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Executives

Dr. John Sperling – Acting Executive Chairman of the Board

Joe D’Amico – Executive Vice President, Chief Financial Officer

Greg Cappelli – Executive Vice President, Global Strategy and Assistant to Chairman

Brian Swartz – Chief Accounting Officer

Allyson Pooly – Vice President, Investor Relations

Analysts

Kelly Flynn – Credit Suisse

Mark Marostica - Piper Jaffray

Gordon [Bossick] – Robert Baird

Sarah Gubins - Merrill Lynch

Kevin Doherty - Banc of America Securities

Jeff Silber - BMO Capital Markets

Susan Stein - Morgan Stanley

Jerry Herman - Stifel Nicolaus & Company

Gary Bisbee - Lehman Brothers

Trace Urdan – Signal Health

Analyst for Corey Greendale - First Analysis Corp.

Brandon Dobell - William Blair & Company

Scott Schneeberger - CIBC World Markets

Apollo Group, Inc. (APOL) F3Q08 Earnings Call July 1, 2008 5:00 PM ET

Operator

Welcome to Apollo Group, Inc.’s third quarter fiscal 2008 earnings conference call. (Operator Instructions) I would now like to turn the call over to Allyson Pooly, Vice President Investor Relations of Apollo Group.

Allyson Pooly

Speaking on today’s call are Dr. John Sperling, Acting Executive Chairman; Joe D’Amico, President, CFO and Treasurer and Greg Cappelli, Executive Vice President Global Strategy and Assistant to the Chairman. Additionally, Brian Swartz, our Chief Accounting Officer will be available during the question-and-answer period.

During the question-and-answer period we ask that you be respectful to everyone’s time and limit your questions.

I’d also like to remind you 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 10K report and subsequent 10Q report filed with the Securities and Exchange Commission. The company does not undertake any obligation to update anyone with regard to the forward-looking statements made during this conference call.

With that I’ll turn the call over to John.

John Sperling

I am pleased to report that Apollo had solid growth in both revenue and enrollment during the third quarter and continues to make significant operational progress, all of which we will discuss in more detail.

Before we discuss the quarter I’d like to address some management changes announced last week. Brian Mueller resigned as President and Director of Apollo Group. We want to thank Brian for his many years of service to Apollo and for the role he has played in our success. We certainly wish him well in his new endeavors.

Joe D’Amico, our current CFO has agreed to serve as our Interim President. Joe has been intimately involved in many aspects of our operation and we are highly confident in his ability to lead Apollo through this transition period. He has earned the respect and trust of our Board, our management and our employees and as a result we do not expect any disruption. Joe and Greg Cappelli, our Head of Global Strategy and Apollo Global will work closely with the operation and global team as we continue to grow the business. We are very fortunate to have an extremely talented, long tenured management team at the executive, regional and campus levels.

In both academics and operations we have the finest employees. I want to thank them all for the service they do for our students. Finally, we are engaged in a CEO search and hope to have an announcement on that front in the near future.

Before I turn the call over I’d like to reiterate that for almost 35 years Apollo Group has been dedicated to delivering the highest caliber of educational programs and services to our students. Helping our students achieve and persist to graduation has been and will continue to be the major goal for all of our faculty and employees as this is what ultimately generates value for our shareholders.

Now let me turn the call over to Joe.

Joe D’Amico

I would like to cover three topics. First I will address our recent management changes. Next I will review our third quarter financial results and last I will comment briefly on the recently announced tuition increases. As always the details and financial data for the third quarter is available in our press release and 10Q and a reconciliation of non-GAAP measures to GAAP measures is included in our press release.

First, organizational changes. I would like to add my personal thanks to Brian Mueller for his dedication to Apollo over the last 20 years. I have had the chance to work very closely with him over the past 18 months and firmly believe that we are on very solid operational foundation and have an outstanding group of people to continue our momentum. I would also like to announce we have named Rob [Rugel] as Vice President of Marketing for Apollo Group in addition to his role as CEO of Aptimus. Rob has been instrumental in our marketing strategy since we acquired Aptimus last fall and he is the financial marketing leader for our organization going forward.

Now our third quarter results. As I discuss the financials please note that unless otherwise stated I will be comparing the third quarter of fiscal 2008 to the third quarter of fiscal 2007.

For the third quarter we reported consolidated net revenues of $835 million, a 13.9% increase. The key contributor to this growth was our 11% enrollment growth. Enrolment growth was in turn fueled by new student enrolments which increased 9.8%. We are very pleased to see this rebounding in the growth rate of new student enrollments after several quarters of decelerating growth. Importantly we experienced an increase in new Bachelor enrollments which is primarily due to a higher number of Axia transfers.

Net income for the third quarter was $139 million, a 6% increase from $131 million. Earnings per share were $0.85, a 13% increase compared to $0.75. Incremental gain in EPS is due to higher net income and fewer shares outstanding as the result of our share repurchase activity over the past twelve months.

Operating margin for the quarter was 26.5%, down 120 basis points when compared to 27.7% in the year ago quarter. Excluding special items in both periods our operating margin declined 210 basis points to 26.7% from 28.8% a year ago due to both higher operating expenses and investments in new business opportunities.

I’ll provide some context around our operating expenses in the quarter and Greg will discuss our investments.

Instructional costs and services (ICS) increased 8.3% to $348 million. As a percentage of revenue ICS declined 220 basis points to 41.6%, a significant improvement. The improvement was driven in large part by lower bad debt expense which was offset somewhat by higher employee compensation. Bad debt as a percentage of revenue declined 160 basis points from 4.0% to 2.4%. This includes an adjustment from the 2007 amount to account for the bad debt reclassification that I have discussed on previous calls and is detailed on our 10Q.

The lower amount of bad debt is due to our continued focus on student retention which has been steadily improving as well as our focus on collections. We are very proud of the progress our people have made in managing bad debt over the last year and we will continue those efforts. However, the decline this quarter was very significant and we cannot assure you it will stay at this level. Also please remember that as a percentage of revenue bad debt will likely increase in seasonally weaker quarters.

Selling and promotional expenses increased 25% to $204 million. As a percentage of revenue this is a 220 basis point increase to 24.4%. The higher spending level is due to an increase in enrollment counselor compensation, higher levels of advertising and other costs associated with our strategic marketing efforts including Aptimus. Enrollment counselor compensation and related expenses explain 90 of the 220 basis point increase. This increase relates primarily to the increased hiring we did during the year. Helping our enrollment counselors achieve success in managing the cost so they are more consistent with our revenue growth is a key objective.

We believe there are several areas within infrastructure and support where we can continue to drive operating efficiencies but they will take some time to achieve. Our advertising costs increased 30 basis points as a percentage of net revenue in the third quarter primarily due to an increase in Internet based advertising. As we have previously stated our advertising spend both on an absolute dollar basis and as a percentage of revenue and both measures are currently higher than we would like. However, we are working on a number of strategies which over the next several quarters should not only reduce our advertising costs as a percentage of revenue but will also allow us to have more control over our brand.

The results are not yet obvious but we are pleased with the initial progress with Aptimus and we will share more specific information on this at the right time.

Now, G&A. G&A expenses were $61 million in the quarter up 58% from the adjusted year-ago level of $39 million. As a percentage of revenue our adjusted G&A increased 210 basis points to 7.3% of revenue in the third quarter. The third quarter spend of $61 million is up from $55 million in the second quarter of 2008. Excluding share based comp, our G&A expenses increased approximately $9 million from the second quarter of 2008 and I’d like to focus on that turn.

First, there was a $3 million increase in overall employee compensation which includes among other things increased headcount at Apollo Global as well as cost to fund our incentive plans. Second, we had about $4 million in incremental legal costs which will vary from quarter to quarter and hopefully will not continue at these levels. Third, there was an incremental $1 million in non-headcount items primarily from Apollo Global. Fourth and finally our administrative space expenses increased by approximately $1 million due to our new headquarters building and Apollo Global.

Regarding the headquarters building as you remember we entered into an option agreement which granted a third party the right to purchase the building and simultaneously lease it back to us. Our extension of the option expired in early June and as a result the option agreement is terminated. We have retained the $9 million option deposit and we are currently marketing the land and building to other parties.

So let me just summarize the key drivers of our 210 basis point drop in adjusted operating margin. ICS as a percentage of revenue declined by 220 basis points. Selling and promotions as a percentage of revenue increased by 220 basis points and G&A as a percentage of revenue increased by 210 basis points.

With respect to income taxes we expect 2008 full year tax rate to be between 38.5% and 39%, slightly below our earlier estimate due to more tax exempt interest. We’d also like to note that we expect share based comp for the year to be below our previous estimate of $65 million due to recent executive management changes but we do not have an estimate at this time.

Before I turn to the balance sheet I want to discuss the extensive review of our vendor relationships that we have performed over the last couple of quarters. We have successfully re-negotiated some of our larger contracts and expect to capture cost savings in excess of $50 million in fiscal 2009. The majority of $50 million in savings will be reflected in ICS costs due to a new outsourcing contract with our existing financial aid processor. We will also capture savings in such areas as telecommunications, office supplies, professional fees, facilities management and others. These savings will somewhat offset the increased investments we are making which Greg will discuss in a moment as well as the higher costs we are incurring in S&P and G&A.

Now I will discuss the balance sheet and our cash flows. Our cash and marketable securities excluding restricted cash totaled approximately $303 million at May 31, 2008 as compared to $393 million at August 31, 2007. During the quarter we generated approximately $259 million of cash flow from operations which was reduced by $24 million for capital expenditures and $23 million for the Apollo Global purchase of UNIACC.

Of the capital expenditures approximately $5 million were one time in nature and represent the final build out of our new corporate headquarters building in Phoenix. We are currently expecting our full year 2008 capEx to be about $100-110 million. During the third quarter we repurchased approximately 9.8 million shares of our common stock at a total cost of $454 million. This represents an average price of $46. Our Board recently authorized up to $500 million for additional share repurchases.

Our allowance for doubtful accounts declined $85 million at the end of May quarter from $100 million at August 31, 2007 and from $92 million in the third quarter of 2007. Our day sales outstanding declined again this quarter to 26 days from 36 days in the third quarter a year ago and from 38 days as of August 31, 2007. The decrease in DSO from year end is primarily due to improvements in our processing time from the receipt of student financial aid, the write off of approximately $28 million previously reserved uncollectable accounts receivable during the quarter and seasonality. As a result of seasonality our DSO may fluctuate from quarter to quarter. Our total allowance continues to exceed all receivables greater than 90 days old.

Finally on pricing. We previously disclosed our recently announced tuition increases going into effect today. While the increases are effective today because many students opt to pre-pay we do not expect the increases to have much of an impact on our fourth quarter results.

Before turning the call over to Greg I wanted to acknowledge and thank all of our employees and our faculty and all of the people associated with the Apollo Group and the University of Phoenix for their incredible efforts and accomplishments this quarter. In my career I have worked with a lot of companies and without a doubt this team is one of the very best. I am very excited about our future together.

Greg Cappelli

Today I’d just like to discuss several areas where we are making investments and provide you with a brief update on our progress in each area.

First our core domestic business. We continue to invest in areas of retention, new programs, and opening new resource centers and as Joe mentioned increasing and advancing our capabilities in marketing.

Second we continue to invest in our online high school initiative. Our new Canadian high school called Ameritus and Apollo Global.

On the topic of retention this continues to be our number one focus to successful student outcomes ultimately linked to maximizing revenue and profitability. During the third quarter we again saw improvement in retention in each degree level which contributed to our approximately 14% revenue growth and helped build our 11% growth in total enrollment. Continuing to grow our revenue at a rate above our long-term targets and given our tuition increases which will go into effect today coupled with the retention efforts we have in place we think this should continue in the near term. It is important to remember though that we typically see seasonality in revenue and retention during the fourth quarter as more students tend to take breaks during the summer holidays.

Our investments in retention includes expanding programs, improving curriculum, and instructional innovation and improved academic and support services for students. Academic quality is the most important to us and a key area of investment going forward. In an effort to provide a transparent measure of our academic quality and performance we did recently publish the 2008 Academic Annual Report for the University of Phoenix.

The report examines our quality and performance in the context of external measures of success including the educational testing service (ETS). The results show that as a group our students tend to enter school with lower test scores than over universities but they close the gap considerably by the time they graduate. Additionally our completion rates are comparable to national levels. Because of our open access admission policy a large number of our students enter with numerous risk factors as defined by the Department of Education. For example, being a single parent and working full time while enrolled.

Our studies show that students with these types of risks do have significantly more success at the University of Phoenix and in many cases it is why they choose to enroll with us. Overall we are proud of the results and continue to strive to deliver the best possible education to our 345,000 students.

One of the more successful retention pilots was the creation of what we call a Student Resource Center. As we discussed last quarter the first center was opened in Texas last spring and with it we experienced significant improvement. Not only in student retention but also in better lead conversion rates and lower employee turnover.

We are in the process of rolling these centers out nationwide. Currently we have a handful of stand alone centers in many other locations with some resource center components. We plan to open several more in the fourth quarter and throughout fiscal 2009. The cost of these centers average about $500,000 each as many are retrofits of existing space while others are new locations. We think this investment will generate positive returns in the form of improving student success, better retention and improved lead conversion over time.

Let me just quickly shift gears to our investments in marketing. As we discussed in the past our education platform is capable of supporting significant growth in student enrollment. However, our direct response Internet marketing strategy has had to change in order to support that growth efficiently and effectively. We intend to become more innovative in our marketing communications. Among other things we are shifting more of our marketing to a direct strategy in which we work directly to advertise with the largest Internet media networks to advertise rather than through affiliate or third-party vendors.

This has required investments for the past five months but gives us far better control over our brand and we feel the quality of leads. Today direct media investments represent a greater portion of our overall Internet media budget. The Aptimus team also has advanced capabilities in search, which on average has higher conversion rates than other ad spend. We are excited about the opportunities in front of us and as we have said we are willing to make the investments now in order to better position ourselves for the future.

Let me spend a minute discussing our investments in new marketing opportunities. For nearly 35 years the University of Phoenix has refined and improved its learning systems and delivery methods and are beginning to leverage our strengths and experience by applying our platform across new markets including high school and global.

First, the virtual high school market which we target through on-site schools. The mission is to serve teens who seek a different type of high school experience and that includes students who may realize greater success with the flexibility of studying at their own time, place and pace. That might include teens that are pursuing their dreams in sports or entertainment as well as other students with special needs. The high school drop out rate average is 30% across the nation so there is a strong need in demand for alternative study.

Insight is a full-time diploma granting institution we acquired about 18 months ago. We will start the 2008-2009 school year with 11 schools in 10 states, an increase of four since our least earnings call including Second Approval in California. Our strategy with Insight is to acquire students in each state and continue to expand the number of states where we operate schools.

While we believe that the virtual high school market is a good incremental business for Apollo we are also applying our platform to the Canadian marketplace with our newly launched Meritus University. Meritus is a Canadian Degree granting University located in New Brunswick and it is focused on working adults. We are initially approved for three programs and we expect it to grow from there. We believe Meritus can be more successful in Canada than the University of Phoenix has been. One of the primary reasons is related to student finances.

Meritus meets the requirements for students to receive student tax credits and other Canadian education incentives. Meritus will begin enrolling students later this year and while small relative to our core University of Phoenix we are excited about the opportunity.

Last we are investing in global markets. During the third quarter Apollo Global closed its first transaction, UNIACC, petroleum based arts and communications university. The purchase price was about $44 million that was composed of cash and assumed debt plus [inaudible] to be paid in four years. Apollo Group’s cash portion was $19 million with Carlisle providing the additional 20%. The remaining portion of the purchase price represented assumed debt. For the quarter we reported Apollo Global revenue of about $4 million and Apollo Global has a current revenue run rate of about $35-40 million. We are pleased with our acquisition and particularly the management team that built this tremendous school. We are working diligently to build the business in Chile and we are finding additional opportunities as well.

Apollo Global continues to search for opportunities around the world that fit our value criteria and I believe we have a solid and growing pipeline in place. We hope to be able to discuss some of these opportunities with you soon.

I’d just like to provide you with a quick summary of the dollar value on our investments. As I mentioned previously three of our key areas of investments include Meritus, Apollo Global and Insight. On a year-to-date basis we have recognized $12 million of revenue from these businesses and $24 million of expenses compared to zero revenues and $7 million in expenses in 2007. These amounts are principally for Insight schools. We expect this run rate to continue in the fourth quarter and we expect Insight to lose a similar amount in 2009 due to the roll out of these new states. Although these investments are costing us margin points today we view them as opportunities to generate incremental long-term growth.

As you know by looking at our G&A line we have made substantial investments in the areas of human capital over the past year. While this has elevated our G&A versus the prior year we do not believe it will increase at the same rate in 2009 and beyond. As I previously stated we expect each of the investments throughout the organization to drive an acceptable return for shareholders which we continue to monitor closely. In the event we can’t acquire capital and an acceptable return like this quarter we’ll look at returning it to our shareholders in a tax efficient manner.

Finally, I just wanted to share a quick story with you. Today John Sperling brought into the office pictures from the very first graduation ceremony from the University of Phoenix back in the 70’s with just eight people. What struck me was the faces of the graduates. They had the very same proud look of great accomplishment our much larger and more diverse student base carries with them today. It made me aware of just how many thoughts of people since that time have received an education from the University of Phoenix that has changed their lives and the proud tradition all of us in management are charged to uphold.

With that I’d be glad to take any questions along with Joe and team.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kelly Flynn – Credit Suisse.

Kelly Flynn – Credit Suisse

I wanted to drill down a little bit more on your parameters for acquisitions. I know you talk a lot about return on investment capital but how big of a deal would you be willing to do and also could you perhaps comment on the speculation of the marketplace that you made an offer on a company for $1.6 billion.

Greg Cappelli

We won’t speculate or comment on any speculation for any area or country. What I will repeat from the last couple of quarters is that we are actively searching out opportunities around the world and we have stated the criteria for us to do anything global is one it has to make sense strategically for us. We have to be able to add value and we’d like to be able to move the growth curve on anything we acquire.

We are also willing to look at small and large transactions. However, you are right we do measure returns very closely here and we understand that the larger you get the more risk there is. That risk criteria has to be built into the proposed return that has to pass our investment policy committee as well as Carlisle’s. I suspect you’ll see speculation from time to time around various areas of the world. We’re not always sure where it comes from but we are focused on one, making sure strategically it makes sense and two, the valuation is something that will create long-term value including the risks that are involved in making that acquisition or a partnership for that matter.

Kelly Flynn – Credit Suisse

On Brian’s departure I imagine the answer is no but can you just confirm there was nothing in the quarter related to that especially in the stock comp line?

Greg Cappelli

No, we can confirm that.

Operator

Your next question comes from Mark Marostica - Piper Jaffray.

Mark Marostica - Piper Jaffray

Greg you mentioned one part of the strategy on the marketing side is to shift more dollars to direct. Can you give us a sense percentage wise where you are today direct versus affiliates and where you think the optimal mix is?

Greg Cappelli

Mark, we just made a decision internally to protect the data a little bit more. We’re not through fully rolling out the strategy yet and we consider some of it competitive. So we will try to help you with that data once everything is fully employed but right now we made a decision not to give specific percentages out which I hope you understand.

Mark Marostica - Piper Jaffray

Did you mention if direct is a greater percentage than affiliate at this point, just relatively speaking?

Greg Cappelli

I didn’t make that statement.

Mark Marostica - Piper Jaffray

Would you be willing to just give us a relative sense at this time?

Greg Cappelli

Mark it is higher than it was but I probably won’t go into any more detail than that.

Mark Marostica - Piper Jaffray

Just to move onto the next question then, regarding enrollment counselors can you give us a sense of your hiring plans for enrollment counselors for the rest of the year? Perhaps where you are at today in terms of a number and how many you expect to be at by the end of the fiscal year?

Joe D’Amico

We’re looking at enrollment counselor hires and where we hire them very carefully. We have pulled forward a significant number of those hires, and feel very comfortable with the level that we are at right now in most areas. We have also taken some steps internally to make sure they are as effective and utilized to the extent that we can. The bottom line is I can’t tell you we won’t hire a few more or some more but I will tell you it won’t be significant.

Mark Marostica - Piper Jaffray

If I can just sneak one last one in and this might fall into the category of unable to answer, but I think this is a fully quarter without your spend on ad.com…or the management fee for ad.com. Correct me if I’m wrong with that. If that is the case can you talk to net savings in this quarter from exiting that relationship?

Joe D’Amico

I won’t give you the numbers but there is savings at least on a management fee versus cost of Aptimus spaces today. We continue to make investments in Aptimus and investments in marketing that we believe will definitely pay dividends in the future.

Operator

Your next question comes from Gordon [Bossick] – Robert Baird.

Gordon [Bossick] – Robert Baird

Today is the first day of your 10% price increase that will go into effect so it may be a little too early to answer this but do you expect any push back from students who may be less willing to take on so much debt? Are you seeing any sensitivity there?

Joe D’Amico

Of course we really don’t know yet. But it is not our expectation that we will have significant push back but we really don’t know. I think there is a lot of trade off here as you think about what is going on in the marketplace with gas prices being the way they are and online education I think will become more popular as individuals look at what it takes 20-30 miles or 10 miles to go to and from class. So I think hopefully that will benefit us in the future.

John Sperling

We did not experience significant push back last year when the price increase was put through either.

Operator

The next question comes from the line of Sarah Gubins - Merrill Lynch.

Sarah Gubins - Merrill Lynch

Could you talk about the qualities you are looking for in a new CEO?

Greg Cappelli

Sure, what we would say is we are looking for character, integrity and leadership. I that is pretty much what we will say about it at this point.

Sarah Gubins - Merrill Lynch

Any comments about the of education industry experience?

John Sperling

That is a plus.

Sarah Gubins - Merrill Lynch

In terms of the ramp for Insight and Canada could you talk a bit about how many roughly speaking how many students you could have given the 11 states next year?

Joe D’Amico

The number of students we really are not disclosing at this point in time. That may change down the road depending on how we end up reporting on Insight. But today we are really not giving out those kinds of numbers.

Joe D’Amico

Our intent is as it gets bigger and we have more to report on it then we’ll look at disclosing more of the data. One of the things we did want to make clear is there is significant investment going into it this year and in the fourth quarter and next year. We feel good about where they are and the strategy and direction behind the management team on what they have accomplished so far but it is taking investment.

Sarah Gubins - Merrill Lynch

You mentioned that you expect Insight potentially to lose about $12 million again next year. That is how you are thinking about it?

Joe D’Amico

In that range give or take and we’ll try to update you on it as we go along.

Greg Cappelli

I just want to add probably more than the $12 million.

Sarah Gubins - Merrill Lynch

Probably more. Then last question in terms of the pattern throughout the quarter for your new student starts and then total enrollment did that pick up later in the quarter or was it fairly consistent throughout the quarter?

Joe D’Amico

The new student growth? New student enrollment?

Sarah Gubins - Merrill Lynch

Yes.

Joe D’Amico

It seems it was good at the beginning of the quarter and I think it was fairly consistent as I recall.

Operator

Your next question comes from Kevin Doherty - Banc of America Securities.

Kevin Doherty - Banc of America Securities

I wanted to see if we could follow-up a little more on the tuition rates increases. To what degree do you expect to be redeploying some of those dollars back into the business or should we really expect more of it to maybe drop through bottom line? I know in the past year you talked more to a 2-3% price increase. How does it maybe change your investment thoughts here?

Joe D’Amico

We talk a lot about the investments we are making so there is nothing on top of…we have talked about that we know what we will be investing in. The pricing we have taken so far hopefully will offset some of the investing and margin points that we are going through right now.

Kevin Doherty - Banc of America Securities

Just on discounting, I think you had mentioned recently that the level of discounting might be declining with the higher online pricing and so forth. Could you just talk about what to expect going forward? I know it has been running global of 5% of gross for you. If discounting does decline how might that impact retention? I know in the past you had mentioned that discounting is a key component on your focus on retention.

Brian Swartz

First of all we give discounts in order to improve retention and keep students in school. So given the recent price increases we will constantly evaluate that from period to period but we only give those discounts, and we have said we believe and we evaluate it afterwards, that we continue to keep students in class as opposed to having them out of class. If it makes sense we will pursue them in the future.

Operator

Your next question comes from Jeff Silber - BMO Capital Markets.

Jeff Silber - BMO Capital Markets

I think it was Joe that mentioned a bit about gas prices. I’m just wondering if you have seen any impact either on your campus locations in terms of maybe some negative impact and in your online programs in terms of some positive impact today?

Joe D’Amico

Nothing I can report yet on the campus side. We haven’t seen any abnormal absentees or anything like that. On the online side I think it is a little too early to tell. We’ll just have to continue to monitor it.

Greg Cappelli

No one is using it as an excuse at this point one way or another.

Jeff Silber - BMO Capital Markets

Going back to the UNIACC and forgive me if I’m mispronouncing it, where are the enrollment numbers for the quarter?

Joe D’Amico

We didn’t give them out.

Jeff Silber - BMO Capital Markets

The enrollment data that you had excludes that?

Joe D’Amico

Correct.

Jeff Silber - BMO Capital Markets

I just have one follow-up from Kelly’s question earlier; in terms of the cost of Brian’s departure, any indication there would be some charge in the fourth quarter?

Joe D’Amico

No, there will not be any charge in the fourth quarter.

Operator

Your next question comes from Susan Stein - Morgan Stanley.

Susan Stein - Morgan Stanley

Any comment on the potential impact from the GI Bill? Do you expect this to be meaningful?

Joe D’Amico

I think the bill just passed last night and we are in the process of evaluating that. We can’t give you any speculation at this point. The devil is always in the details on those bills so we will be getting into it but we don’t know of anything at the moment.

Susan Stein - Morgan Stanley

I just want to confirm you are looking for a CEO, not a President. Is that right?

John Sperling

Yes.

Susan Stein - Morgan Stanley

Does this external search mean this will absolutely be filled internally?

John Sperling

Yes.

Joe D’Amico

I don’t know that you answered that. Would you repeat your question please? Be filled externally, was that the question?

Susan Stein - Morgan Stanley

Yes.

Joe D’Amico

Okay. Yes.

Susan Stein - Morgan Stanley

You have no sense of the timing yet, correct?

Joe D’Amico

We haven’t said. We hope to announce something sooner rather than later but we don’t want to say any more than that.

Operator

Your next question comes from Jerry Herman - Stifel Nicolaus & Company.

Jerry Herman - Stifel Nicolaus & Company

Just a question on retention. Can you give any metric whatsoever that gauges that progress and I’ll ask the couple of quarter-old question about graduation and matriculation rates for Axia and especially in the context of the Bachelor starts turning the corner. Have they turned the corner and should we see continue growth in Bachelor starts?

Joe D’Amico

Let me take the last part first on the associate’s graduates into Bachelor programs. That continues to go well. We continue to work on that but we are very pleased with the progress we have made to date. Whether we have turned a corner, I don’t know that I can tell you that yet. We certainly for the first time in several quarters have had an increase in Bachelor starts and we hope that continues but we can’t give you any assurances on that.

Jerry Herman - Stifel Nicolaus & Company

Retention, you seem to be making progress on retention generally and is there any metric that you can offer in that regard that helps us gauge your progress there?

Joe D’Amico

We do the persistence calculations similar to what you do as a metric that you can look at and at all levels it improved this quarter.

Greg Cappelli

Jerry, maybe one of the things we’ll try to give out more color on in the future is in some of the things we are testing and there are many, a lot of the resource centers we are seeing some good results. It is early on and we don’t want to give out percentages or what not but we are clearly pleased with what we are seeing there and that is just one example of a number on the retention front. We are very, very focused on that extremely important indicator because it is really an indicator of the health of the whole business and we try to update you as precisely as we can going forward.

Joe D’Amico

Our people are very focused on it and have done just a tremendous job. For the last several quarters we have made very nice strides in improving our retention or persistence. Our graduation rates, I think you have probably seen our Annual Academic Report which we intend to publish annually and in that there are graduation rates and that is where you can judge our progress in terms of how we are doing on that front.

Jerry Herman - Stifel Nicolaus & Company

Just a very quick follow-up, Rick have you put a number on the number of resource centers you intend to have by the end of this year or next year?

Brian Swartz

The range has been around the 25 number. That could fluctuate some and that is for this year and then potentially doubling that size the following year.

Operator

Your next question comes from Gary Bisbee - Lehman Brothers.

Gary Bisbee - Lehman Brothers

The bad debt expense was a pretty big swing fact quarter to quarter and I wondered if you could give a little more color on you cite retention so should I think about that you have got a fewer number of kids dropping out in the first month so more money you keep less from the DOE lets you refund to them? Is that a big piece of it or what are the other factors? How does retention really help that?

Greg Cappelli

Retention helps especially with the drops. I think you said it correctly. If a student drops and we have a return to lender situation then that student owes us money and that could contribute to bad debts. I think a quarter ago or so we actually put in place a more student friendly return policy or fee policy so that the amount of classes you had to take before we charge you for the entire course was more. It gives our students a better chance to get acclimated and see how the curriculum works for them. That will also have an impact on that debt as well. Those are some of the factors.

In terms of what we have done, we have spoke about this for four quarters now or five quarters and we have put just a tremendous amount of effort into our processes and to ensuring that we have all of our paperwork done and that at least we maximize our chance to collect all the money from the student as we possibly can.

Gary Bisbee - Lehman Brothers

I realize you said that number would be a bit volatile quarter to quarter but over the last six months it has dropped by almost 60% and maybe the first quarter to the third quarter is not a great seasonal comparison but when you say volatility are you talking a couple million bucks one way or the other? Or could it be a bigger swing?

Joe D’Amico

I really can’t answer that. I would like to be able to tell you more precisely but given that this is so dependent upon our execution of all of our practices precisely that it is difficult to say whether or not we have set a new level or not. I have a feeling that the percentage anyway will go up and down here but I think we have made some really, really good progress and we have to thank our people for that.

Gary Bisbee - Lehman Brothers

When I look at the growth in enrollment in comp and I’m not just talking since you hired at least 500 reps, but over the last three years it has definitely been growing at a higher rate than starts and do you track, first of all, or can you give some commentary on rep productivity. It seems to me as you have gone more to online and more to Axia the productivity of the average rep is falling. I wonder if that is just some of the things the company has struggled through the last couple of years or that is just a fact that it takes more rep time to sign up a kid for Axia or online versus the old campus model. Any commentary on how we should think about that going into the next couple of years?

Joe D’Amico

I think it is important to recognize where we have been, where we had enrollment counselors on the campus level who were only enrolling for the campus. Then, as you recall, we had to have enrollment counselors at the campus enroll online and at the campus. That was a significant learning exercise. We had to go through training and the like and we are constantly replacing enrollment counselors to turnover so that has an impact. I think anyone who has ever had anything to do with a call center understands the difficulties of that.

We are going to make a renewed effort if you will at looking at what we can do to better support our enrollment counselors in any way possible. Whether that is in support, whether it is from a marketing perspective, giving more tools to our enrollment counselors. There is more competition as well. It is a very complicated area and we are going to take a shot at doing what we can to improve the outcomes there. I think your observation is correct. The productivity of the group as a whole has probably deteriorated over time and we are taking a close look at what we can do about that.

Greg Cappelli

One thing that might help some, Gary, is the turnover is down with an NEC group so we hope to have a more tenured staff going forward but as Joe said we are very focused on it.

Gary Bisbee - Lehman Brothers

Have you been getting a lot of leads in Canada that you can turn over to Meritus or are you going to have a lot of up front spending to prime the marketing pump in the brand there rather than just sending leads that might be a better fit for that like you have done a lot with Axia.

Joe D’Amico

We are getting leads for Canada and we will also be introducing new programs as well over time. We will put some marketing dollars into Canada as well. We are not prepared to say exactly the number and that is being evaluated right now from Rob [Rule] and his crew. We’ll try to update you on that as we have a better idea of the dollars that are going to ultimately go into Meritus in 2009. In relation to the University of Phoenix it is not going to be a significant number.

Operator

Your next question comes from Trace Urdan – Signal Health.

Trace Urdan – Signal Health

If I could I want to go Joe maybe go one layer deeper on Gary’s question about the bad debt expense. Can you describe for us in simple terms what the mechanism of the calculation is there and why you would have such a change as you saw in this quarter? You are speaking mainly about retention but I’m still not getting what the trigger is for that coming down in the quarter so dramatically.

Brian Swartz

The methodology that sets the reserve not changed in any of the last numerous quarters, at least since Joe and I have been here, so it is really a function of, as Joe said, of the front end process of working with students, collecting the money from students, keeping students enrolled so that when they drop there isn’t a receivable they still owe us. As long as they stay in school they can persist through. So it is coupled with that front end process of working with the students as well as increased retention that is driving the bad debt expenses.

Trace Urdan – Signal Health

Is that collecting cash from them up front sooner?

Greg Cappelli

Either cash from them or processing their financial aid and getting the receipt of the Title IV funds if that is the case from any of our students or any other cash mechanism they are using.

Trace Urdan – Signal Health

So then maybe given that why wouldn’t you have the confidence this level could be maintained?

Greg Cappelli

It requires continuous focus.

Trace Urdan – Signal Health

No, I understand continuous focus.

Greg Cappelli

It’s just one of those things you have got to monitor and watch.

Trace Urdan – Signal Health

I understand the focus. It is just that Joe seemed to imply it might not stay at this level; it might go back a bit. I wondered if there was a reason for that or you are just not commenting.

Joe D’Amico

It is a cautionary maybe the accountant in me that needs the conservative nature.

Trace Urdan – Signal Health

The other question I have it looked like the Masters retention as best we can measure seemed to be quite strong in the quarter. It also looked like revenue for student in the Master’s area was strong in the quarter. I was wondering if there was anything behind that observation?

Joe D’Amico

Nothing special has popped upon that.

Operator

Your next question comes from Corey Greendale - First Analysis Corp.

Analyst for Corey Greendale - First Analysis Corp.

On Aptimus, you mentioned Internet spending being higher than you wanted. I just wondered how long do you expect that to persist?

Joe D’Amico

It will be higher than we’d like for at least several quarters but I want to be sure you understand we also have many goals and many objectives that we are monitoring very closely and measuring. It is not something that will change over night but over time it is our view that it will change. We have been talking about that as well for awhile. At the right time we can give you more insights into that but at this stage we don’t want to lay out more competitive information than we have.

Greg Cappelli

One of the things we are doing now is it is important for us to; we understand that, that is a level not acceptable to us at this time. We want to bring that down. One of the things we do is measure the marginal return for spending dollars on advertising in all the different channels.

Although it is higher, marginal return is still positive for us which is why we continue to spend. As Joe said everybody here is focused on it. We hope to be able to deliver some good news at some point in the future here. I think we have made the right investments and it is going to take a little bit of time here. We’ll keep you updated but at least we have put those investments in place. We are not content to just do things the way they have been done over the past couple of years.

Analyst for Corey Greendale - First Analysis Corp.

I think Greg you had mentioned $50 million in savings from renegotiating vendor contracts. Was that crack then that would be offset by the number of other investments you had talked about in global and things like that?

Joe D’Amico

The $50 million estimate is correct. That represents let me say what I believe are low hanging fruit. I think we will as an organization continue to stay focused on how we can be more efficient and more effective in our spend and use the power and the size of this organization to take advantage of our ability to negotiate better deals. We as an organization now are taking that on.

Greg Cappelli

Well you heard me talk about the investment dollars which were the biggest pieces so you can see the size of those cost savings. The thing we didn’t try to quantify and it is difficult and frankly it is part of the ongoing concern for the business, if we invested heavily in human capital over the past year we won’t be investing at that same rate, but in a lot of areas in the organization. As Joe said this is part of looking at the organization. This is part of looking at the low hanging fruit as well in terms of vendor contracts and there is more to go there hopefully. Will it totally offset all the investments? I can’t tell you for sure but it is a real good start.

Joe D’Amico

Also those investments are expected to generate revenue that will truly offset those investments as we expect nice returns from them.

Greg Cappelli

We don’t expect to just keep coming back quarter over quarter saying we continue to invest at a higher and higher rate and not have anything to show for it. That would be unacceptable.

Operator

Your next question comes from Brandon Dobell - William Blair & Company.

Brandon Dobell - William Blair & Company

Joe, I want to make sure I understood something you said in your opening remarks, over the next several quarters the advertising cost should decline as a percentage of revenue. Is that still an accurate statement? I would imagine that statement would include any investments you are thinking of making with Meritus? Is that a fair way to characterize that?

Joe D’Amico

No. I’ll have to go back to my remarks now. I don’t think I said it would decline as a percentage. What I did say was we weren’t satisfied with the absolute dollar and the percentage of revenue either amount and that we were working hard at changing that. But I didn’t make any commitments or projections as to where it would be.

Brandon Dobell - William Blair & Company

I just wanted to make sure I didn’t misstate what you were trying to come across.

Greg Cappelli

The key here Brandon is it is just going to take some time. There is no magic bullet here and what we are doing is hopefully something that will have some real positive impact at some point in time.

Brandon Dobell - William Blair & Company

Going back to an earlier question about the enrollment counselors. You talked a little bit about turnover and about productivity. I wonder if you could give it a context for what was either productivity metrics you’d like to use that you think are most accurate, compare that to where we were a year ago or compare it to where you think you can get in the next year, and probably as importantly in terms of enrollment counselor turnover especially in the first six months of a tenure how much room do you think you have to improve that and what time frame? What do you think is the right time frame to improve that metric?

Joe D’Amico

We’re not giving those measurements out and enrollment counselor has an awfully difficult job. We measure it on a number of factors. So I don’t plan to give those measurements out. I think what we have said though is just based on the growth in costs what we’d like to do is try to get more in line with our growth in revenue. So, that is the way we are looking at it. We have a lot of measurements and specifics. Again, it is another area I think will take a little bit of time to fix. There isn’t a magic fix there but we are going to look at some bigger ideas if you will to provide the support we think will help us.

Greg Cappelli

Internally we are measuring those statistics very closely and we look at them often.

Brandon Dobell - William Blair & Company

A couple of weeks ago at the Blair conference you talked about shareholder returns, corporate returns and student returns on the value proposition. As you think about your decision to raise price, especially not just this near term decision but on the next two or three-year basis where you have got still substantial room between the tuition and Title IV. How do you reconcile that decision with what the student value proposition might look like now compared to a couple of years from now if price goes up? Do you think the students still have the same value for going to school with you as they would right now?

Joe D’Amico

Without question Brandon. We try to measure those returns. We understand that our returns can’t be any higher than our students over time and we think we are competitively priced, that is not all students look at when they look at evaluating where to go for an education, and some of the reasons we put the price increase is because we are putting more into the education as well and costs go up every year. To answer your question correctly we very much believe those returns are still there for them in a significant way.

Operator

Your next question comes from Scott Schneeberger - CIBC World Markets.

Scott Schneeberger - CIBC World Markets

Within LCS obviously bad debt had a large impact but also you alluded to classroom lease expense and depreciation. Could you give us an idea on magnitude on these two and is that just scale that you are getting there with over the fiscal or is there initiatives in place to further push that?

Brian Swartz

In terms of space, we hope to continue to get leverage through the utilization of our base. It varies from period to period while we look at our real estate needs very militantly and make those decisions on that level. Then again on bad debts this is our highest revenue quarter or generally our strongest quarter and that is a very seasonal nature of the percentage of revenue. We’re going to stay focused on it.

Scott Schneeberger - CIBC World Markets

Also, Greg you mentioned a strengthening pipeline globally and obviously a lot of hires I’d imagine occurring globally or across different geographies. Could you speak a little bit more to the pipeline? Perhaps size. Is it large entities, small entities, mixed geographical location types of investment you are looking at? Any color there.

Greg Cappelli

As I said we are evaluating the opportunities we think we could have the most impact on together with a partner anywhere in the world and there are different opportunities of all sizes. What I would say is there are more opportunities that look like the one we already did last quarter than speculation of what we might have done this quarter. I think that is probably true globally, not just in one area.

There are leverage opportunities. Those would have to meet all our criteria on all fronts for both ourselves and Carlisle in order to enter into something like that. Like I said, we are evaluating and we want to understand what is going on around the world. So we have put the people in place to do that. We have great investment policy committee’s here and we’ll continue to report back to you on what we find.

Operator

Your next question comes from Mark Marostica - Piper Jaffray.

Mark Marostica - Piper Jaffray

I just want to turn quickly back to Bachelor starts again and ask the question with the month of June behind us if you could comment on whether or not you saw continuation of the turn to start growth in June on the Bachelor level?

Joe D’Amico

For the month of June? For Bachelor’s only I don’t have that information handy.

Mark Marostica - Piper Jaffray

How about for the business just overall? Starts for the overall business?

Joe D’Amico

We’re just not going to comment on that.

Operator

Your next question comes from Jeff Silber - BMO Capital Markets.

Jeff Silber - BMO Capital Markets

Nobody has really asked about the private lending environment. I know it is a relatively small component of your student base but I’m just wondering if you can give us an update on what is going on there?

Greg Cappelli

It is small and it is getting smaller because of the increase in Title IV loan limits so this is really a non-issue for the company. We still have lenders who are doing private loans. We have not had any issues as best I can tell, anything significant in any way. We are finding when students aren’t able to get a loan I know from some other discussions with one of our lenders there are private loans being gotten by students privately that don’t go through us so we might not even know sometimes when the student is getting a private loan. But so far we have just not had any impact from the loan sector or private loan issues.

Operator

Your next question comes from Gary Bisbee - Lehman Brothers.

Gary Bisbee - Lehman Brothers

You have talked the last couple of quarters and in some conferences about this whole concept of the resource centers to help retention and what not. I’m actually not clear on exactly what it is. Could you just explain…is this just having an academic advisor and an admissions rep close by that they can think of it as a physical presence near them? What exactly are you doing there?

Joe D’Amico

It is a physical presence near a student group and it is a center where students can come to enroll, get tutoring, learn how to get onto the system, all kinds of support mechanisms there.

Greg Cappelli

Meeting with a counselor.

Joe D’Amico

Meet with a counselor. Where they can have interactions directly with us whether online or on the ground and they have proven to be from our perspective very interesting and the first one we did was very successful from our perspective and now we are doing some others to see if we can repeat that success.

Greg Cappelli

You are welcome to visit any of them to see what you think but from our perspective to really provide another avenue for students to have a touch point to University of Phoenix from their online world I think that is what we are getting response back from. These are nice, open, airy centers. They are good places if you just want to go study on a Sunday the usage goes way up when people are completing assignments and might need some help with something or just need a quiet place to go. So far so good. You are welcome to check it out yourself.

Gary Bisbee - Lehman Brothers

Is there any reason you won’t turn all the existing 100 campuses or whatever it is, start to try to use them for this? I’ll go see one. It sounds like it is quite different.

Joe D’Amico

We’re going to take this a step at a time at this point.

Greg Cappelli

We just haven’t made that evaluation yet.

Operator

There are no further questions at this time.

Joe D’Amico

Thank you everyone. We appreciate the questions and your continued interest and support of the company. Have a good day.

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