Operator: Good morning, and welcome to the Second Quarter 2013 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please refrain from entering into the queue until those instructions are given.
This conference call is being recorded today, March 25, 2013, 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 12, 2013 beginning approximately two hours after we conclude today. The replay number is 855-859-2056 or 404-537-3406 internationally. The conference ID for the replay is 12434663.
I would now like to turn the call over to Beth Coronelli, Vice President of Investor Relations. Mrs. Coronelli, go ahead please.
Beth Coronelli - VP, IR: Thank you for joining us today to discuss our second quarter results. Participating on the call are Greg Cappelli, Chief Executive Officer of Apollo Group and Brian Swartz, Senior Vice President and Chief Financial Officer. Greg will update you on our initiatives and strategy and Brian will discuss the second quarter financials and outlook. Joe D'Amico is also here and will be available during the Q&A portion of the call.
As we discuss our results today, unless noted otherwise, we will be comparing the second quarter of fiscal 2013, which ended February 28, 2013 to the second quarter of fiscal 2012. I'd also like to remind you that this conference call may contain forward-looking statements with respect to future performance, financial condition, regulatory compliance and other matters regarding the business of Apollo Group and its subsidiaries that involve risks 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 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.apollo.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 the financial and other quantitative information to be discussed today as well as the reconciliation of GAAP to non-GAAP measures is available on our website.
With that, I will turn the call over to Greg.
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: All right. Thank you, Beth. Good morning, everyone. This continues to be an extraordinary period within the higher education sector. It’s the time really of unprecedented change, driven by new workforce demands, technological innovations, and economic, political and competitive dynamics.
Individuals are evaluating their opportunities to gain appropriate skills necessary to compete in the global economy. For decades, many colleges and universities including our own offered one primary way to do this, through a full degree-granting program.
There is over 80 million people in the U.S. labor force who could benefit from some type of post-secondary education or training. The delivery of this education will quickly need to come in new and different ways, so that working learners can more quickly use their skills to begin or further their careers.
At Apollo Group, we’re focused on developing new and innovative ways to deliver training and skills that the working learner and companies need to help close the widening skills gap across the country. Our organization is built on a history of responding to shifts and higher education. The spirit of continuous change and innovation helps us better support our students.
Today, I will talk about some of the changes we're making within our organization to ensure we are meeting the needs of students, as they look to position themselves for future success.
The cornerstones of our strategy include differentiating University of Phoenix, diversifying Apollo Group and optimizing our operations. First, let me recap our results. We reported revenues of $834 million, compared to $963 million in the second quarter of 2012. Our earnings were $0.12 per share or $0.34 per share excluding special items. The University of Phoenix ended the quarter with total enrolment of about 301,000 students. For new degree enrollment we reported a year-over-year decline about 20% for the second quarter.
Now I'd like to highlight some of the key steps we're taking to enable us to compete more effectively today and in the future. We are working to differentiate University of Phoenix, which we believe is a path to sustainable long-term success. We continue to reposition our offerings and brand to connect education to careers. Launching initiative such as new career-oriented tools and expanding our more than 2,200 corporate partnerships.
To return the growth within University of Phoenix, the team is further positioning the University to connect all delivery options in higher education, degree seeking, non-degree and certificate-based programs. As I said upfront, students are requiring more than just one option to acquire the knowledge to compete more effectively in today's labor force. They are interested in acquiring tangible skills now, which support a full degree of program if desired.
We must be truly distinctive. We are adapting a delivery model and ensuring we continue to provide an outstanding experience the right value. The goal is to help learners find the best path to their desired career and also to address the needs of employers to attract appropriately skilled workers. In order to support this effort, we are incorporating direct relationships with the most influential businesses in the world.
Right now we’re tackling the tough questions and challenging conventional wisdom. We’re looking at every aspect of how we interact with and serve potential and existing students. We’re focused on functionality, simplicity of use, speed to market and flexibility. This is a process that will move quickly and we’ll provide more detail on future calls as we move forward with our plan.
The second cornerstone of our strategy is leveraging our core strengths to diversify Apollo Group. From a global perspective there are more than 250 million people who between now and 2025 will need access to high quality post-secondary education. Our goal is to have a significant impact and helping educate those students.
I recently joined our BPP team and participated in the education nation U.K. summit where academic leaders, politicians and business executives came together to discuss the future of education in United Kingdom. We’re positioned at BPP to play an important role on helping close the countries vital skills gap. We put in place the right team at BPP and a strong plan to allow for success going forward.
We were pleased to received notice last week that BPP's accreditation was reconfirmed to the 2018, 2019 fiscal year for the BPP University College of Professional Studies.
On a separate note, we just opened our second new integrated classroom and online working learner program at Apollo Global. The first one was developed and launched in our Mexico operations and it’s now been rolled out to BPP. Both the Mexico and BPP launches are performing well and we’re fine-tuning the model in preparation for potential expansion later this year.
Regarding our services business, which incorporates Apollo Education Services and IPD we’re expanding our relationships with traditional institutions and are making significant progress in order to return this important business back to growth.
We also continue to optimize our operations. While there is still work to do, we’ve made progress in reengineering our business and refining our delivery structure. We've been aggressive in managing our costs and as a result have increased our target savings by $50 million. We now anticipate delivering a minimum of $350 million in savings through the 2014 year as compared to 2012. We’re making Apollo Group a more nimble and competitive organization.
Regarding our Higher Learning Commission accreditation reaffirmation, as we announced in late February, we received the peer team draft report for University of Phoenix. The draft report raised some concerns related to administrative structure and governance, resulting in the recommendation of probation.
If the HLC Board of Trustees were to adopt the recommendation of probation, they would also reaffirm the University’s accreditation during that period, which is recommended through fall 2014.
The draft reports specifically noted the University is well-resourced and innovative and has many strengths, including a high level of relevant student services and technology. We’re actively engaged in working to alleviate the government’s concerns.
Throughout the past nearly 40 years, we’ve participated fully in the peer review process and its goals and support of high-quality education.
Before I turn the call over to Brian, I just like to comment on our management structure at Apollo. Joe D'Amico has served as the President of the Apollo Group since June 2008. Prior to that, he served as the COO, EVP and CFO and Treasurer of our organization. Joe has worked tirelessly over the past seven years in many different capacities and today he is stepping down from his post as President.
We thank him for his leadership and many contributions as President. Joe has accepted a new role as EVP and Advisor to the CEO. I'm personally very excited to have Joe in this new position. It will focus on developing new senior-level relationships with Fortune 500 companies along with helping us to maintain strong relationships with senior political and regulatory leaders throughout the world.
We are also now conducting a national search for a Chief Operating Officer for our organization, we now report back and update you on that accordingly. As I close, our committed is to become the educator of choice for working learners, serving students and providing them with the real workplace skills as well as helping employers with higher qualitative workers.
This is supported as we execute our strategy to differentiate University of Phoenix, diversify Apollo and optimize our operations. As we forge ahead we look to the future with enthusiasm, optimism and determination to exceed the expectations of our students and also you as our shareholders.
Now, I'll turn the call over to Brian.
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: Thank you, Greg and good morning everyone. I'd like to start by reviewing our second quarter financial results. I'll also provide a few other update and then share our business outlook. During the second quarter, we reported revenue of $834 million, down 13% year-over-year.
The decrease was primarily the result of a 16% decline and degreed enrollment at the University of Phoenix to approximately 301,000 students. For new degreed enrollments, the University of Phoenix reported a year-over-year decline of roughly 20% to approximately 39,000 students.
Revenue per student was essentially flat year-over-year, reflecting price increases, which were offset by a decrease in average nights of attendance. We expect revenue per student to be roughly 1% to 2% negative year-over-year during the second half of 2013.
The use of grants, by the University of Phoenix impacted our revenue per student, which reduced revenue by approximately $5 million in the second quarter. Grants were less than anticipated in the quarter as some of the programs were rolled out later than expected. This favorably impacted revenue per student. Our view is that (grant) in a more targeted are preferred to broad-based options and attracting students. As an example, University of Phoenix piloted a grant program with a corporate partner – with various corporate partners and plans to roll that out more broadly in the second half of the year. As a percentage of revenue, discounts for the second quarter were roughly 7%. Our current expectation is that we'll remain at approximately at the same level for the remainder of the year.
For the second quarter, income from continuing operations was $13.5 million or $0.12 per share. The second quarter results included restructuring and other charges of $44 million associated with our optimization efforts and litigation credits of $6 million related to the favorable resolution of certain legal matters. Excluding these items, our operating margin was 8.1%, income from continuing operations was approximately $38 million and EPS was $0.34 per share.
Next, looking at our second quarter operating expenses; as we anticipated excluding special items, we had declines in all of our operating expense line items on a year-over-year basis with the exception of marketing which I'll discuss in a minute. The decreases were driven by our continued focus on expense optimization as well as reduced costs associated with lower enrollment levels. We expect to continue to decrease our expenses through the remainder of 2013 and beyond. As a reminder about 13% of our cots as a percentage of revenue are directly variable in nature and are included in the instructional and student advisory expense line item.
With respect to marketing, total cost increase year-over-year in the second quarter as we rolled out the second wave of advertising for University of Phoenix's 'Let's Get to Work' marketing campaign and supported the launch of our new career-oriented tools. While it takes time to reposition the University of Phoenix brand, initial results show the campaign is favorably influencing the perception and likelihood of consideration for the University of Phoenix.
Share-based compensation was $11 million in the second quarter and for the full year, we expect it to be around $60 million. Bad debt expense as a percentage of revenue was 2.2% in the second quarter, versus 3.2% in the prior year quarter. This reduction was due to less accounts receivable as a result of lower enrollment levels and also to the implementation of certain process improvements.
For 2013 we expect our full year bad debt expense as a percentage of revenue to be generally consistent with the second quarter. Our effective tax rate was 51.1% for the quarter and 43.1% for the first half of the year. We anticipate our tax rate for the full-year of fiscal 2013 to be about 42%. Since the first half rate was about 43%, we would expect the second half rate to be slightly less than.
Turning briefly to the balance sheet and cash flows. At quarter end, we had unrestricted cash and cash equivalents of $821 million and our outstanding debt with $91 million. Our free cash flow defined as cash provided by operating activities less capital expenditures in the second quarter increased to $67 million as compared to $44 million in the prior year. The increase was principally due to the timing of cash payments, inclusive of lower capital expenditures, partially offset by a decline in operating income.
Before moving to our business and financial outlook, I'd like to update you on a few items. First, cohort default rates, for the University of Phoenix the draft 2011 two-year CDR recently released by the Department of Education was 14.3%, consistent with our expectations and lower than our previous two-year cohort rate. The downward trend is primarily attributable to student repayment initiatives. The two year CDR is expected to be finalized in September of 2013. The 2010 draft three-year rate was just recently released by the Department of Education and was 26.1%, down slightly from the previous three-year rate. We did not experience the same rate of decline in this rate when compared to the two-year rate, given the longer measurement period. However, we do anticipate that we will see improvement in the three-year rate in future years as a result of our student repayment initiatives.
Second, I'd like to provide an update on our cost optimization efforts. We are pleased to report we are increasing our cost savings target by $50 million. We now expect to favorably impact annual operating expenses by at least $350 million in fiscal year 2014 when compared to our 2012 cost base. We expect to realize about three-quarters of these cost savings in fiscal year 2013. Consistent with my comments on the last call, we anticipate restructuring and other charges related to our optimization efforts of approximately $200 million, with most of these costs incurred in fiscal year 2013.
As a reminder, we've recognized restructuring charges of about $44 million in the second quarter and $68 million in the first half of 2013. Also, last Friday, our Board of Directors approved a share repurchase authorization up to an aggregate amount of $250 million. The timing and amount of any future share repurchases will be made at management's discretion as market and business conditions warrant and permit. Consistent with our strategy, we will continue to evaluate all investment opportunities and allocate capital to differentiate the University of Phoenix, diversify and expand our operations, both domestically and globally and as appropriate return capital to shareholders.
Now, I would like to spend a few minutes on our business outlook. Our financial outlook hasn't changed since last quarter. For fiscal year 2013, we expect net revenue of $3.65 billion to $3.75 billion and operating income excluding special charges of $500 million to $550 million. While March is generally a softer month and keeping in mind we are only three weeks into the quarter, University of Phoenix new degree enrollment is trending consistent with the rate of decline we experienced in the second quarter. However, it is too early to comment specifically where we will end up for the third quarter.
To reiterate Greg's comments above, the University of Phoenix is undertaking fundamental change to ensure that its value proposition aligns with student and employer needs, connecting education to careers. Through these efforts it is our intent to improve the University of Phoenix new degree enrollment trends and position the University for growth.
With that, let me turn the call over to the operator to answer your questions.
Operator: Peter Appert, Piper Jaffray.
Peter Appert - Piper Jaffray: Hi, Brian I was temporarily distracted there at the very end, you would said in the last call -- positive starts in the second half. Is that still the expectation?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: Hi, Peter, this is Greg. We're doing everything we can to return University of Phoenix back to growth as far as exactly the time we're not commenting on that right now. We hope it sooner rather than later. We're in the middle of repositioning the brand as you know and positioning ourselves with less reliance on affiliates and others. So what we're very focused on is making sure that we get our most competitive product at the University of Phoenix into the marketplace as soon as possible and you'll recall some of the comments that I made upfront in the call suggests some of the things that we’re doing to try to get there. So at this point, we’re focused less on the exact date and when we'll return to growth in the start number and ensuring we hit our deadlines internally to get our best product offering for University of Phoenix into the marketplace. We are working very, very hard to do that. It doesn't mean it couldn't happen by the end of the year, but we're just not focused on that date right now.
Peter Appert - Piper Jaffray: the second quarter's start performance at least relative to Street expectations, I guess, was maybe a little bit weaker than anticipated. How did it compare with your expectations?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: From our expectations, it's probably a little weaker than we had gone into the quarter hoping for, some of that's dependent on exactly the timing of spend, again a little bit less than we probably would've done. There is timing involved with that. We did see some good signs on the brand from third-party organizations that are measuring the effectiveness of what we're trying to do with our brand, but not a ton different from our expectations. It's a market that is difficult right now to deal with. We are doing that. We are just very focused internally on the University of Phoenix making sure we've engineered the best products for our students and trying to get that into the marketplace along with the changes that we are making to the brand. That's everything from the education to careers initiative, the initiatives with our corporate partners, which are continue to grow, and we're doing well with and growing in that area. There is a number of very good things are taking place, we're just focused on execution in those areas.
Peter Appert - Piper Jaffray: Last thing, Greg, the change in the COO spot, do you envision a change in the definition of that role as a result?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: We haven't had a Chief Operating Officer. We have had a President, but I do envision Chief Operating Officer that's instrumental helping me operationalize the strategy at the Apollo Group.
Peter Appert - Piper Jaffray: That's the reason for the change?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: No, well, the reason for the change is that Joe is stepping down from that position. He's been in it a number of years and elected to take on a new position, but we're excited for him in that role and also excited to be bringing on capability in the (CRR) that I think will be helpful to us.
Operator: Jeff Meuler, Robert W. Baird & Co.
Jeff Meuler - Robert W. Baird & Company: If you could just comment on the grants. It sounded like in your commentary you were talking about a shift in the timing of the grants, but it also – if I had my numbers right, it sounds like maybe the back half is going to be a little bit lighter in terms of percentage of revenue. Could you just confirm that? Is it that you feel that you're being more efficient as you do the grants in a more targeted fashion and what's driving that?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: Jeff, it's Brian, the answer is yes to both of your questions. So on the initial comments that we made on the last call, we did expect the financial impact from the grant program to be bigger than what we expect it to be today for the full year. For the second quarter, it was less. It impacted the second quarter by about $5 million, which is less than we had thought. After coming out of some of the pilots on some of the grant programs, we realized a more targeted approach versus a broad-based grant program was more effective with the students and so we are going to rollout more of those, but they will be in a more targeted fashion. For the full year impact, we don't expect it to impact us as much as we did when we were on the January call.
Jeff Meuler - Robert W. Baird & Company: You also reduced your second half expectations, correct?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: The impact on revenue per student will not be as severe as it was, because those dollars are less than they were, but financially our revenue and operating income outlook is still the same for the full year.
Jeff Meuler - Robert W. Baird & Company: Then in terms of acquisitions, I guess, how large of acquisition would you guys consider and if you could just run through your perspective on what are the key leverage points that you talked about rolling out online offerings in Mexico and BPP and if you could just kind of talk what are the key leverage points between having the University of Phoenix along with international operations versus what you all have to replicate?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: This is Greg. We don't really comment on the size of acquisitions. I think what we've done in the past is or what we've said in the past is we have a team that is studying organizations throughout the world in key markets that we believe are going to be good markets for the Apollo Group. The timing of doing anything in those countries depends on finding the right organization, the right management team, which is critical, the political environment in that country. We've done both acquisitions and also startups as you can see from our India operations. So we continue to look at a number of different markets and your team is active in discussions. Anything that we do as I have said in the past, we need to feel comfortable can create long-term value for our shareholders whether it's a startup or an acquisition, so that's how we think about the world (indiscernible) and then I’m sorry. Did you say – was your question -- your second part of the question on the University of Phoenix internationally?
Jeff Meuler - Robert W. Baird & Company: No. The second part of the question was just what do you feel are the key points that are leverageable in the model between University of Phoenix aren't having international operations as a part of it and what do you have to replicate?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: I understand. We've done that actually. There are many things that the global team has been able to leverage from the University of Phoenix. There are programs, types of programs that we have in Mexico that were originally developed up here in the United States. Interestingly, also the Mexican operations have also been able to deliver that’s originally were – excuse me our pilot, the type of classroom that I talked about was rolled out and is now being piloted in Great Britain. That is actually, it's a good question, because the key to having real long-term success in global is to leverage a Global Knowledge network where they are sharing not only in curriculum, but ideas in the way that they deliver that curriculum, whether its faculty or others or technology or whatnot and that collaboration is actually happening quite effectively right now.
Operator: Gary Bisbee, Barclays.
Gary Bisbee - Barclays: Any update on global losses, I think it was flattish with the loss, similar to the loss from a year ago. Do you still think that those losses can narrow this year or is that more likely something that would happen in fiscal '14?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: We do expect the losses to be less this year and you can see in the 10-Q the segment footnote. I do want to point out, you keep in mind that we had in the first quarter of this year, a charge for about $12 million we discussed in our MD&A in the first quarter, related to some foreign indirect taxes that was one unusual item this year. Then in the prior year there was – I think a most recent impairment charge in the first quarter of last year as well. So, when exclude those kind of unusual or special items, we do expect kind of the operating losses to be less this year than they were last year.
Gary Bisbee - Barclays: Then on the 'Let's Get to Work' ad campaign. I think you said there was – you saw that is favorably influencing perceptions, but you didn't say anything about directly driving enrollment. Is it too early to tell or is it too difficult to say exactly what's going on there?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: No. Good question. I think it is too early to – it's early on and the overall impact from a – if you think about 18 months ago, we didn't have anything in the way of other education careers for the most part. This has been delivered – developed, executed on internally and delivered to the marketplace by the Phoenix team in a short period of time, just having these capabilities and it really follows a call from the nation. We are listening to employers and others that are frankly looking for institutions to prepare people for – given the proper skills to get into the marketplace quicker and be more effective. So we are starting to see signs that the brand is moving toward that and some positive signs, I think it's too early, Gary, to tell exactly when it's going to have a direct impact on starts. We've seen some positive signs at phoenix.edu, and things like that, but I think it's too early to say for sure what the impact is, we're excited about it.
Gary Bisbee - Barclays: Then just lastly, you made a quick comment, Greg, at the beginning about non-degree and in certificate, which I know you've always had some of these offerings, but it sounds like, I guess you've announced one or two new things. How are you thinking about this, can this be a material piece of the business over time and what types of opportunities are you thinking about as you plan that out?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: Let me back up for one minute here. The comment I made was historically many institutions, but the University of Phoenix has had really one type of a product to go to market with for 30 plus years and that’s for the most part a degree granting program. So if you think about the – you know, you’ve heard me talk about before the two-thirds of the labor force in the U.S., doesn’t have a bachelor’s program. And that over 80 million, I mean that’s over 80 million people, 50 million have never tried and then 30 million never completed. But the more time I spend with our corporate partners around the U.S. and outside the U.S. it’s becoming clear. That comment I made upfront is pretty well documented. In fact there was an article just this week in a major publication. There is about 80 million people who could benefit from some type of education in this country. If I put it in our own terms, we have an (SUV) right to go-to-market with and it’s a good one. But there is different seasons, there is different economies, and what we know employers are looking for is, the degree program is great, you do it well, keep doing it, deliberate efficiently and effectively. But they have employees that would greatly benefit from getting some skills, getting some value for those skills whether it’s a certificate or shorter-term program in different areas. Again you have to do it effectively and well, but it gives them value quicker and allows them to be more effective, more quickly on their time and for the corporation or Company that they work for. Yes, we are incorporating that into University of Phoenix and in our institutions and we believe that can be a very effective part of the Apollo Group going forward. We think there is an ecosystem out there of 10s of millions of people that will be able to bring into the Apollo family. Well, we just didn’t have product before to help them. If they choose to go on do a full degree grants in program, wonderful. I think the statistics have held up very well in terms of the value that brings to you over a lifetime frankly, but it can't be only product that we have for individuals in the global economy going forward. I believe it can be impactful to Apollo Group and be a meaningful part going forward.
Gary Bisbee - Barclays: Is it safe to say this is still pretty much in the planning stages or is there parts of the curriculum they already offer that you can tailor in fairly short order to more targeted specific non-degree offering?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: No, I mean, there is some things we've already delivered to the market. You may have seen the Innovator's Accelerator that was produced with Clay Christensen that's in the marketplace now. There are many other shorter-term programs being developed inside and frankly, outside of the University of Phoenix, now that we will be delivering to the market this year. So I am excited about that. It's also one of the reasons that we've worked so hard to become a more efficient organization and to continue to get our cost structure in a place where we want it.
Operator: James Samford, Citigroup.
James Samford - Citigroup: Just a few comments or I believe it is on persistence (trends) at least at this point, but they were down throughout the quarter across the board. How much of that was really more sort of graduations versus that dropout? Any context with regards to how the HLC probation might be impacting people's decisions to reenroll?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: Yeah, James, yeah, persistence was down year-over-year. I think it was a few – 20 or 30 basis points I think the way those people externally calculate it. It was primarily impacted by attrition not by grads. As we look at the (rev) the second half of the year, we do expect persistence to improve in the second half. Retention is a huge focus for us, it always has been and the current trends we like to, we're not pleased with that. So we have a lot of initiatives that are going in, in the second half at the University of Phoenix to improve those and then also in the second half of the year there will be less seasonal increases in graduations, which we've experienced in prior years. So that's how we think about the persistence as we go through this fiscal year. In terms of HLC, it's just – it's too early to comment, I mean today we remain fully accredited and thus far hasn't had a significant impact and we need to play that process out and then ultimately when the HLC Board of Trustees make their decision we can update the market in terms of what our view is at that time?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: We are on our plan internally, with the dates that we need to meet with HLC, which is pretty much I will say about at this point, we're working very hard to get that done with the HLC. The other point I would just comment on retention is there is probably five or six, as Brian said, real key initiatives, frankly connecting education careers is a big one. There is lot of coaching around that. Our student learning experience, our depth of learning continues to rollout, the classroom versus student service platform – number of different persistence pilots that we're working with, including the sequencing of how courses are delivered to students. We continue to learn there and make changes as necessary.
James Samford - Citigroup: Just a quick follow-up on the pricing side and I know that pricing guarantee is really sort of still relatively new, any impact there on retention, are you starting to see people either take more process or (indiscernible)?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: I'm sorry was your question – did you say price – what was the question on price, sorry?
James Samford - Citigroup: Freezing your prices for (folks) who remain involved?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: I think students -- that was very positive. One of the things that we know is a concern for students and by the way, I think that is having an impact. Is that in today's economy, it's a big relief to them to try to get a more certainty around what their expenses are going to be and this allows them to have more certainty over a period of time with the University of Phoenix that they are going to know exactly what it's going to cost them. We have had positive feedback from this program. Brian, I don't know if you want to add anything?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: No, I think that’s right in line James, I mean the feedback from students has been very, very positive and the feedback we get from our counselors is very appreciative, in fact that they can lock in their tuition rates as long as they stay with the University, so it's been very favorable.
Operator: Jerry Herman, Stifel.
Jerry Herman - Stifel Nicolaus: First question is just an update on the campus rationalization. It looks like you guys are about 25% through that. Is it on target with the expected impact on new student flow? I think you guys previously said 4% to 5% and I guess so part of that is that any reason for maybe the slightly weaker starts?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: It's probably had a bit more of an impact that we had originally anticipated, but it's within our range. It is on target. The team has just done an outstanding job. Obviously, we knew we're going to have to deal with negative media around that and really I said that you see a lot of that big national headlines, but in the local markets it's been something that's actually had an impact. We'll get through that. There is so many good things that the teams are doing locally and from my perspective, it's delivering really what's most important to students on a timely basis and to the employers that they work for. We're very, very focused on that, hitting the milestones as I said before to finish getting all of our product on to the marketplace really by our fiscal year end and that's what people are most focused on. It's a good question though, and it’s definitely had an impact.
Jerry Herman - Stifel Nicolaus: Let me go high level for a minute, sort of conceptual question, your view of the company and how you manage it, you guys referenced growth and just talk to us about your view of Apollo as a growth company versus the great cash flow that it generate and now you and Board think about managing that to shareholder value?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: Excellent question. Look, what I've said recently and before is this is a great organization. People's hearts are in the right place, everybody truly cares about students. We’ve relied and frankly so have some others throughout the higher education industry on a model that worked for 20, 30, 40 years. That's changing, the sector is changing. There are still hundreds of billions of dollars of expenditures in higher education whatever your tax status is. Students needs are changing, technology is changing that and so, are their lifestyle, so is the economy and we need to evolve with that and what we’ve been spending a lot of time with, not only at the Board level, but in my management team and throughout our organization is what can we deliver. Let's make sure we understand where the puck is going in hockey terms in higher education. What does the chessboard look like? Who has the king, the queen, the rooks on the chessboard? What's our position going to be in the next three to five years? There is a tremendous need. There are tens of millions of people that need help. We've had primarily one vehicle to do that. We've taken a good look at that chessboard. We think we know where we need to go to have success and return Apollo absolutely back to a growth vehicle. If you think about high-level strategy, what I’ve said previously is, in the U.S. we have our proprietary vehicles to deliver higher education, that's been the University of Phoenix, it's been Western International; and globally we are entering new countries. You'll see us, I'm sure, in additional countries in the near future as well. We're trying to do that in a strategic way. It's 215 million projected students globally. In places like India, there is 500 million kids under the age of 22. So we know global is important. We know at the postsecondary level where we are staying very focused. We have nonproprietary vehicles to deal with the U.S. as well and that's been our AES/IPD division and that division had to be rebuilt. We've got an excellent senior-level manager in that area. That person is starting to turn that operation around and that will be our way to drive the innovation that we've been able to achieve and continue to achieve within University of Phoenix and our other institutions into the marketplace in a traditional basis, so our nonproprietary business. Finally, we have a division called Lightspeed and that is to focus on innovation. You’re going to be hearing more out of us on that division going forward. They are going to be delivering innovative solutions to the marketplace. So we’re very focused on those four areas. University of Phoenix, as everybody knows, is a huge part of the value of this organization. We’re trying to do the things we know that are necessary to get it back to growth, but for the right reasons, not just to grow it. People’s needs have changed. They need more than just a full degree-granting program where at the end of two or four years, you can wave a piece of paper that means a lot you worked very, very hard for it, but it takes a long time to show the value that you’ve received, to get the increases in your pay and the change in your lifestyle that you’re looking for. So we’re listening, we’re learning. We think there is an enormous opportunity in this marketplace. We have a great platform. We have people focused on the strategy, the execution of that strategy and we’ve never ever been more focused on (hitting) delivery dates and reaching our, frankly, our short, mid and long-term goals with the Apollo Group. I know that’s a longwinded answer, but I wanted to be clear.
Operator: Corey Greendale, First A.
Corey Greendale - First Analysis: Just a couple of quick questions. I was hoping you might comment specifically on the trends in new seatings at the bachelor level, which compared to the other levels did weaken more materially. I know, we all know the various headwinds that are impacting you and the industry, but if you could speak to what might have driven kind of the sequential weakening from into Q2 versus Q1?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: Yeah, Corey, I mean there was nothing unusual from a programmatic or degree or programmatic level. Individually, you are right, it is down roughly 24%, which is down a little bit more than the new degree mix as a whole, down 20%, but there was nothing unusual programmatically.
Corey Greendale - First Analysis: In terms of repositioning of the brands, could you help us understand kind of tactically where you're at just in terms of your marketing mix? I know, Greg, you said earlier something about moving away from affiliates. Just is there some color you can give on how many of your new students are still coming from affiliates versus the corporate channel and how that’s changed?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: Yeah, it continues to decrease, but I will tell you, there is some very good affiliate. Their world is changing, too, as I’m sure you know. We've been very careful about positioning ourselves with only the high-quality or as we see it high-quality affiliate. There has just been a tremendous change for everybody in that world over the past several years actually. We know where we want to go. We have no issue using, and are building relationships with high-quality affiliates, but again, our goal has been also to deliver our own message into the marketplace around education to careers and the other things that we’re doing and to drive people also to our phoenix.edu website. There's a tremendous team that works on that every day and optimizing that area for us. It continues to get better and better and our hope is that we’ll see some improvement in that area going forward, because those are some of our highest quality students that come in that area. But the brand is it’s early on the repositioning. As you to talk to experts and we talked to the firms that we’re using who are excellent, that have helped us design this, that have worked with us with our ambitious goals to get this into the marketplace, because it is where we want to go. I think it's relatively early on it is moving, it's going to take time to get there, but we're seeing progress every day.
Corey Greendale - First Analysis: Just one last quick one, I think you got some data under your belt now from the price freeze you put into place, should we read into the fact that you are using less discounts that it looks like the elasticity of pricing maybe you're not seeing as much change in demand based on change in pricing issue, but have anticipated or how you're looking at the elasticity of demand based on tuition prices?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: Thanks Corey. Listen, we've never just looked at pricing as one variable by itself. We do study it in our markets for sure. You need to deliver a competitive value proposition. There are some that are very successful doing that at a really lower price point. They might not have as many services or capabilities as some of the higher price points, maybe, maybe not. I know from our perspective, we're looking at the complete package. We're talking to students every day and their employers to understand where that right value proposition is to the student. For certain programs, if that means a lower price, that's great others it will mean, a higher price. We're not just focused on looking at price in the marketplace. I know that it plays an important role and we are very cognizant of that. The price freeze was really done more, because we were – we are engaging with our students and we were hearing that just try to eliminate that confusion for us going forth. Just right now it's a tough time for people and they want to have some certainty around what their builds are going to be. That was something that we felt we could do for them right away to give them that certainty. But as we developed new product, as I said upfront, we'll price it effectively and accordingly and affordably along with what that value proposition is, we will also ensure that our cost structure as I said before continues to evolve, so that we are nimble and efficient organization and we can deliver the value proposition that we think is best for our students. That's why we're working so hard to do this now.
Operator: Kelly Flynn, Credit Suisse.
Kelly Flynn - Credit Suisse: Couple questions about the expenses; some of the individual expenses line items were a little different than my model and also different from the first quarter, so I was wondering Brian, could you perhaps give us some help with run rate levels we might assume for G&A and marketing, and then also on bad debt, I think you said full year is going to be close to 2.3%, you saw on Q2, but I just want to confirm that?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: So on G&A, it was up sequentially in Q2 off of Q1, there was some – there was about $5 million retirement bonus included in there which was an unusual item in Q2. We would expect to as the year progresses and into the future to reduce that cost on a sequential basis, so hopefully that provides a little color on G&A. With respect to marketing, as we talked about on the last call, total marketing was up about 9% this quarter year-over-year. We thought it would be up little bit more, some of that was favorably impacted by quite frankly some efficiency reductions, our efficiency opportunities we captured in our marketing operations group, so that's not just marketing or advertising rather that's also the cost associated with supporting our marketing operations including by the way are what we refer to in our workforce solution or our corporate channel. So we have some internal operating efficiencies more than what we had expected, which was a good thing and then ad spend was down a little bit, but more in our non-UoP businesses versus UoP business that impacted that in Q2. As we look at the second half for the marketing expense, I think it will be roughly flat as we look to further position the University of Phoenix. It could be up, depending on the decisions we might make, but at least right now that's what we’re expecting it to trend; and then on bad debt expense. I know you asked about that as well. I made some comments. Obviously it's down in part because we have just lower student levels and as a result lower AR and then we are able to implement this quarter some process improvements too which favorably impacted it and as a result, as you said in my comments, the full year bad debt expense, we think will be in line with the Q2 rate as a percentage of revenue, so, that's hopefully provide some color on all three of those line items.
Operator: Jeff Volshteyn, JPMorgan.
Jeffrey Volshteyn - JPMorgan: If I could update us on the timeline of (indiscernible) before the end of June?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: I am sorry Jeff, we’re having a little difficulty hearing you on that. I think it was around HLC and really we’ve made the comments that we're going to make there in terms of HLC. From a timing perspective, we're hitting our benchmarks and those that we need to– and also there is data on that, I believe in the 8-K that we (reported) earlier.
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: I think it is consistent with what we disclosed in the 8-K. We haven't said much more. HLC has still indicated they would like this to be brought up by their Board of Trustees in the late June timeframe and we continue to work with them to meet their – what they are trying to accomplish there in terms of getting in front of the Board.
Jeffrey Volshteyn - JPMorgan: I apologize for that (indiscernible). One more question. How many campuses do you expect to close in the next quarter or any sort of comment around that would be helpful?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: Yes, Jeff, I know we've talked about most of the restructuring charges and there's detail in the 10-Q that we filed. Most of it relates to the accrual of operating lease expenses, future operating lease expenses, which we accrue at the time that we close the various locations. So far this year, we've incurred about $60 million or so, I think it's $63 million year-to-date in the first half. I've talked about a number around $200 million. Assuming all the approvals come through and working with the various regulators by state, we do expect to close the most number of campuses out of all of the closures that are taking place in the third quarter. So through the second quarter, we've closed about 25% of the locations. We expect that to increase more dramatically in the third quarter and then plateau off there thereafter. So again, we're working with the various regulators making sure most importantly that we are talking care of the students of those campuses. That is absolutely the most important thing. So there is always a possibility of some of those could get delayed, but general timing is Q3 will be the high point.
Operator: Paul Ginocchio, Deutsche Bank.
Paul Ginocchio - Deutsche Bank: Hey, Greg, you've got a proven technology that could help third parties improve access and maybe to lower costs. What's the outlook and timing for your ability to get the licensed at the third parties and then I have a follow-up for Brian?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: That is something that the AES/IPD team is doing. In fact they're in a pilot with a number of a different college and universities in that area. So we'll give you an update on that. You're right, we look at the developments, the investments that we've made in infrastructure technology platform internally and there are many colleges and universities that can benefit from that. I believe we're going to have success in that division overall. In that we'll definitely keep you updated on their prospects going forward.
Paul Ginocchio - Deutsche Bank: Brian you talked about your discounts paying around 7% for the remainder of the year yet the revenue per student is downward 2%. How do you square that, it seems to be little bit of a – as it gets – revenue percent gets worse, how come discount still go up a little bit?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: Well, for the full year they'll go up a little bit, while we're just kind of ballpark in and just to put in perspective, Paul, I mean I know you have this data back in 2011 discounts were about 5.4%, they trended up about 60 bps year-over-year into '12, most of that as we talked about previously was the expansion of our corporate partner channel, which we do provide some discounts to those partners. This year we do expect it to go up, it'll go up more because of the impact of grants – more than the 60 bps that it did from '11 to '12 and the impact on revenue per student, although we do expected to be negative 1% or 2%, previously we thought it would be more when we thought the discounts would go up because of the size of the grant program. So if you do the math it should all make sense.
Operator: Brandon Dobell, William Blair & Company.
Brandon Dobell - William Blair: Couple of quick questions on starts. Any color from you guys on how the different degree types, I guess trended or came out versus your expectations maybe even for first half of the year. I've seen what you thought you would expect in bachelors versus associates and then any kind of color on kind of forward expectations too?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: I'll ask to Brian to give you some more specifics. But I would say that trend is moving towards bachelors is probably consistent with the positioning that's been done over the past couple of years. I will say, as I said upfront, Bandon, that we are delivering, excuse me developing and intend to deliver new types of product to the marketplace as well going forward. So, we'll be talking about that mix. But I don't think there has been any tremendous surprises from my perspective on where it's coming in. Brian, do you want to add anything.
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: Brandon, I agree with obviously what Greg said. I mean there is no, as I mentioned earlier, there is no – not unusual that's happening (program), but our goal is to obviously identify students we can help (indiscernible). (We have favorably initiated) a mix in the student body, not on a new enrollment basis. But on a total enrollment basis, the University of Phoenix team has done a nice job of moving more towards bachelors for your degree granting versus two, hoping of course last several years as you know, that might shift a little more favorable through the rest of this year, relative to where it was at the end of last year, but not as significantly. So again, nothing unusual programmatically and there is no target percentages for the student body by degree type. It's all about identifying the students that we can be most impactful of.
Brandon Dobell - William Blair: And then to dovetail that, in your conversations with some of the corporate partners or employers, what are – what is your perspective on kind of price versus value for some of these potentially – they are non-degree granting programs or some of the – I guess kind of more corporate sponsored. Do you think you can generate the kind of price points or value that we’d like to see or that corporation is pushing back even all this disruptive technology models out there, saying that we need to lower price point to get the right value out of it for them?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: Sure. No I absolutely think we can deliver what they are looking for. We're not trying to insinuate that Apollo Group is moving all in one direction towards non-degree granting vehicles, but the mix is what we need to do a better job with and the conversations we've had are excellent. That division that is dealing primarily with corporations is growing and has been growing. They are doing an excellent job. We’re excited about it. They would like some additional product to serve our corporate partners, we're listening and we will absolutely deliver what they are looking for at a value proposition that they are looking for – that they are looking at it for. So everybody is hard at work in that area and we'll keep you guys updated for sure.
Operator: Sara Gubins, Bank of America Merrill Lynch.
Sara Gubins - Bank of America Merrill Lynch: Thanks for sneaking me in. Question about orientation, it doesn't seem like there has been a lot of changes at least from what we can tell to orientation in the last couple of quarters. Is that right and are you still thinking about making changes to orientation and has there been any rate achieved to the rate at which the students matriculating to University of Phoenix?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: First Sara, you are going to see additional changes to orientation. It's an excellent very effective front-end program. It has not had as much impact on when we talked about this upfront; on long-term retention rates, that wasn't necessarily 100% of the design of what it was for. Obviously, it's keeping students out of debt that shouldn't be taking on debt and that's the most important piece of orientation for us, but we think it can be more impactful on a retention basis as well. We're working very, very hard to make those improvements. I am really excited about some of the things I am seeing come out of the team, both from a content perspective and delivery perspective as well. So, yes, we will be talking about some additional improvements there to that program over the next couple of quarters.
Sara Gubins - Bank of America Merrill Lynch: Then just two really quick questions. Brian you – in the answer to Kelly's question, you were talking about marketing. You said second half probably flat maybe up a bit, did you mean as a percent of revenue or on a dollar basis?
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: No, flat year-over-year, so on a dollar basis year-over-year (indiscernible) to this quarter. There is obviously a seasonality in the marketing or the advertising spend which is a biggest component of marketing, so year-over-year it would be flat as our current expectations.
Sara Gubins - Bank of America Merrill Lynch: Then just last thing, the strategic changes that you're thinking about in terms of degree of length and kind of how you go to market, some really interesting. I am just wondering, is there a specific time when we should expect to hear new changes to the strategy or is it just something that will kind of evolve over time and we'll hear about it as it goes?
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: Again, our internal strategy isn't changing from what we said. We are not talking a tremendous amount about some of the competitive developments that are going on internally, but what I'll say about this, yes, you will be hearing more. We will talk more about it over the next couple of quarters. We are listening to the many, many, many corporate partners that we now have. We think we understand what they are looking for. It’s taking some development in our part and people are working very, very hard at Apollo to deliver on that. So again, it’s about being competitive to deliver for our corporate partners, and frankly, students and what they need to compete effectively for jobs that are being globally sourced. So, you will hear more about this from us going forward for sure.
Operator: We have no further questions in queue. I’d like to turn the call back over to Mr. Cappelli for any closing comments.
Gregory W. Cappelli - Director, CEO, Apollo Group, Inc.; Chairman, Apollo Global, Inc.: Alright. Thanks, operator. Thank you everybody for joining us. Let me end with this. Our team is – they are very focused. They are working day and night to become a more competitive and effective organization and really to deliver on the high expectations we’ve set for ourselves internally. Their goals are clear. The strategy is clear internally. We certainly believe in this industry. We’ve listened, as I just said, to our students and our employers. As you can see, we’re serious about becoming a more efficient organization, really so, we can be nimble, and move faster and compete effectively within this important industry. So I’ll leave it at that. Thank you again for joining us. We look forward to updating you again soon. Take care.
Brian L. Swartz - SVP and CFO, Apollo Group, Inc.: Bye.
Operator: Ladies and gentlemen, thank you for your participation in today’s teleconference. You may now disconnect.