Q2 2009 Apollo Group Earnings Conference Call - Final.(Broadcast transcript)

OPERATOR: Good morning, ladies and gentlemen. Welcome to Apollo Group Inc. fiscal 2009 second quarter earnings conference call. At this time participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. Please refrain from entering into the queue until instructions are given. (Operator Instructions). This conference call is being recorded today March 31, 2009. It 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 10, 2009, beginning approximately two hours after we conclude today.

Additionally, this call will be broadcast over the Internet and can be accessed via the Company's website at www.apolloGRP.edu. I would now like to turn the call over to Allyson Pooley, Vice President, Investor Relations of Apollo Group. Mrs. Pooley, please go ahead.

ALLYSON POOLEY, VP, IR, APOLLO GROUP: Thank you. Good afternoon. Thanks for joining us. Speaking today will be Chas Edelstein, Chief Executive Officer; Joe D'Amico, President and newly appointed Chief Operating Officer; and Greg Cappelli Executive Vice President of Global Strategy, Assistant to the Chairman and Chairman of Apollo Global; additionally, Brian Swartz who was promoted today to Senior Vice President and Chief Financial Officer and Treasurer will be available during the Q&A period. During that time we ask you to be respectful of everyone's time and limit your questions. We expect to take the time necessary to answer all of them.

Before we begin we would like to remind you that as we discuss our results we note that unless otherwise stated we will be comparing our second quarter of fiscal 2009 to the quarter ended February 28, 2009, to the second quarter of fiscal 2008. I'd also like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of Apollo Group that involve risk and uncertainties. Various factors could cause 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 item 1A and elsewhere in the Company's 10-K report and in subsequent 10-Q reports filed with the Securities and Exchange Commission. The Company does not take any obligation to update anyone with regard to the forward-looking statements made during the conference call. With that, I would like to turn the call over to Chas.

CHAS EDELSTEIN, CEO, APOLLO GROUP: Good afternoon, everyone. Thanks for joining us to discuss our second quarter results today. I'd like to provide some highlights from the quarter and then spend some time discussing our focus on academic quality and assessment. Joe will then discuss our results in more detail from both a financial and operational perspective and finally Greg will update you on the investments we are making as well as our outlook.

Before I begin I'd like to address our recently announced management and Board changes. Today we announced a transition within our finance and operations department. Joe D'Amico who has been with Apollo since November of '06 when he was brought on board as interim CFO is relinquishing his role as CFO in order to focus his time on the operations side of the business. He will continue as President of Apollo Group and is taking on the newly created position of Chief Operating Officer. This promotion reflects the outstanding leadership that Joe has demonstrated and my confidence in his ability to further enhance our core operations.

We also announced today that Brian Swartz has been promoted to Chief Financial Officer and Treasurer. Brian joined Apollo in early '07 and has worked closely with Joe over the past two years. Together they have greatly enhanced our reporting, governance and corporate finance capabilities. Brian has earned the respect and trust of the Board and the senior management team and I'm confident that Brian will serve this Company well in this important role. Gregg Iverson who joined Apollo in April of '07 as Controller has been promoted to Chief Accounting Officer. He will continue to serve as Controller as well and continue to work closely with Brian in this new position. And finally I want to welcome Fred Newton to Apollo. Fred started last week as our Senior Vice President of Human Resources. He brings over 20 years of human Resources experience to Apollo which will serve our employees well. I'm very much looking forward to working with Fred in his new role.

On the Board front as we announced a couple days ago we added three new directors bringing the total to 13 from 10 previously. We are delighted to have Terri Bishop, Steve Giusto and Manny Rivelo joining the Board. Terri is currently Executive Vice President of External Affairs at Apollo Group. She has been with the Company for over 25 years and brings tremendous insight to the Board.

Steve Giusto who currently serves as CFO of Korn Ferry plans to step down from that role soon in favor of his new role as senior advisor to Korn Ferry's CEO. Steve brings decades of finance and accounting experience which will be in value to the audit committee which he will be joining replacing Dino DeConcini on that committee.

Manny Rivelo has been with Cisco Systems for 17 years. His vast knowledge and experience in the technology industry will be of great value as we continue to grow our student body and the systems to support them. Manny will join the compensation committee of the Board replacing Sue Redmond on that committee.

Now let me turn to our earnings results. I'm pleased to share another record quarter with you. During the second quarter we continued to benefit from investments we are making in key academic and operating areas. For the second quarter our net income excluding a securities litigation charge a year ago increased 78% to $125 million resulting in diluted earnings per share of $0.77. Consolidated net revenues increased 26% to $876 million which resulted in operating income growth of nearly 90%. In round numbers that 26% revenue growth this quarter breaks down as follows.

Enrollment growth at University of Phoenix contributed about 20 points of that total revenue growth. Recent price increases at University of Phoenix contributed about 4 points. And the other 2 points came from increased revenues at Apollo Global and other schools. Total enrolment growth at University of Phoenix was driven by very strong new student enrolment growth of 23% as well as from continued year-over-year improvement in student retention.

Our students and the quality of their academic experience are the key drivers at Apollo. We are very mindful that we are in an economic downturn which has some state and local colleges capping attendance or even closing campuses. At the same time, President Obama in a recent speech addressing education reform specifically called out the need to prepare not only young people but older workers who need new schools to change careers. He called for life-long learning. This is very much in line with the vision on which University of Phoenix was founded over 30 years ago. We are just as committed today to our vision of providing access to high quality, affordable education as well as providing opportunity and choice to as many students as can benefit both here and abroad.

The quality of the educational experience can be measured in many ways. We are very focused on learning outcomes and we are committed to transparency in our academic operations. We have invested in the identification and measurement of student learning outcomes and have been a leader in the assessment movement from early on. This was a key objective behind publishing University of Phoenix's first ever academic annual report last summer. It provides a transparent look at issues such as academic quality including student performance and satisfaction as well as completion rates.

The results show that as compared with students entering college nationally, on average University of Phoenix students begin with lower levels of preparation in the general areas of critical thinking, reading, writing and math. But by the time they graduate they perform at comparable levels. We are very proud of the completion rates of our students in light of the fact that most of our students have several college risk factors such as holding down a job or raising children while going to school which lowers the statistical probability of completing college. Our programs incorporate services targeted at addressing these risk factors and related students needs in order to enhance their chances to graduate. Just a note, we do plan to publish our second academic annual report this fall which will provide you with an update on certain of these data points.

Our commitment to academic quality and excellence and our focus on the student experience is essential to University of Phoenix's success. We also believe our national scope is a service to the nation at a time when our country needs to expand rather than restrict enrolment in higher education. We take this responsibility seriously and feel honored that we are in a position to create long-term value for our shareholders, while serving this important societal need. And with that I will turn the call over to Joe.

JOE D'AMICO, PRESIDENT, COO, APOLLO GROUP: Thanks, Chas. Chas gave a great overview of the results and now I'd like to discuss some of the financial details and operational actions driving them. And then update you on a few of the current topics that we know are on your mind. Before I begin I would also like to congratulate Brian Swartz and Greg Iverson. Their efforts and support over the last two years has been a tremendous help to me. Their efforts have been critical as we advanced our accounting and finance organization and I have every confidence that under Brian's leadership we will continue to execute the vision we set two years ago.

Now for the results. We reported 26% revenue growth driven by increases in enrollment, retention and net tuition pricing. We are pleased with the continued growth in the student enrollment and retention across each degree level. We believe this is in large part due to the robust marketing initiatives we have been implementing which are producing better quality student inquiries resulting in students who are more seriously interested and ready to enroll in our programs. Additionally, we are pleased to report that due to our renewed focus on advertising in our local communities we have begun to see some incremental growth at our campuses particularly at the bachelor level. During the quarter we continue to see transfers from our associates program to our …