If any of you read G&D from Columbia, there’s a good investment thesis about shorting this company in the summer 2009 edition. Bloomberg News, sent from my iPhone. Apollo Weakness for Phoenix Revenue Spurs Short Sales Oct. 30 (Bloomberg) – The University of Phoenix, the largest for-profit college in the U.S., may have set off on a collision course with the federal government and investors in 2001. That’s when its founder, John Sperling, urged executives at his 80th birthday party to boost enrollment fivefold to half a million students, a goal it has almost accomplished. Now, Phoenix’s parent, Apollo Group Inc., is facing challenges to its growth. The Securities and Exchange Commission is investigating how Apollo books revenue, the company said Oct. 27. Apollo recorded a charge of $80.5 million to cover costs it expects to pay to settle a lawsuit alleging that it violated federal student recruitment rules. Profit in the quarter ended Aug. 31 fell 60 percent largely because of that charge. Apollo shares, which had more than doubled since 2006, may have difficulty rebounding from an 18 percent decline the day after the SEC probe was disclosed. Phoenix may also face scrutiny as the U.S. Education Department examines for-profit universities that rely heavily on taxpayer-supported financial aid. In fiscal 2009, Phoenix derived 86 percent of its $3.77 billion in revenue from federal grants and loans, up from 48 percent in 2001, and approaching a federal limit of 90 percent. “The outlook for Apollo next year has definitely become a lot tougher,” said Robert Wetenhall, an analyst for RBC Capital Markets in New York, who lowered his rating on Apollo shares on Oct. 28 to “underperform.” Axia’s Growth Phoenix’s enrollment has almost doubled to 443,000 from 227,800 in fiscal 2004. About 90 percent of that growth has come from a two-year online college called Axia, created in 2004. While Phoenix originally focused on bachelor’s degree and graduate degree programs for managers whose employers paid their tuition, Axia attracts students with lower income and less academic preparation, the majority of whom depend on federal financial aid. Apollo’s revenue was $1.1 billion during the three months ended Aug. 31, five times the amount during the same period in 2001. Net income rose almost threefold to $91.5 million. The company’s shares fell 23 cents to $57.92 at 9:36 a.m. in New York Stock Exchange composite trading. Before the close on Oct. 27, the stock had fallen 4.8 percent this year, compared with an 18 percent rise in the Standard & Poor’s 500 Index. Investors have bet against Apollo, with 10 percent of its shares sold short as of Oct. 15, compared with 3.5 percent for the New York Stock Exchange as a whole. Apollo’s short interest has risen to 13.4 million shares from 6.6 million a year ago. Obama Administration Phoenix now has to deal with the Obama administration, which is tightening review of for-profits and has close ties to community colleges that compete with Axia. Driven in part by the shift to Axia, Phoenix’s growing reliance on taxpayer funds is drawing government attention. The average annual tuition is $10,350, $500 less than what federal aid will pay for a low- income freshman under age 24. By comparison, annual tuition at public community colleges this year averages $2,544, according to the College Board, the New York-based nonprofit organization that owns the SAT college admissions test. “It makes sense to examine institutions that rely heavily on federal aid,” Robert Shireman, Deputy Undersecretary of Education, said in an interview without singling out any university. “Certainly, one of the data points we look at for triggering possible program reviews is a large growth in the use of federal financial aid.” Uncover Problems Such a program review would be designed to uncover problems with financial management or signing up students who are unqualified or aren’t fully aware they’re taking out loans, and may result in fines, suspensions or terminations from eligibility for financial aid, Shireman said. Students are reliant on aid because of the recession and rising college costs, said Sara Jones, an Apollo spokeswoman. Phoenix expanded into online two-year degrees to continue its shift from a niche institution for degree completion into a comprehensive university, not to obtain more financial aid dollars, she said. The 90 percent limit on federal revenue, enacted in 1992, penalizes schools for having low-income students, said Gregory Cappelli, Apollo Co-Chief Executive Officer. “We want to help people,” Cappelli said in a Sept. 9 interview at the company’s Phoenix headquarters. “They need to be able to read and write and compete at the college level. Know what? We don’t want your money otherwise.” The company believes the revenue recognition policies being investigated by the SEC are appropriate, Brian Schwartz, Apollo’s chief financial officer and treasurer, said in an Oct. 27 conference call. Few Graduate While Phoenix has succeeded in drawing students, most don’t graduate, leaving them without degrees and often burdened by loans. Only 8.9 percent of Phoenix students without prior college experience complete a degree in six years, including 5 percent of those who attend classes online, according to the National Center for Education Statistics, in Washington. The national graduation rate is 56.1 percent for four-year schools and 30.9 percent for two-year schools. Besides leaving school prematurely, many students aren’t able to pay their bills, with U.S. taxpayers picking up the balance. Of Phoenix students who should have begun repaying loans in 2007, 9.3 percent have defaulted, up from a 7.2 percent rate a year earlier and more than the national average of 6.7 percent, according to the Education Department. The university works closely with lenders and delinquent students to stave off defaults, said Robert Collins, Apollo’s vice president for financial aid. ‘Replacement Curve’ Phoenix’s dropout rate means the school needs to recruit 250,000 new students a year – equivalent to six University of Michigans – to maintain current enrollments, said former Apollo manager Mark DeFusco, now an education investment banker at Berkery, Noyes & Co. in New York. “The replacement curve is astronomical,” DeFusco said. “You have to feed the beast.” Phoenix’s growth is hardly uncontrolled, said Jones, the Apollo spokeswoman. The university has “more than 200 campuses and learning centers” which means it can add 1,000 students a day by enrolling five at each one, she said. Phoenix gained 102,000 new students in the quarter ended Aug. 31, according to Charles B. Edelstein, Apollo Co-CEO. The question of whether recruiters sign up unqualified students is the focus of the lawsuit that Phoenix said it expects to settle for $80.5 million. The 2003 suit brought by two former employees in federal court in California alleges that Phoenix violated a 1992 ban on paying recruiters on the basis of enrollment numbers. The company has denied wrongdoing. ‘Dumb as Doornail’ In a deposition in the lawsuit, Jennifer Kahn, a recruiter who left Phoenix in 2006, said she complained to her boss about a prospect who couldn’t handle college. “I had a student, let’s refer to him as dumb as a doornail,” Kahn said. “And my manager told me, ‘Enroll him. It’s not our call to say who has a right to an education.’ As a consequence, he started, he went to the first night, he knew he was in deep doo-doo, and dropped. He never should have been there.” Tom Corbett, a former director of online enrollment at Phoenix who provided an affidavit in the lawsuit, said in an interview that the school’s recruiters were like brokers peddling subprime mortgages. “The University of Phoenix’s management culture is fueled by greed, the same as the housing scenario,” Corbett said. “There was no emphasis on the student’s actual values, goals, background, experiences.” Compensation Methods Timothy Hatch, an outside counsel for Phoenix and a partner in the Los Angeles office of Gibson, Dunn & Crutcher, said the school enrolled the student mentioned by Kahn because he had completed an associate’s degree at another for-profit college. Phoenix’s compensation methods are legal because teamwork and student retention figure into its salary adjustments along with enrollment expectations, he said. The criticisms by Corbett and other former employees don’t reflect the views of Phoenix recruiters and managers in general, he said. The Education Department may tighten 2002 rules that let colleges pay recruiters partly on the basis of enrollment, according to Shireman, the deputy undersecretary. The department announced on Sept. 9 that it may prohibit misrepresentations of information provided to students and prospective students. The move was prompted partly by reports the department received about Axia recruiters, according to a federal official familiar with the matter. Prospective Students In tape-recorded telephone calls heard by Bloomberg News, Axia recruiters told Wall Street researchers posing as potential applicants that its credits could be transferred to Harvard University and Columbia University. Those schools don’t grant transfer credit for online undergraduate courses, the universities’ spokesmen said in e-mails. Cappelli said he isn’t aware of the alleged misrepresentations. “There’s not a mandate or a directive from anyone in the management team to fool or hurt people,” he said. “Traditional colleges make errors, too.” Phoenix has a pilot program to improve student readiness for college, Cappelli said during a conference call with analysts on Oct. 27. Lower retention rates and extra remedial instruction and other support services for Axia students have damped Apollo profits, he said in September. ‘Concerted Effort’ “We are making a concerted effort to get back our focus on bachelor’s and master’s degrees,” said Cappelli, a former Credit Suisse research analyst who joined Apollo in 2007. “The return to the student is better if they stay in school and complete their bachelor’s degree. The return to us is better, too. Not all of our growth is coming from Axia anymore.” The company supports a proposal in Congress that would allow colleges to exceed the 90 percent ceiling on the portion of revenue from financial aid until 2012, and not to count increases in student loan limits as federal revenue. The proposal, which passed the House last month as part of a broader education bill, isn’t included in a Senate version, said Mark Kantrowitz, publisher of the FinAid.org and FastWeb.com financial-aid Web sites based in Cranberry Township, Pennsylvania. Phoenix officials said the 8.9 percent graduation rate measured by the government counts only first-time students. Including transfer students, 27 percent of Axia students graduate, according to the university’s 2008 Academic Annual Report. Of those pursuing bachelor’s degrees, Phoenix said 38 percent graduate. No Placement Phoenix doesn’t help graduates land jobs, nor does it track where they find employment, Jones, the Apollo spokeswoman, said. She said most Phoenix students already have jobs. Simon Saffery, 30, a Hawaii resident, transferred to Phoenix’s online program as a junior in 2006 and graduated last year with a 3.9 average out of 4.0 in computer science. He said he has applied for 25 entry-level information technology jobs without receiving a single interview. Almost half of the openings he sought were at Apollo itself, Saffery said. He is unemployed, owes $45,000 in student loans and may declare bankruptcy, Saffery said. Jones declined to comment on individual students, citing privacy considerations. According to a 2008 survey by Phoenix, graduates of its associate and bachelor’s degree programs earned average increases in personal income of 19 percent and 28 percent, respectively. Founder’s Dream Sperling, who has an economic history Ph.D. from Cambridge University in England, founded Phoenix in 1976. His mission was to give working professionals a convenient way to get back to school and boost their academic credentials without having to quit their jobs, according to his 2000 autobiography, “Rebel With a Cause.’’ Students, who learned in teams and took five- week courses in business, nursing and other fields, tended to be managers in their mid-30s whose employers reimbursed them for tuition. Richard Chait, a professor of higher education at Harvard in Cambridge, Massachusetts, who has studied Sperling’s university, said the school “saves money everywhere” by hiring part-time faculty, leasing real estate, and centralizing administration. “The genius of the University of Phoenix is that it spends $1 million to develop one course that it gives a thousand times,” Chait said in an interview in his office. “Community colleges spend almost nothing developing a thousand courses that they will use once.” Expanding Eastward In the 1990s, Phoenix expanded eastward, opening facilities in Michigan, Maryland and Pennsylvania. Today, according to its Web site, the university has campuses in 39 states, the District of Columbia, Puerto Rico, and two Canadian provinces. From 1995 to 2000, Apollo’s stock rose more than 10-fold, making it one of the 30 top-performing stocks in the Russell 3000 Index. When enrollment was about 20,000, Sperling told executives Phoenix would have 100,000 students by 2000, Bob Barker, a former Phoenix executive vice president, said in an interview. At his 80th birthday party in 2001, Sperling raised his sights to 500,000, DeFusco said. Apollo never formally adopted Sperling’s vision, said Jones, the spokeswoman. She said Sperling was unavailable for interviews. As fast as Phoenix was growing, it was drawing from a limited customer base of mid-career managers, former Apollo president Brian Mueller, CEO of for-profit Grand Canyon Education Inc. in Phoenix, said in an interview. Students had to be at least 23 years old and have two years of work experience and as many as 60 credits from other colleges. Rapid Growth By 2004, the university had eliminated its credit and age requirements, Jones said. DeFusco, who worked at Apollo from 1994 to 2003 in academic affairs and then opening campuses for Phoenix, said Axia’s tuition was set just under the federal limit for financial aid so government grants and loans could cover most, if not all, of the cost. The college’s tuition-pricing “was a financial-aid play,” DeFusco said. Apollo spokeswoman Jones said that was not the case. Unlike students who came to Phoenix to complete degrees, the company said that three out of five Axia attendees haven’t gone to college before. “It’s no longer the mid-career manager, it’s somebody working a minimum-wage job somewhere and looking to get out of that dead end,” said Laura Palmer Noone, a former Phoenix president who is now CEO of Piccolo International University, an online school based in Scottsdale, Arizona. Career Aspirations Sabrina Bogan, 39, a criminal-justice major, said in an interview that Axia has improved her writing. The Richmond, Virginia, mother of three, who has a high school equivalency degree and used to work as an assistant manager at a convenience store, said she has written essays on the death penalty and energy conservation. “The person that I was before I started taking those classes could not have done that,” Bogan said. She said she hopes to land a job in a lawyer’s office after she finishes her associate’s degree next year. Not all Axia students benefit. Laura Holder, 29, has a diploma from Prairie Grove High School in Prairie Grove, Arkansas, where she took special-education classes, she said. According to her mother, Beatrice McCormack, Holder has an IQ of 65 to 70, within a range the Washington-based American Association on Intellectual and Developmental Disabilities defines as intellectually disabled. Axia Recruiter Holder, who lives in an apartment with her husband, said she learned about Phoenix on the Internet and contacted the school in hopes that a college degree would help her find work as a preschool teacher. The Axia recruiter, she said, asked if she had graduated from high school, not whether she was in special education. “They said once I go through the classes, I would get a job in teaching,” Holder said. Holder enrolled at Axia in October 2006 and realized the classes were too hard for her, she said. She left school amid a payment dispute without completing a course. A collection agency dunned her for a tuition balance of $1,710. Jones, the Phoenix spokeswoman, said the school is aware of a handful of instances in which intellectually disabled students enrolled and soon demonstrated that they didn’t have the ability to succeed. In those cases, she said, Phoenix worked to help the students withdraw without financial obligation. Community Colleges Axia may soon face more competition for students. The Obama administration has proposed allocating $12 billion to publicly run community colleges, which also give two-year degrees. While Sally Stroup, a former Apollo lobbyist, oversaw post-secondary education in the George W. Bush administration, former community-college leader Martha Kanter plays a similar role now. “Some in the administration, if they were advising students who had a choice of going to a community college or a for-profit college, would say, ‘Pick the community college,’” said Scott Fleming, a Washington lobbyist who represents Apollo. The Education Department isn’t out to “shut down or maim” for-profits, Cappelli said. “If Obama means what he says, that he wants everyone to have one year of college, how do you accomplish that without for-profit higher ed?” he said. To contact the reporter on this story: Dan Golden in Boston at dlgolden@bloomberg.net . Find out more about Bloomberg for iPhone: http://bbiphone.bloomberg.com/iphone Sent from my iPhoneP
“the school is aware of a handful of instances in which intellectually disabled students enrolled and soon demonstrated that they didn’t have the ability to succeed.” “Intellectually disabled”?
Lol, that’s sad.
Fidelity is going to have a bad year recruiting looks like.
Fidelity doesn’t have a bad year recruiting…recruiting has a bad year when Fidelity decides not to hire.
the stock has already taken a pounding since the investigation came out 3 days back, read this article as well for some entertainment http://www.citronresearch.com/index.php/2009/01/13/citron-releases-the-document-that-the-apollo-group-nasdaqapol-does-not-want-you-or-the-us-government-to-see/ this company looks doomed.