Apollo Education Group (APOL) CEO Gregory Cappelli on Q1 2016 Results - Earnings Call Transcript

| About: Apollo Education (APOL)

Apollo Education Group, Inc. (NASDAQ:APOL) Q1 2016 Results Earnings Conference Call January 11, 2016 8:30 AM ET

Executives

Beth Coronelli - Senior Vice President, Investor Relations

Gregory Cappelli - Chief Executive Officer

Greg Iverson - Senior Vice President, Chief Financial Officer

Analysts

Peter Appert - Piper Jaffray

Jeff Silber - BMO Capital Markets

Denny Galindo - Morgan Stanley

Paul Ginocchio - Deutsche Bank

Sara Gubins - Bank of America

Corey Greendale - First Analysis

Trace Urdan - Credit Suisse

Jeff Mueller - Robert W. Baird & Co.

Operator

Good morning. My name is Shannon and I will be your conference operator today. I would like to welcome everyone to the First Quarter Fiscal 2016 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operation Instructions]

I would like to turn the call over to Beth Coronelli, Senior Vice President of Investor Relations. Ms. Coronelli, please go ahead.

Beth Coronelli

Thank you for joining us. Participating on the call with us today are Greg Cappelli, Chief Executive Officer of Apollo Education Group, and Greg Iverson; Chief Financial Officer. As we discuss our results today, unless noted otherwise, we will be comparing the first quarter of fiscal year 2016 to the first quarter of fiscal year 2015.

I'd also like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Apollo Education Group that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in our quarterly reports and Form 10-K filed with the SEC, and also on the 10-Q that was just filed this morning, both of which are available on our website. The company disclaims any obligation to update any forward-looking statements made during the call.

Additionally we may refer to non-GAAP measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. Our press release, available on our website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures.

And with that I'd like to turn the call over to Greg Cappelli.

Gregory Cappelli

Thank you, Beth. Good morning, everyone from Phoenix. Thank you for taking the time to participate in our conference call. Today I'd like to speak to three areas of focus that are primary drivers as we work to increase shareholder value for the long-term.

First is the execution of our transformation plan at the University of Phoenix. We'll update you there. Second is the diversification and growth through Apollo Global. And, third, efforts to further adjust our cost base and simplify our operations. I'm then going to turn the call over to Greg Iverson, our Chief Financial Officer, to review our first-quarter results.

Earlier this morning, we also released a statement that the Board of Directors has made a determination to pursue strategic alternatives. We won't be able to make any further comments at this time. As a consequence of that we will not be addressing the topic in our formal remarks.

Let me start with the University of Phoenix where we are taking dramatic steps in making meaningful progress to further enhance student outcomes and to provide outstanding career-relevant higher education for working adults.

Given the magnitude and scope of the changes being made, there's been a negative impact on enrollment and revenue so far in fiscal year '16, but the actions the University is taking we believe will lead to better outcomes including increased retention, which we're seeing early signs of. Adapting quickly to this rapidly evolving environment is best for our students and key to our long-term success.

I'll just share a brief update on a number of the concrete actions that we're taking at University of Phoenix to implement the transformation plan. First, diagnostics and pathways, in piloting a more rigorous diagnostic we're assessing the cognitive and academic foundation of our incoming students, and we're learning that students who take the diagnostics enroll and pass their first course at a higher rate.

Information gathered in the pilot is driving changes in the curriculum, course work, course sequencing and resources to address skills gaps for our incoming students in an effort to increase their academic success and engagement.

We still plan to implement our enrollment diagnostic and admissions criteria this year across the entire university to help ensure we're enrolling students academically prepared for the rigors of a college degree program at the University of Phoenix.

Second, our programs, the goal here is to reduce operational complexity and offer programs that are better aligned to direct job pathways. Our portfolio of associates programs has been reviewed to ensure they are aligned with existing industry credentials, as we adjust offerings and content to reflect feedback from employers.

Nine associate degree programs were eliminated, and over 350 courses were refreshed during the first quarter. We continue to review our offerings to spotlight existing quality programs, develop new certificate and degree programs, and eliminate others, as appropriate.

We've added significant expertise within each college as it pertains to ensuring we better understand employers' needs across the industry specialties and align our programs accordingly.

Third, reducing course starts, our objective is to improve student retention and generate cost savings through thoughtfully reducing the number of program starts and course frequency.

This will have an impact on enrollments and revenue relating to adjustments in existing student schedules to align to the new cadence. We believe this change will result in better student retention and satisfaction with more optimal class sizes and fewer course cancellations. Early indications suggest these changes will improve first course pass rates and lower withdraw rates.

Finally, related to marketing, we're taking a renewed approach, including the elimination of the use of the affiliate channel in the first quarter. And we're focused on student fit, college specific messaging, increasing employer awareness of our programs, and the redesign of our Phoenix.edu website. We're working to rebuild our reputation with meaningful options step by step.

You'll see the implementation of our new marketing campaign later this quarter. We believe these initiatives, along with our campus realignment and other actions we've taken previously will form the foundation for a stronger university with higher completion rates and improved student satisfaction, and will support our goal to transform University of Phoenix to a more trusted, focused, higher retaining and lower complexity institution.

We continue to operate in a challenging regulatory environment. We've been responding to the Department of Defense's actions to put the university on probation for the department's tuition assistance program.

We're working closely with the Department of Defense to be a good partner in the higher education of active duty military members and their families.

Let me be clear, Apollo and University of Phoenix have taken very strong actions over the past 5 years to dramatically improve student protections. The list is long, including the elimination of recruiter comp based on enrollment levels.

One of the first to institute a student tuition and debt calculator, mandatory three weeks of student orientation for college newcomers, that's prior to taking on student debt. A risk-free period, eliminating third-party marketing affiliates, and that's just to name a few.

Our student loan default rates are significantly lower than just several years ago and now closing in on the national average. This organization has won the prestigious Ethisphere Compliance Verification Award to recognize our considerable ethics and compliance initiatives.

And we remain committed to working with our regulators in order to drive the best compliance results possible, while playing a very important role in the education and training for working learners throughout the country.

Next, let me quickly touch on Apollo Global which continues to expand into new geographies while growing organically, as well. We continue to build a worldwide presence for Apollo Global and I'm pleased to report every institution in global is growing.

We expect organic revenue to grow close to 20% for fiscal year '16 on a constant currency basis, and in excess of 20%, including our newest acquisition.

However, unlike prior years, Apollo Global is now cash flow positive, and as we further leverage our infrastructure we expect to deliver a minimum of $40 million of EBITDA in fiscal year '17. We're gaining economies of scale at global and are successfully collaborating across the institutions.

In December, we closed on the acquisition of Career Partner in Germany. That's a premium higher education platform, which includes some of the most respected brands in businessman management, hospitality and tourism.

The addition of CPG to Apollo Global allows us to expand our global network and is an opportunity to share best practices and build upon highly respected brands.

Now I'd like to discuss our commitment to operating excellence and efficiency throughout Apollo. Given the speed and scope of the transformation we're making at University of Phoenix, we think it's prudent and necessary to ensure we continue to match our cost base with near-term revenue declines.

There's no doubt that some of the initiatives we're taking are putting significant pressure on near-term enrollments, as I said before. But, as I also said last quarter, we're willing to sacrifice near-term revenue for long-term success.

Therefore, I asked our organization to collaborate and to work together to find additional efficiencies where it makes sense that will allow us the runway to get through the transformation at University of Phoenix while maintaining the financial health of Apollo. This is a very significant initiative and I'm pleased with our progress so far.

We are all committed and working together to the ongoing financial health of the organization going forward. As an side, we've hired a third party firm with deep education industry expertise to both validate the plan and help ensure the cost structure is consistent with achieving the transformation plan and the university's vision and objectives.

Before I close I just want to quickly update you on an exciting development related to our B2B efforts. We're pleased to announce a new partnership with Genesis Rehabilitation Services, one of the nation's largest providers of rehabilitation services and a division of Genesis HealthCare, to develop scalable rehabilitation therapy training programs in China.

There's a strong need to meet China's growing therapy needs, as the second largest healthcare market in the world, and we're honored to support Genesis in their efforts to meet this need and prepare aspiring healthcare professionals. We'll have more information as this contract unfolds.

I'll now turn the call over to Greg Iverson.

Greg Iverson

Thanks, Greg. And good morning, everyone. To recap our consolidated results, revenue in the first quarter decreased 18% year-over-year to $586 million. We reported an operating loss for the first quarter of $45 million, which include goodwill impairment charges of $73 million, primarily representing the goodwill balance related to the University of Phoenix. This charge was not deductible for income tax purposes.

Excluding special items, operating income was $54 million. Net loss from continuing operations attributable to Apollo in the first quarter was $58 million or $0.53 per share. Excluding special items, income from continuing operations was $31 million or $0.29 per share.

Focusing first on the University of Phoenix, revenue in the first quarter was $463 million with an operating loss of $18 million. Excluding special items, operating income was $73 million.

University of Phoenix enrolled 24,500 new students in the first quarter, down 38%. Total degreed enrollments was 176,900, a decrease of 22% year-over-year. Our first quarter new degreed enrollments were adversely affected by the transition to our reduced number of course starts per month, which we believe will improve the classroom experience and optimize class size.

First quarter revenue per student was flat year-over-year. This reflects the impact of our price adjustments last year, which was offset by an increase in student scholarship awards and the impact of the reduced number of class starts.

Class starts during this transition period reduced the average weeks students attend class and therefore the revenue recognized in the quarter. Discounts in the first quarter were 13% of revenue driven primarily by an increase in students receiving scholarships that reward progression toward graduation. We continue to expect discounts to be approximately 13% of revenue in 2016.

Moving on to Apollo Global, first quarter revenue was $115 million with a reported operating loss of $2 million. Adjusting for depreciation and amortization and special items, Apollo Global's income was $8 million in the first quarter compared to $7 million in the prior year.

On a constant currency basis Apollo Global grew double-digits in Q1 and we expect Global to grow in the mid 20%s, including the impact of the acquisition of Career Partner.

Excluding the impact of Career Partner, organic growth at Apollo Global is expected to be in the high teens, close to the 20% long-term growth rate expectation for Apollo Global. As stated in our last call, we expect the Career Partner acquisition to contribute approximately $8 million of EBITDA annualized for 2016.

Turning now to our operating expenses, in the first quarter, total operating expenses excluding special items decreased approximately $96 million or 15% year-over-year, primarily as a result of lower enrollments as well as continued reduction of our cost base.

Our effective tax rate excluding special items for the first quarter was 43%. Excluding special items, and assuming the expected release of uncertain tax positions, we anticipate our effective tax rate to be about 47% for the full year.

Our effective tax rate continues to be impacted by the decline in the pretax income of our domestic businesses and foreign tax losses that do not have an associated tax benefit. We expect this trend to reverse as Apollo Global becomes profitable.

With respect to the consolidated balance sheet and cash flows at quarter end, our cash and marketable securities were approximately $756 million and our outstanding debt was $43 million.

Our liquidity, which includes our cash and marketable securities and available borrowings on our $625 million credit facility, was $1.32 billion. Free cash flow for the quarter was an outflow of $33 million or $11 million excluding restructuring payments.

Now I'd like to update you on our financial targets for 2016. Based on our current view we are targeting net revenue in the range of $2.14 billion to $2.18 billion. This range includes approximately $30 million of revenue for fiscal year '16 associated with the acquisition of Career Partner.

Finally, we are targeting $115 million of operating income for 2016 excluding special items. This will require additional cost savings and we are increasing our gross cost savings commitment for 2016 to $400 million.

Thank you. We will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Peter Appert from Piper Jaffray. Your line is open. Please go ahead.

Peter Appert

Thanks, good morning. So Greg, I know you can't talk about the strategic review. But I'm wondering just how you can help us understand sort of the regulatory complexities of what you might have to think about in the context of the strategic review and particularly the change of control rules and regulations?

Gregory Cappelli

Peter, I understand your question and your focus. We've said as much as we can say on the topic. I just can't comment further on that press release. And when we have additional comments we're going to make them. So, I appreciate that, but we just can't comment further.

Peter Appert

Okay. How about, is 150,000 still the number you're thinking about in terms of the year end enrollment target?

Gregory Cappelli

Yes, I'll let Greg address that because we've been doing a lot of work on sort of de-risking the back half of the year and our targets and that to insure that we take out the appropriate amount of cost to align our cost base with potential revenue. So, Greg why don't you talk about that.

Greg Iverson

Peter, as Greg mentioned, we have de-risked our revenue forecast for the remainder of the fiscal year. And the revenue targets that we provided equate more closely with a ending enrollment in the 140,000 student range.

Gregory Cappelli

If you think of the number of initiatives that we're taking, fairly quickly, all in the fourth quarter of '15, first quarter of '16, we think they are extremely important, whether it's the diagnostics, the change in the start dates, the assessment on the front end and many others, the taking out of the associate programs, the affiliate channels, all in the light of improving outcomes.

And we believe those are going to want to work and we want to give them room to work, even though it's a lot to do all at once, so we can come out the other side as quickly as possible.

So we've looked at the whole year including going into next year and done what we thought we need to do, so that we can get our cost basis in order, in order to prepare for that, to preserve our financial health.

Peter Appert

Understood. And then, Greg, related to that, the DoD financial responsibility score, how big a risk is it that's something that could come to bite you in the context of some of these charges you're going to have to take?

Gregory Cappelli

Yes, it's a good question. I'll let Greg address that.

Greg Iverson

Yes. So, historically we've had a very strong composite score ratio for the last several years. This year, with the goodwill impairment charge that we recorded related to University of Phoenix, it’s reduced – it will reduce our composite score when reported at year end relative to where we've been at the past.

But based on the financial projections that we outlined we still continue to believe that we have a reasonable level of cushion relative to the 1.5 threshold.

Gregory Cappelli

And if we needed to take further action there we would.

Peter Appert

Got it. And just one last thing, any programs you would call out, Greg, in terms of positives or negatives from an enrollment trend perspective?

Gregory Cappelli

Yes, I don't have that list of programs in front of me but there actually are. And there is a number of areas within the university and the colleges that are seeing, particularly in areas of healthcare in certain areas of the country, and in IT, where we're seeing some good results.

There's signs of retention, as I said, in first course and second course completion rates. So, there are some good green shoots here and we want to make sure that we see that through for the entire fiscal year.

Peter Appert

Got it. Great. Thank you.

Gregory Cappelli

Thank you, Peter.

Operator

Your next question comes from the line of Jeff Silber from BMO Capital Markets. Your line is open. Please go ahead.

Jeff Silber

Thank you so much. I'm apologizing in advance, but I'm also going to ask a strategic alternatives question. And I've had folks ask me, if you can't comment then why did you have to issue a press release, was it something that your attorneys pushed you to do?

Gregory Cappelli

Yes, Jeff, what I can tell you is that the company put out the statement it's going to put out. And we've just said as much as we can say on the topics at this time. And, again, we'll have additional comments when we make them. But this is what we can say at the time. I apologize.

Jeff Silber

Okay. I understand. Just moving back to fundamentals, you mentioned the reduction in class starts. Can you just talk about I guess the order of magnitude what it was beforehand and what it is now?

Gregory Cappelli

Yes, sure. Greg do you want to take that?

Greg Iverson

So the biggest impacts from a financial perspective from the change in course starts we experienced in the first fiscal quarter, both from a new degreed enrollment standpoint, as well as for our continuing students who adjusted from our previous weekly starts to the less frequent new course start cadence. So, we believe the majority of the financial impact was reflected in our Q1 results.

Gregory Cappelli

And, Jeff, think about the strategy behind that, right, weekly starts are something that when you're dealing with hundreds and hundreds of thousands of people coming through, that were more appropriate for several years ago.

But as the leadership of the university looks at the preparation of students that they want to have in working with them before they actually start the class, having a very healthy cohort, it makes everything less difficult and complex and the preparation levels are higher. And we expect, and we're already seeing students doing better that are starting in those cohorts.

So the whole premise of everything that we're doing taking this near term pain is quickly as possible come out the other end. And this is something that the university leadership feels strongly will be a part of helping that.

Jeff Silber

I understand that. I guess, my question was, I know you were doing weekly starts beforehand. Can you just remind us how often the starts are right now?

Gregory Cappelli

Sure. In most cases it's monthly; in some cases it's twice a month.

Jeff Silber

Okay. So I just wanted to confirm that. Thanks so much.

Gregory Cappelli

Sure.

Jeff Silber

And then on the expense line items, I know you had alluded to the fact that there's potential for more cost cutting. But from a modeling perspective for the rest of the year is the first quarter kind of the run rate we should use?

Obviously I understand the seasonality in the business, but beyond that, is that a good base for modeling the rest of the year?

Greg Iverson

I think if you look at our Q1 expenses relative to the prior year, you'll note there's a disproportionate decrease in both our marketing expense and our admissions advisory expense.

So those are reflective of some of the actions that we took in the fiscal year, most notably the exit of the affiliate channel. So we will be experiencing reductions, I'd say, across the board in each of the different expense line items. But those are the two that were impacted on a disproportionate basis.

Jeff Silber

Okay. Great. That's very helpful. Thanks so much.

Gregory Cappelli

Thank you, Jeff.

Operator

Your next question comes from the line of Denny Galindo from Morgan Stanley. Your line is open. Please go ahead.

Denny Galindo

Hi, there. Just to comment on starts trends, your starts are down 38% this quarter. Is this kind at the bottom or could it potentially get worse? So what are your thoughts on what starts are looking like for the next quarter and maybe for the whole year?

Greg Iverson

Sure, Denny. So our current projections - based on our current projections, based on a percentage decrease year-over-year, we are projecting that this current quarter is a trough period for enrollments and we're expecting some moderating of that trend on a go forward basis, I guess, with the exception of the second fiscal quarter which should be relatively in line with the first quarter.

Gregory Cappelli

Yes, and part of the thing that will be unfolding is a new pattern here, where you can imagine if you have less starts in certain periods over the last, call it, the holidays and December, how those classes build and form in January, February, and March, right, with those new start patterns. So we'll be providing an update on that on the next call.

Denny Galindo

Okay. And then the cash flow from operations was negative this quarter, which doesn't typically happen for you guys. Can you give us any thoughts on how the cash flow should develop over the next year, as well? I imagine you had some unusual expenses this particular quarter?

Greg Iverson

Yes. So we're - we continue to project to have positive free cash flow for the full year. So that's cash flow from operating activities minus capital expenditures. In the first quarter, as you noted, our free cash flow was negative and that was principally the result of some uses of cash from working capital, principally in the accounts receivable, accrued liabilities and restricted cash areas.

Denny Galindo

And then one other question just about Apollo Global, you have Germany now, you have BPP, Brazil, Mexico. Maybe you could talk about how much some of these assets use shared services in Apollo Global and how much are kin d of standalone managed at a country level?

Gregory Cappelli

They are sharing services and particularly in technology where they've built a really good capability there to help generate economies of scale. And they're sharing best practices in terms of what they're learning with new programs across the board.

So I would say that Apollo Global is not operating as standalone institutions, that one of the major keys for any institution that we identify there is a good fit in. And any country that we think is a good fit is to make sure that there are ways to share best practices, and that, as a whole, the network can scale better and generate more value than just being a number of standalone institutions.

It was never designed that way when we designed it from the beginning, and that's the way we continue to run the organization.

Denny Galindo

That's it for me. Thanks, guys.

Gregory Cappelli

Thank you.

Operator

Your next question comes from the line of Paul Ginocchio from Deutsche Bank. Your line is open. Please go ahead.

Paul Ginocchio

Greg, I don't think you're going to answer my question. But I was just going to ask you about the timing of this announcement. It just seems odd that you're announcing it when your new enrollment declines are at their worst.

And why wouldn't you have just waited until, if some of these initiatives that you've just implemented in the last two quarters start to pay off, you'd be in a better position in a few quarters? It just seems a bit odd, the timing?

Gregory Cappelli

I understand your question and I've said what I can say about it. There's some language in the press release that's out this morning about the announcement. But I just can't say anything else about it. I do understand your question, but I apologize.

Paul Ginocchio

Great. And then you talked about positive free cash flow. Can you just tell - I think you said there was roughly, I think, $22 million of restructuring charges in the first quarter.

Can you just talk about how much of the announced or planned restructuring for fiscal '16 plus the stuff you've done in the past, what are the restructuring charges that run through fiscal '16 and then what's the run-off into 2017, also?

Greg Iverson

So our current projections for restructuring charges, excluding the goodwill impairment for fiscal '16 is in the neighborhood of $100 million. And…

Paul Ginocchio

I'm talking about cash through balance sheet – sorry, cash through the cash flow statement?

Greg Iverson

Yes, our restructuring liability payments for fiscal '16, we're modeling at the same level. So that's going to be both a combination of cash payments on restructuring charges that we incurred in prior years along with cash payments associated with any 2016 actions.

Paul Ginocchio

And does that drop off significantly in fiscal '17 or is it broadly similar?

Greg Iverson

We're not providing outlook on fiscal '17 at this time.

Paul Ginocchio

I was just trying to ask about stuff that's already been done, how the run-off. But, okay, thank you.

Greg Iverson

Yes. Well, I mean, I can tell you that – and this information is generally in our 10-K, as well. The run-off cash payments associated with actions that we've announced to date in fiscal '17 is quite a bit lower than that fiscal '16 number I mentioned.

Paul Ginocchio

Thank you.

Gregory Cappelli

Thanks, Paul.

Operator

Your next question comes from the line of Sara Gubins from Bank of America. Your line is open. Please go ahead.

Sara Gubins

Hi, good morning.

Gregory Cappelli

Morning, Sara.

Sara Gubins

First, on the enrollment expectation of ending the year at about 140,000 versus 150,000 previously, could you talk to us about what's different than what you expected last quarter, just to try to understand it in the context of whether or not there might be factors that could cause it to move down further over the course of the year?

Gregory Cappelli

We tried to account for that the best we could with the number of initiatives that are going on. But clearly looking at those initiatives, right, and the rollout and the timing accounted for the change, right, in the enrollment projection for the year. I'll let Greg comment, as well.

Greg Iverson

As Greg mentioned, what we've tried to do is really de-risk our plan for the back half of the year. And so also, as Greg mentioned, there's so many things that are going on within the university, including the rollout of a new marketing campaign.

And so, if you look at I guess, the financial factors that bridge between the past outlook and what I mentioned earlier in terms of enrollment in the 140,000 range, it's a combination of lower new degreed enrollment assumptions, especially at the very end of fiscal '16, as well as continue - the remaining effects of the course frequency change.

Gregory Cappelli

And we're using these numbers, again to set our cost basis for the remainder of the year and going into '17, and if they outperform those enrollment levels then we'll all be happy.

Sara Gubins

Okay. Great. And then the persistence trends, that improvement that you saw this past quarter, do you think we should continue to see improving trends?

And could we see positive year-over-year movement in persistence, presumably at some point, but when would you expect to see it?

Gregory Cappelli

Yes, I mean, we would be disappointed if we didn't see those trends continue. That's the basis for taking all of these significant initiatives. So we realize that it takes time for that to play through.

And some of the things, some of these initiatives students are just getting through their first couple courses. So, as we see 3Q - three-course and fourth-course completions we'll have a much better data of the magnitude of the follow through. That will be very helpful into the spring to provide you more data on that. But it is the whole reason that we're taking these steps.

Sara Gubins

Any way to help us think about the magnitude that you've incorporated into your revenue expectations?

Gregory Cappelli

Yes, Greg?

Greg Iverson

Yes, we have assumed some improvements in calculated persistence, really student retention, through the back half of the year, as a result of all the actions that the university is undertaking.

Going back to a previous question around our outlook, I think we've risk-adjusted those assumptions somewhat. But it's our plan and our belief that we will see some positive trends in our persistence rates going forward.

Sara Gubins

Okay. The $400 million of cost cutting, that's the active cost cutting and then presumably there's more given the variable nature of student base coming down or is that $400 million the total?

Greg Iverson

$400 million is the total. That's all in including fixed and variable.

Sara Gubins

Okay. And then, last, could you talk a bit more about what's driving the strong organic growth at Global? And I'm sure it varies quite a bit by school and market. But I'm wondering if it's more marketing initiatives, new programs, new campus openings, particular markets that are performing better or worse than others?

Gregory Cappelli

It's a combination of things, Sara. We've acquired really good institutions who have only improved their ability to offer new programs and their accreditation standards and their most trusted status.

They've gotten out ahead of the ball with certain changes, moving to online in certain programs, like in BPP where the whole industry changed in the PQ business and they were ahead of that. They have - a lot of the institutions that they're working with have gotten out ahead of the B2B trends, as well.

So, if you think about the University of Phoenix it was built really B2C, with some business relationships as well, a lot of people already working. Some of the institutions in Global are very actively working on business relationships and B2B relationships, knowing that the consumer will follow, right, as they build as they build this.

I'll just give you an example. BPP in the law school, they have over 50 exclusive agreements with the top law firms in the country. So they have just excellent relationships with businesses. They continue to build those. They're networking together. I mean, it’s driving - it's working, it's driving organic growth.

Is everything perfect in every country? No, it's never going to be there. We're always going to be dealing with opportunities to improve and excel in certain countries. But as a whole, the management is doing an excellent job of working with each other across the board, building scale and improving institutions, while sharing best practices. So we like what we're seeing right now.

Sara Gubins

Thank you.

Gregory Cappelli

Thanks, Sara.

Operator

Your next question comes from the line of Corey Greendale from First Analysis. Your line is open. Please go ahead.

Corey Greendale

Hi, good morning. Just a couple of quick ones.

Gregory Cappelli

Morning.

Corey Greendale

First, again, sorry to go back to the thing you're not commenting on. But I just had a factual question I was hoping you could answer. I believe that a change in control could happen just with a purchase of the Class B shares without anything happening to the Class A. Is that correct?

Gregory Cappelli

I just can't comment on it. I'm sorry about that. There was a separate release put out on it from the board and I apologize that I don't have that information to comment on it.

Corey Greendale

Okay. And then on the fundamentals, a flip side question of what Sara asked, Global is doing well, but I think it did slow somewhat the growth from last quarter on a constant currency basis.

Can you just comment on that and whether there's anything specific going on there and whether you expect that should reverse the next quarter?

Gregory Cappelli

Yes, that's a great question and, yes, there are some timing issues. Greg, why don't you talk about that?

Greg Iverson

Yes, I guess, the two things I'd call out, so one is, if you look at Apollo Global's results on the first quarter on a year-over-year basis, there was pretty significant revenue impacts from foreign currency. I think if you look at the delta caused by foreign currency it's in the ballpark of $13 million.

And the other thing that we experienced in the first fiscal quarter relates to BPP. And so part of BPP's business is in the accountancy training space. So there is two key credentials there, ACCA and CMA. Both of the bodies that oversee those exams have moved from two exam sittings per year to between four and six exam sittings per year.

So historically BPP has had a lot of this exam prep revenue in the first fiscal quarter and highly seasonal, as you can imagine, with just two exam sittings a year. So beginning this year and on a go-forward basis we would expect to see less seasonality in the BPP business across those two line items.

Corey Greendale

Okay. And then just one other quick one, it sounds like moving to mostly monthly starts has been largely, by and large, positive. Have you seen any negative impact on the show rate that was the one potential negative I saw about change?

Greg Iverson

No. From an operational standpoint, I think it's been a smooth rollout and we've seen some nice positive benefits.

Corey Greendale

Okay. Great. That's all I had. Thanks.

Gregory Cappelli

Thanks, Corey.

Operator

Your next question comes from the line of Trace Urdan from Credit Suisse. Your line is open. Please go ahead.

Trace Urdan

Hey, good morning.

Gregory Cappelli

Good morning, Trace.

Trace Urdan

I wanted to go back one more time, if I could, and maybe press Greg Iverson a little bit on the impact of the change in starts. Is there any way that you can help quantify a little bit more than you have? I know that you stated you thought the majority of the impact was contained in Q1.

But either in terms of the percentage of the impact on the year that's contained in Q1 or maybe even just something more granular like how many starts you feel were impacted relative to the prior year, just to help us kind of frame how much of what we're looking at is what's happening in the market and how much of it is the result of these changes that you're making to your business.

Gregory Cappelli

Yes, we'll do our best here.

Greg Iverson

Sure. The impact in the first quarter was meaningful. So, all of the new students coming into the university who would have potentially started on a weekly basis now were delayed, delayed their enrollment. So, that had an impact.

And then also, as we mentioned for the existing students it certainly had an impact on them, as well. So our estimates around the new degreed enrollment in the first fiscal quarter as a result of the rollout is about 1,700 students.

Trace Urdan

Okay. That's very helpful. And then a comparable question related to the Department of Defense probation, I know it's not going to be nearly as material, but can you help us think about that as well?

Greg Iverson

Sure. What we discussed in the past call and I think also in public releases is that the students who were impacted by the DoD probation status, we would expect to have an impact on our revenue of less than 1%.

Trace Urdan

Yes, I was more concerned about just the actual numbers of enrollments. Can you comment on that?

Greg Iverson

Well, I guess…

Trace Urdan

The impact on your revenue - the reason I ask is because the impact on a percentage basis, you have guys throwing out that 38% decline number. A relatively small number of students can impact that percentage number more than the relatively minimal impact on your revenue.

So, that's the point of my asking. I want to sort of understand what - how many percentage points, if any, is it worth in terms of that?

Greg Iverson

Yes, it's a good question. And, as you probably know, those students who are part of the Department of Defense tuition assistance program pay a significantly lower tuition rate. It's a 250 credit level.

So, you're absolutely right that less than 1% of revenue does equate to a disproportionately large number of students just based on the much lower tuition rate.

Trace Urdan

Okay, all right. I'll let you off the hook for that. And then the other question I had was, you guys report, in your release you talked to us about the operating income of the business units. Obviously there is some one-time expenses that are attached to the University of Phoenix and I was wondering if it was possible to quantify that.

It looks like, if you add back 100% to the University of Phoenix, that we actually saw UOP margins expand year-over-year in the first quarter, and I'm wondering if I'm off base in thinking that or whether you can comment on that?

Greg Iverson

If you look back in the earnings release toward the end, we do have segment EBITDA for the different business units, including University of Phoenix. So hopefully that's helpful to see that level of detail excluding the restructuring charges.

Trace Urdan

Okay. I was looking at the operating income, but I'll take another look. Sorry about that. And then the final question, a little bit more esoteric, but, Greg Cappelli, when you guys have this pathway recommendation that's leading people to better outcomes, at least that you're seeing initially.

How many different options are we talking about? Like, how much complexity is involved in recasting the course progression that the students are taking that are having this impact?

Are we just really talking about one or two or three different changes that you recommend that they make relative to what you might have seen otherwise?

Gregory Cappelli

Well, the university and management is doing everything they can to make the institution less complex, right. It was very complex. It had gotten very big, many programs. And so the pathways is - and, again, it's been brought up, the negative 38%, yes.

So a lot of that is from the very significant steps that we're taking to try to get through this as quickly as possible. But to your point, Trace, one of the things that we're trying to do is make it less complex along the way.

So the way I would answer that is management of Phoenix is looking at that and just trying to get a clear idea of where you should be. So, if you should be starting in a certain cohort with at a certain level, right, with certain types of students at the University of Phoenix, they're going to put you in that. They have so much more information about you, right.

It's not easy, always, taking the assessment, but in these pilots, but they are gathering the information. It's just a few different options, right, but it's to give you the best chance. And some of those students will come back to the university after they've done the preparation that they need. We know that.

So it's to provide the person with the best opportunity and the most honest assessment for their well being. And we feel that if we do that they're going to end up in a great place or back at the university when it's appropriate.

Trace Urdan

Okay. So last call I think Jeff asked you and you answered it and it was very helpful, you talked about maybe sending somebody to a community college, for example and recommending they take some courses and come back. I think as an alternative pathway to better prepare them, that makes a lot of sense.

My question was more to do, you seem to be implying that - and maybe I got this wrong. But you seem to be implying that for the students that are starting, you're making recommendations to them about different things that they could be doing. Is that not the case? Are we just talking about screening better at the front?

Gregory Cappelli

I'm talking about after the assessment but before starting is the recommendation of where they should be, and cohorting students better, so they have a better experience with the level of student that they're with in the classroom. Those are things that they're working on. So, I'm sorry, Trace, its pre actually starting.

Trace Urdan

No, I was just trying to get a little bit more of a feel for exactly what we're talking about and making it a little bit less abstract. So, you're saying that basically some of the students might for example, require more remedial preparation in math, so they would be put together with other students that have that same need and they would be sort of in that cohort. Is that what you're talking about? I'm just trying to get a feel for what we're describing here?

Gregory Cappelli

Sure. The admissions and the pathways have not been completely implemented. That's what these pilots are for. They are determining sort of the cut scores for the products. There is really three paths. There is advanced, there is standard and there is something like go to a community college, right?

So, it's not meant to be very complex. It's supposed to be straightforward, less complex, but very clear to the individual. And they're really doing some great work there with the data that they're getting back.

Trace Urdan

And how - sorry, last question, how - when can we expect that this process will be sort of fully worked out and implemented? It sounds like you're still figuring things out…

Gregory Cappelli

And these have been big pilots, right, with a lot of impact. So I don't want to imply that they haven't. We've given out some data on that in the past. In some cases where it's affected 20% of the starts or more, that has a bigger impact than if you think about dealing with the funnel of students coming in, because some are choosing not to take the diagnostic at all, which tells you something about the student's commitment there, as well.

So - but there's going to be major work done throughout this fiscal year. I think going into '17 we'll be in a great place where things will be humming along more complete. But they want to get it really really right.

And to their credit at the University of Phoenix, they are piloting making changes, piloting getting data, making adjustments, and it's just getting better and better. So a lot of credit goes. The team is putting in a lot of work and they want to do it the right way.

If this were about trying to make sure that we're at a certain enrollment level every quarter, then it would be a different story, but we're not doing that. We want the best outcomes and we want the transformation to go as soon as possible despite the near term consequences. And that's why we have to manage our costs. We have to give ourselves that runway so we can get through this.

Trace Urdan

Okay. Thanks, Greg.

Gregory Cappelli

Thanks so much, Trace.

Operator

Your last question comes from the line of Jeff Mueller [Robert W. Baird & Co.] Your line is open. Please go ahead.

Jeff Mueller

Yes, thank you. Can you just give us a refresher on the ownership of the voting shares? I think there was a Form 4 about a collateral call on some shares to fulfill a loan. But I don't recall if those are voting shares or not. So, any refresher you could give us on the voting stock ownership.

Gregory Cappelli

Jeff, I'm sorry, I don't have that information in front of me. I do recall obviously the filing there. And I don’t - I just don't have any further data. I think those were A shares, but I don't have that. I'm pretty sure they were, actually.

But I can research that a little bit for you. But that was all disclosed in a prior filing. So…

Jeff Mueller

Okay.

Gregory Cappelli

I'm sure those were A shares.

Jeff Mueller

Okay. And then the $40 million minimum EBITDA target for Global in '17, is that inclusive or exclusive of the contribution from the German acquisition?

Greg Iverson

That is inclusive. So, now that we've included the partial year results for Career Partner, we're expecting EBITDA for '16 to be in excess of $40 million now for fiscal '16.

Jeff Mueller

Okay. And then can you give us a sense of the breadth of profitability in Global? You've done a few acquisitions of I guess, Germany and open colleges and that have been profitable, and then you're improving BPP.

So, just any way you can frame up the breadth of the profitability. Is it concentrated in just a few institutions or is it pretty broad?

Gregory Cappelli

Well, I mean, it's a great question. We are looking at – I mean, profitability matters a lot to us in Global. There are some things, when we look at valuing the organization and creating long-term value, where local accounting revenue rack and things like that are different than we convert to in the US.

So, we will follow that very clearly in the US. But that's why we look at EBITDA and cash, because that to us is the ultimate barometer for creating value. And I'll let Greg speak to that a little bit more.

Greg Iverson

Yes, first I want to just correct something I said to answer your last question. That $40 million of EBITDA obviously refers to fiscal '17, not to fiscal '16.

But with regard to the composition of Apollo Global, so as we've said in the past, BPP is more than half of the revenue of Apollo Global. So it's clearly the largest institution. It's one of the institutions we've owned for the longest period of time.

And so we are seeing some very significant - or starting to see some revenue growth there and also, importantly, some better leveraging of our fixed cost base.

So we are seeing, as Greg mentioned, revenue gains in each of the different business units. But, to your point, just given BPP's size relative to the whole Apollo Global portfolio, we definitely see a disproportionate amount of our EBITDA, both this year and next year.

Gregory Cappelli

They've been through the transformation. The management has done an incredible job going through a very tough market there, sort of '09, '10, '11, taking the necessary steps, transforming, doing what they need to do, in a similar way to what's going on here to get improved relationships, outcomes, status. And it's working so their profitability has moved up nicely. They addressed the costs early on, which wasn't easy.

I will say this too, Jeff, that when you look at certain institutions around the globe, some are making some meaningful investments. So if we're opening up a number of new locations in Mexico, right, that's going to have an impact or if we're investing in Brazil or in open colleges, that's going to have an impact.

But we look at all that closely, we look at returns and incremental invested capital. We care very, very much about measuring the near term results, but also the long-term value that can be created. So that's how we assess the level of investment and the offset to profitability near term. Does that help?

Jeff Mueller

Okay. It does. And then just one more for me. On Global, I just want to make sure I have it right. I think that it was 20% organic constant currency growth last year. That's also the five-year long-term target.

But you're saying dipping down maybe to the high teens this year. I know it's not a big change, but the only factors I heard were BPP timing and FX. So, is there anything worth calling out that's potentially driving a bit of deceleration in Global organic constant currency this year?

Gregory Cappelli

Not really. I mean, there's nothing that stands out. Whether its high teens or 20% it's going to be -call it 15% to 20%, it's going to be in a range, depending upon the timing and level of investments.

But I don't see anything as I look across the organization to point to, other than the timing of things that Greg mentioned like the change in the number of times you can take exams and tests and things like that at BPP. If there is something that's more meaningful we'll call it out going forward.

Jeff Mueller

Fair enough. Thank you, guys.

Gregory Cappelli

Thanks so much.

Operator

As there are no further questions on the phone lines at this time, I would now turn the call back to Greg Cappelli.

Gregory Cappelli

All right. Thank you so much, everybody for listening this morning and for your understanding. And we'll look forward to following up and talking to you again soon. Take care.

Operator

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

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