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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good morning, ladies and gentlemen, and welcome to the Apollo Group Incorporated second quarter fiscal 2008 earnings conference call. All lines are currently in a listen-only mode. Later we will conduct a question and answer session and introductions will follow at that time. Please refrain from entering into the queue until those instructions are given. (OPERATOR INSTRUCTIONS) This conference call is scheduled for one hour and is being recorded today, March 27, 2008, and may not be reproduced whole or in part without permission from the company. There will be a replay of this call made available through April 4th, 2008, beginning approximately two hours after we conclude today. The replay number is (800)642-1687, or (706)645-9291 internationally. The conference ID number for the replay is 38038119.
Additionally, this call will be broadcast over the internet and can be accessed via the company's website at www.apollogrp.edu. I would also like to remind everyone that the conferences may contain forward-looking statements with regard to the future performance of Apollo Group that may 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. I would now like to turn today's call over to Peter Sperling, Vice Chairman of Apollo Group. Mr. Sperling, please go ahead.
PETER SPERLING, VICE CHAIRMAN, APOLLO GROUP, INC.: Thank you. Good afternoon, and thank you for joining us today to discuss our second quarter results. John is unavailable today and it's an honor to be opening the call in his absence. We again reported solid revenue and enrollment growth in the second quarter. During the quarter we achieved many important milestones and we were pleased to announce our first Apollo Global transaction, the acquisition of UNIACC in Chile. Despite the highs and lows of the industry over the past 30 years the Apollo Group has been successful by providing a high quality educational experience that is convenient, accessible and relevant to our students and their employers. We continue to focus on providing real measurable value to our students, and believe that our programs, services and commitment to our students success will allow to us grow consistently in the long run.
On today's call Brian Mueller will update you on our second quarter operational progress and discuss our long-term strategic plan. Joe D'Amico will then review our financial results and Greg Cappelli will review our capital deployment priorities and provide an update on Apollo Global. Finally, we will open the call to your questions. With that, I will turn over the call to Brian. Brian?
BRIAN MUELLER, PRESIDENT, APOLLO GROUP, INC.: Thank you, Peter. We are pleased with the top line results we generated in the second quarter. We achieved double-digit year-over-year revenue and enrollment growth for the fourth quarter in a row. Before I discuss the second quarter detail, I want to comment on two of many investments that were made in the first half of fiscal '08. The two investments negatively impacted our second quarter results, but we made these investments because we believe they will better position us to drive growth over the long term.
First, in advertising during the months of November, December and January, we were transitioning off of ad.com's platform and onto the Aptimus platform. Overall the transition went smoothly. However, for a period of time during the transition we were not able to manage the affiliate and search process as well as we can do currently. As a result we were not as aggressive in our spend and this negatively impacted our student starts. We now have better intelligence on lead sources, drive a more efficient process and we believe this will eventually lower student acquisition costs.
Second, over the last year an increasing percentage of leads have come from a less mature [UOP] markets particularly the northeast, the southeast and the midwest. We believe this is because of our increased physical presence in those markets over the last five years. As a result, we decided to do further invest in this opportunity by pulling forward the hiring of enrollment counselors in those regions. These investments along with our investment in Insight schools and the increase in G&A due to our added personnel over the last year, account for the vast majority of our year over year decline in adjusted margin.
Now let me address the quarter in more detail. As many of you know the company has been intensely focused on student success and at keeping levels of retention and graduation rates high. We are approaching this from many angles including: programmatic expansion, curriculum improvements, instructional innovation, tutoring services and the service provided to students by all front line staff. Our efforts led us to ending the quarter with 330,200 students, which was a 10.7% increase over the second quarter of 2007. Undergraduate student enrollment including associate and bachelor students grew by more than 13% year over year to over 257,000 students. Masters enrollments grew by 1.4% to 67,000 students and our doctoral enrollments increased by 19.1% year over year. We saw the greatest improvement in retention at the associates level, our fastest growing segment, and we are working hard to drive improvements at all levels. New student starts were 65,000, which was a 6.2% increase versus a year ago.
As I said our acquisition of Aptimus and the transition of lead generation process to us has gone well. Their technology has been integrated with our systems, lead flow is flowing through these systems and the data we are gathering represents a significant improvement over where we were. The skill set of the team is a major asset. As we have become comfortable with managing the marketing affiliates and have gained the necessary intelligence, we have begun to increase our advertising spend. As a percent of revenue for the quarter, advertising was down slightly versus the second quarter of 2007. But we spent aggressively in February especially the last two weeks of February and will continue that spend at least through the third quarter. We now have the strong internal marketing platform and a sizeable spend in the marketplace which we intend to leverage to a greater extent in the future.
Additionally we are continuing our focus on branding and we are pleased with the results we have had on raising the awareness of the University of Phoenix and the quality of programs. In the second quarter net revenue increased approximately 14% year over year, again, well above our long-term target of mid-to-high single-digit growth. Excluding discounts and refunds our degree seeking growth revenue increased approximately 15%. We consider discounts to be another component of our retention focus. The increase in discounts primarily came from three areas. One, scholarships awarded to some bachelor students based on persistence and academic achievement. Two, grants awarded to associate grads matriculating into our baccalaureate program. And, third, continuing to give certain students who withdraw from a course for legitimate reasons a second chance at the course without charge. Given the improvement we are seeing in retention we believe these investments will pay off in increased revenues and profits long term.
I will now turn to the cost side of the business and discuss some of the major items impacting our results. Our adjusted operating margin which excludes special items was 15.7% for the second quarter versus 18% on a comparable basis a year ago. As I mentioned at the beginning of the call this due to ongoing investments we are making in our business, which we believe are necessary to support our strategic growth initiatives and a continued demand for high quality accessible education. Instructional costs and services as a percent of revenue declined 1.2 percentage.points to 47.2%. The majority of this improvement came from leveraging the cost benefits of a greater percentage of our students choosing to attend classes online. We also benefited from better pricing with certain suppliers as a result of renegotiated contracts.
Offsetting the gains were an increase in bad debt expense, which Joe will discuss in a few minutes, as well as investments that we are making in academics and operations. Specifically we are investing in …