The University of Phoenix – On the Right Track Again Toward Graduation

Implications: This fiscal first-quarter report issued on Feb. 7, 2007 from Apollo Group. Inc., the for profit educational provider that runs the University of Phoenix (UOP) appears to represent a key turning point for an improved outlook with most analysts. The University of Phoenix, with more than 300,000 students at some 160 learning centers and 100 campuses (including an online campus) is the US’s largest private university. With fears subsiding regarding competition, earnings restatements and an investigation into options backdating, Apollo Group (APOL) is up a healthy 17% year to date through March 22.

Once a glamour stock in the for profit educational sector, peaking at $94 a share in 2004, Apollo has faced a seemingly endless list of challenges in the past few years including the strength of its senior management team, accounting irregularities, the options back dating, changing demographics of adult students, the law of big numbers (can it continue to grow at its strong historical growth rates), questions relating to its strategic direction, federal financial aid issues, and even calculations of its graduation rates, etc.

Analysts seemed mostly impressed with this quarterly report and senior management statements about its future despite the fact that the report itself was unaudited. Apollo was upgraded by Thomson Financial – Gradient, and; Columbine Capital Services; Argus (Buy), Morningstar (Buy), Morgan Stanley (“we remain bullish”), S&P (Sell). Apollo expects to file the audited statement for the first quarter of 2007, third quarter of 2006, and its report for the 2006 fiscal years by April 30. See commentary section below for short and long term outlook; key positives and challenges.

Analysis:

Upfront, I should state that I am an instructor at UOP in addition to being an adjunct professor and on the faculty at several other universities. Hence, my intrinsic goal is for UOP to succeed or even thrive, but I do recognize the many challenges ahead as the university is not yet fully out of the woods.

What’s there to feel good about?

·The new management team led to company president Brian Mueller appears to be earning respect from the key publics – faculty, employees, students, investors, etc.

·The earnings beat analyst’s expectations of $106 million, or 62 cents per share

·There was an 8.6 percent growth in overall student enrollment

·13 new academic programs will be opened within the next six months

·Definitive progress is being made with Axia College, UOP’s new two year college to address changing demographics in the adult student population (Axia enrollment increased 69.4%, reflecting the company’s commitment in Axia college programs).

·International expansion is underway: Latin America (Brazil, Mexico, Chile); and Asia (India and China)

·The company also expanded into the K-12 online market with the acquisition of Insight Schools in January 2007 leveraging its online expertise into an entirely new and nascent market.

What’s there to be concerned about?

·The restatement of historical enrollment number and uncertainly related to potential additional charges or restatements could increase the likelihood of additional inquiries from the SEC, other regulatory bodies or even the department of education (related to Title IV lender refund reimbursements)

·Increased competition online from newly aggressive traditional schools such as the University of Maryland; plus continued competition from traditional universities offering more convenient evening courses designed for working adult students

·Bachelor’s degree students at UOP were down 6%, which to some degree reflects the cannibalization of this segment by Axia students; however, this decline appears to have moderated versus fiscal QTR 4 reflecting an increasing pool of Axia students transferring to UOP bachelor degree programs.Masters degree students also declined 6% due to increased competition for online MBA and other programs.

·Aging baby boomers, once the primary target for UOP recruitment efforts

·Can UOP effectively control potential increased instructional costs and services due to higher enrollment numbers and bad debt expense?

·Can UOP also control the increased costs for selling and promotional expenses due to increased number of enrollment counselors and a large increase in advertising costs?

·How much bad debt did the company take on during the past few years as some students neglected to pay tuition?

·Can the company provide more transparency on how it counts student enrollments for online and ground classes so that analysts can determine more accurate graduation and drop out rates?

Key’s to success:

·Focus future student targeting to Generation Y as the educational needs of 70 million baby boomers approaching retirement continue to decline; the flexible scheduling and lower tuition of the Axia strategy is right on for this younger target group coupled with international expansion and selective acquisitions

·Continue building brand recognition to recruit students via efficient advertising and lead generation; in 2006 the University of Phoenix bought the rights for over 20 years to put its name on the Arizona Cardinals’ new NFL stadium

·Aggressively invest to develop educational curricula, more effective delivery methods and supporting academic services

·Proactively - continue positive public relations initiatives to minimize negative publicity; beyond the recent negative NYT article (see below), I found a web site called: www.uopsucks.com that is shocking to say the least – it reminds me of some of the negative PR web sites on Wal-Mart

·Continue to capitalize on core competencies such as the rEsource center – its online student and faculty web site for all curriculum and student reading materials

·Strive to achieve higher levels of accreditation – it is my understanding that UOP is accredited by all appropriate regional and state accrediting agencies and is a candidate for accreditation with the ACBSP - the Association of Collegiate Business Schools and Programs.In the future, it would be extremely useful for UOP to also seek admittance to the AACSB, the most prestigious accreditation affiliation for bachelors, masters/MBA and doctoral programs in business.For example, Intel recently decided not to reimburse tuition for MBA programs without AACSB accreditation.In addition, Proctor and Gamble will not hire graduates of non-AACSB accredited programs.

·Upgrade admission standards where appropriate – as an example, UOP’s MBA program should consider requiring the GMAT which is required by virtually every fully accredited MBA program in the U.S., however, UOP does require a minimum of a 2.5/4.40 cumulative undergrad average for admittance to their MBA program and most other graduate programs, plus at least three years of work experience.

Fueling some of the key issues facing the Apollo Group and the University of Phoenix was a scathing article written by Sam Dillon, Titled, “Troubles Grow for a University Built on Profits” that appeared in the New York Times on February 12, 2007. As a faculty member I was upset about the article and wondered if any of this could be true. Essentially, Sam Dillon portrayed UOP as a post child for the for-profit postsecondary education market designed for large profits, significant federal aid, and low overhead, education.

The University of Phoenix on its intranet site to students and faculty issued an incredibly detailed fact vs. fiction rebuttal, almost line for line.  It also issued a letter to the editor of the New York Times located at: http://phoenix.edu/about_us/the_facts/the_facts.aspx

What I found most objectionable were the distortions of fact, for example in the calculation of student graduation rates. The NYT stated the real graduation rate at UOP is only 16% and is among the nations lowest. Having taught at UOP for several years, this figure made no sense to me. The University of Phoenix’s actual graduate rate appears closer to 50-60%, the same average found among traditional public colleges.

According to the UOP rebuttal, “The 16 percent graduation rate cited by the New York Times applied to only 7 percent of University of Phoenix’s total student population. The federal standard used to calculate this rate requires universities to report only those students with no prior college experience. The vast majority of students attending University of Phoenix enrolled with a significant level of prior college course work as well as professional experience and therefore cannot be reported into the federal database.”

In one key area I did agree with Sam Dillon – is that UOP needs to raise the bar on its accreditation affiliations. Regional accreditation is simply not a high enough or sufficient standard in the competitive world of higher education.

Overall, I am proud to teach at UOP. Yes, it’s not Harvard or Yale or even an NYU where I received my MBA. The upper tier of my UOP students could do well at most universities. However, some at the bottom are perhaps benefited by the smaller size classes at UOP, and the individual attention provided to students by UOP’s strong student support services. I can state that UOP’s emphasis on writing, presentation skills, critical thinking, and the hiring of instructors who have real world experience represents a positive to a student’s career progression and in using their educational skills beyond graduation.

From a macro standpoint, demand for educational services should continue to remain strong for degree programs in key fields such as business, information technology, and healthcare, etc. Given the increases in tuition at public (7.1%) and private universities (5.9%) four-year institutions per a survey by the College Board there seems to be an inherent inefficiency of nonprofit institutions that lack incentives to reduce cost.

Proprietary institutions such as the UOP that can offer new instructional delivery, online, evening, weekend programs and meet the needs of nontraditional students and working adults should continue to experience rapid growth in the future. The huge unknown is the future impact of public and/or private universities in effectively penetrating the adult education segment once dominated by for profit centers like the University of Phoenix.