But there are no, as it stands now -- if you're asking if there's structurally a big program in place, the answer is no right now.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. And then in terms of the ground footprint, you guys I think closed down or repositioned one of the schools out in California. How do we think about the ground footprint out there in terms of locations or kind of square footage looking out the next year or 2 as leases come up? Do you plan any major shift, either up or down?

Gregory W. Cappelli

We've closed and repositioned a number of schools every year that I can remember. That happens every year. And we're evaluating our campus footprint and our online footprint continually, so...

Charles B. Edelstein

That's why it's one of the workstreams in the project that I've been talking about.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. And then final one for me, back to your comments on the gainful employment data when you talked about program compliance. Was that -- was the -- using the BLS kind of a transitional framework? Or was it using the actual ratios from the SSA data? I just want to make sure I understand what you guys are talking about in terms of compliance.

Brian L. Swartz

The rates that are going to be -- the comments that Chas made in the script, Brandon, are based on the information we received from the department on Friday, which will be public tomorrow morning.

Operator

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

Gregory W. Cappelli

All right. Thank you, operator. Thank you, everyone. Chas and I just would also like to quickly thank our entire management team, everyone at Apollo Group and Global continue to work so hard to deliver quality education to so many thousands of people around the world. We're proud of you and excited about the future.

And then on a final one, I just -- we'd all like to thank Chas for his many contributions to Apollo. Certainly for those of you that know Chas, you know he's truly a very smart, diligent and honest and sincere person. And to us at Apollo, you're always going to be part of our family. So thank you, Chas for everything you've done.

Charles B. Edelstein

Thank you.

Gregory W. Cappelli

And we'll be talking to you, everybody on the phone soon. And certainly if we don't, the next quarter. Take care, everyone.

Charles B. Edelstein

Bye.

Brian L. Swartz

Bye.

Operator

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

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Source: Apollo Group Management Discusses Q3 2012 Results - Earnings Call Transcript
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