Apollo Group's 4Q earnings announcement highlighted changes that the company is making to their business model in fiscal 2011:
"The Company expects fiscal 2011 to be a year of continuing transition in its operations as it implements initiatives, primarily at University of Phoenix, aimed at enhancing the student experience, expanding student protections and shifting the mix of enrollment to more experienced students who have a greater likelihood of succeeding in the Company's programs. Some of these initiatives include:
Changes in the roles of the Company's admissions personnel and comprehensive changes in their evaluation and compensation systems, including the elimination of enrollment results as a component of compensation effective September 1, 2010; University Orientation, a free, three-week, non-credit bearing program which, beginning November 1, 2010, will be required for all new students enrolling at University of Phoenix with fewer than 24 transfer credits; and The continued reduction in emphasis on third-party affiliates for lead generation and other enhancements to the Company's marketing approach."
So, what is the new compensation structure for admissions counselors based upon (from conference call)?:
"...we designed and are implementing a system that allows our admissions personnel to more fully develop relationships with perspective and current students...in short, we’ll be compensating them based on the competencies and relationships they build with students and the student experience they help create."
More on compensation structures from Q&A (from conference call, thanks to Seeking Alpha for transcript):
"The second point is that we’ll compensate them fairly for the role that they are playing, and the key, as we said earlier; there is absolutely nothing in their evaluation that relates to new enrolment. Most of the evaluation is done on competencies and also the student experience that they are creating. We are not going beyond that right now. I think some of this is actually kind of proprietary and our people are very excited about the changes that we’re making, at least most of them, and we’re excited about it."
The company noted in their conference call that about 20% of students were not completing the University Orientation program:
"Over 30,000 students have gone through the orientation program now and we continue to see positive results as we work to improve its effectiveness. To-date, the results remain such that about 20% of the students are self-selecting out, and of those that enroll, their retention rates over the first few courses continue to be significantly higher."
And as for changes in their internet lead strategy, they are restructuring that program to improve the quality of their leads (from conference call):
"We’ve accelerated an aggressive restructuring of the Internet lead channel and particularly the affiliate marketplace as we were getting a disproportionate share of our underprepared students from this channel."
Turning to enrollment growth (a metric investors are quite keen on), it fell in the fourth quarter by 10% from 102,000 in 2009 to 90,000 in 2010. Apollo expects to see this trend accelerate in the quarters ahead (it may surprise many that over 58% of Apollo's degreed enrollment includes Bachelor's (41% of total), Master's (15% of total) and Doctoral degree candidates (2%)):
"The decline in University of Phoenix new degreed enrollment experienced in the fourth quarter of fiscal year 2010 is expected to accelerate during the first quarter of fiscal 2011, resulting in a significant year-over-year decline."
How much is growth going to decelerate going forward? Try 40% (from conference call):
"For the first quarter, the impact of the changes we are making as well as the various external factors could result in a decline in new degree enrolments in excess of 40% year-over-year."
As for why enrollment growth declined 10% in the fourth quarter (from conference call):
"New degreed enrolment was down 10% due in part to the continued pilot of University Orientation, which adversely impacted undergraduate new enrolment. We also continue to experience lower new enrolment at the Masters level, a trend that we’d like to reverse."
They went even further in providing color on this trend during the Q&A that followed their prepared remarks:
"...we had an incredible amount of negative press during the quarter, which is something that’s hard to quantify, but we know it caused some difficulty during the quarter. Also, we’ve been working on piloting and talking a great deal about change within the compensation system for our enrolment advisors. So I think the combination of those things really created pressure on the enrolment during the quarter."
As the company bumps up against 90/10 limits in 2011, they taking the following steps to manage it (from conference call):
"We have implemented various measures intended to reduce the percentage of the University of Phoenix’ cash basis revenue attributable to Title IV funds, including emphasizing employer paid and other direct pay education programs, encouraging students to carefully evaluate the amount of necessary Title IV borrowings, and continued focus on professional development and continuing education programs....We also intend to consider other measures, including tuition price increases."
Later during Q&A they indicated they might go as far as to raise prices twice in a year to stay below the 90% threshold:
"...traditionally had done annual price increases, but as we approached 90 in any given year, if we needed to take a second price increase to help fix that. We would do that."
As to the size of the available market, the company expressed their excitement with the following statistics (from Q&A):
"There’s 50 million people in this country who have never tried to go to college. There’s 30 million people who haven’t completed college."
In terms of relationships with community colleges (friend or foe?); from Q&A:
"We absolutely view ourselves as a partner to community colleges. As I’ve said before, we get our very best students for community colleges...we have announced lots of articulation agreements and the key for us is making them more effective and that’s what we are focused on..."
Oh, and as for company guidance for 2011 (from earnings announcement):
"Given the transitional state of the business, and the uncertain regulatory environment, the Company is withdrawing its prior preliminary business outlook for fiscal 2011..."
Investors hate uncertainty and declining growth rates and punished the stock in after-hours trading by almost 15%.
- APOL: Projects 40% Decline in FYQ1 New Enrollment (Barrons): "After for-profit education company Apollo Group (APOL) this afternoon said a clamp-down on recruiting would hurt enrollment this quarter, the company revealed to analysts on a conference call just how bad it could be: a drop of 40% compared to last year’s Q1."
- Apollo Group Pulls 2011 Views; Roils Education Sector (Wall Street Journal): "The withdrawn guidance and the potential for weakened future results sent a shudder through the education sector, sending Apollo shares down sharply in late Wednesday trading and giving a back-to-school haircut to the stocks of at least seven of its peers...Among other education stocks, Corinthian Colleges Inc. (COCO) was down 5.8%, Career Education Corp. (CECO) was down 6.9%, ITT Educational Services Inc. (ESI) was off 8.1%, DeVry Inc. (DV) was off 5.1% and Strayer Education Inc. (STRA) was down 6.4%."
- Apollo withdraws outlook, warns on enrollment growth (Reuters): "Apollo Group Inc (APOL.O), the biggest for-profit U.S. education company, blamed an uncertain regulatory environment for withdrawing its 2011 outlook and warned of a significant drop in new enrollments, setting a dismal tone for an industry facing intense government scrutiny."