Apollo Group (APOL)

Q2 2011 Earnings Call

March 29, 2011 8:00 am ET


Joseph D'Amico - President and Chief Operating Officer

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

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

Charles Edelstein - Co-Chief Executive Officer and Director

Allyson Pooley - Vice President of Investor Relations


Brandon Dobell - William Blair & Company L.L.C.

Michael Tarkan - FBR Capital Markets & Co.

Ariel Sokol - UBS Investment Bank

Paul Ginocchio - Deutsche Bank AG

Jerry Herman - Stifel, Nicolaus & Co., Inc.

Blair Mlnarik

Andrew Steinerman - JP Morgan Chase & Co

Jeffrey Silber - BMO Capital Markets U.S.

Kelly Flynn - Crédit Suisse AG

Peter Appert - Piper Jaffray Companies

Sara Gubins - BofA Merrill Lynch

James Samford - Citigroup Inc

Suzanne Stein - Morgan Stanley

Scott Schneeberger - Oppenheimer & Co. Inc.

Steven Bachman

Corey Greendale - First Analysis Securities Corporation

Trace Urdan - Signal Hill Capital Group LLC

Gary Bisbee - Barclays Capital



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Good morning, ladies and gentlemen, and welcome to the Second Quarter 2011 Earnings Release Conference Call. [Operator Instructions] This conference call is being recorded today, March 29, 2011, and may not be reproduced in whole or in part without permission from the company. There will be a replay of this call available through April 8, beginning approximately two hours after we conclude today. The replay number is 800-642-1687 or (706)645-9291, internationally. The conference ID for this replay is 47837838. I would now like to turn the call over to Jeremy Davis, Director of Investor Relations. Mr. Davis, go ahead, please.

Allyson Pooley

Thank you for joining us today to discuss our second quarter results. Participating with me on the call are Chas Edelstein, Co-Chief Executive Officer; Greg Cappelli, Co-Chief Executive Officer and Chairman of Apollo Global; and Brian Swartz, Senior Vice President and Chief Financial Officer. Joe D'Amico, President and Chief Operating Officer is also here with us, and will be available during the Q&A portion of the call.

As we discuss our results today, unless otherwise noted, we will be comparing second quarter of fiscal 2011, which ended February 28, 2011, to the second quarter of fiscal 2010. I'd also like to remind you that this conference call may contain forward-looking statements with respect to future performance, financial conditions, regulatory compliance, and other matters regarding the business of Apollo Group that involve risks and uncertainties. Various factors could cause actual results of the company to materially differ from any future results expressed or implied by such forward-looking statements. These factors are discussed under Risk Factors and elsewhere in the company's most recent 10-K and subsequent 10-Q reports filed with the SEC, and available on our website at www.apollogrp.edu.

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

Charles Edelstein

Okay, thanks, Jeremy and good morning, everyone. Special thanks to those of you on the West Coast, who are up early with us this morning. I'd like to start off this morning with a brief overview of our business and how we're positioning ourselves within the higher education sector. Then Greg will talk a bit about the key initiatives we've been working on, and why we're excited about what we're seeing. And then Brian will cover the results from the quarter in more detail, and provide some commentary on our outlook for the business.

The past several quarters have been a time of considerable change within our sector. At Apollo, we set out a plan, starting a couple of years ago, to drive change within our organization and thereby, lead positive change in the higher education sector. These changes are focused on improving student outcomes, improving the student experience, and positioning our company for sustainable long-term growth, while reducing risk to the business.

These initiatives have contributed to lower enrollment in the second quarter, and we expect that trend to continue in the near term. However, importantly, we are seeing indications that these initiatives are having a positive impact on certain quality measures within our institutions. These indicators include a mix shift toward higher degree-level programs, as well as improving retention rates, following the initiation of our first year sequence program, which was launched last year.

We expect the declines in new enrollment that we're experiencing in 2011 to be felt more in our financial results in 2012, but we believe our initiatives represent the right thing to do for our students and for the long-term health of our business. Within the U.S., we believe our market opportunity is large and growing. Importantly though, we're focused on targeting that portion of the market, which we think we can most effectively serve with our offerings. We do this by trying to identify students who are willing to put in the effort to succeed, and who we believe are likely to benefit from our programs.

While it's difficult to pinpoint the exact size of the market, we believe University of Phoenix has a vital role to play in helping Americans remain globally competitive. There's a large mismatch between the supply and demand for higher education in this country, and traditional public and private schools lack the resources to meet that demand or address the need of many non-traditional students. There is increased competition for these students, but we believe we're well positioned to garner an attractive share of the millions of students comprising our targeted domestic market. As always, our primary focus remains on these domestic opportunities inherent at University of Phoenix. In addition, we continue to see strong demand for post secondary degrees internationally, and we intend to continue our pursuit of growth through international expansions.

Finally, on the regulatory front, I'd note that we continue an active dialogue with policymakers in Washington, which I would characterize as substantive and constructive. We've been working to ensure that we're compliant with rules that were finalized last fall, and we believe we could comply with each when they are scheduled to become effective in July. We don't yet has visibility into the timing or substance of final rules on gainful employment, but we're pleased with the seriousness with which the administration and congress are approaching and evaluating the issue. Because we take our compliance responsibility very seriously, we're particularly pleased to have reported in February that University of Phoenix received an expedited final program review determination letter from the Department of Education related to the department's recent program review this past December. There were no significant adverse findings in the program review, and the department concluded the university has initiated or completed acceptable corrective actions with respect to each compliant item identified in the review, and each finding has been closed.

We remain vigilant in our determination to drive positive change throughout our institution, which is intended to further enhance the value of degrees conferred by our institutions to the many students who stand to benefit from our quality education and thereby, build long term shareholder value. And with that, I'll turn the call over to Greg.

Gregory Cappelli

All right, thanks, Chas. Good morning, everyone. During the second quarter, we continue to execute on the key strategic initiatives we've been talking about with you in recent quarters. As a reminder, some of these include changes in our admissions process and the way in which we evaluate and compensate our advisors, the implementation of University Orientation, refinement in our marketing strategy including investments in our Workforce Solutions group to build our corporate relationships, and enhancements in the areas of student protection, as well as ongoing investments in the student experience, including enhancements to our student platform. While some of these initiatives are having an adverse impact on our new enrollments, we are encouraged by some of the early indicators we're starting to see in the business. First, with respect to the changes in our admissions process and the way in which we evaluate and compensate our advisors. This continues to be a big, big undertaking. It'll take sometime for our Admissions Advisors and supporting our staff to gain comfort and get acclimated to our new approach. As you know, we've eliminated the old performance evaluation and compensation system on September 1, 2010. This was absolutely the right thing to do, but it did create some uncertainty and disruption for our staff in the field. We've continued to enhance our coaching and training for advisors and managers regarding the competencies that we expect from them, and the new evaluation criteria that will be used for annual evaluations have now been rolled out to our employees in the field.

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