Editor's note: On Wednesday, Jan. 11, Apollo Group announced the resignation of Chairman and CEO Todd Nelson, who after leaving Apollo will be "pursuing personal investment opportunities." Apollo Group's founder, John Sperling, immediately took over as interim chairman of the board. Simultaneously, the CEO of Apollo's University of Phoenix Online subsidiary, Brian Mueller, was appointed company president. Interestingly, Mr. Mueller's promotion to chief operating officer was announced less than a month ago in the company's fiscal Q1 2006 earnings release.
Foreshadowing? Perhaps. Mr. Mueller's rapid ascent at Apollo suggests to us that, as sudden and out of the blue as this change appears, it was actually brewing for some time.
Yet we were in contact with Mr. Nelson as recently as a few weeks ago, working out the final details of an interview that we published on Jan. 4 -- and he didn't reveal a thing about his plans. In honor of Mr. Nelson's departure, we hereby republish the Jan. 4 interview in full for your reading pleasure. Give it a look over -- can you find any signs that we missed? Email me with comments if so.
In the business of providing for-profit education to working adults, one company stands out. With a market cap of $10.6 billion, Phoenix, Ariz.-based Apollo Group
Rich Smith: Todd, Apollo Group has been getting a lot of press recently. But for the benefit of those who still don't know the company, can you give us a three- or four-sentence thumbnail sketch of what you do?
Apollo Group CEO Todd Nelson: Apollo Group is a leading education management company providing higher education programs across the nation for students who must work while attending college. Its subsidiaries are the University of Phoenix, The Institute for Professional Development, The College for Financial Planning, and Western International University.
Rich: Traditional colleges love to brag about graduates who became presidents, captains of industry, and so on. Give us a "Who's Who" list of Apollo Group grads. Where are they now?
Todd: We don't keep a "Who's Who" type of tally or ranking among our graduates, but here is a small selection (among thousands) of accomplished professionals who have graduated from Apollo's University of Phoenix:
- Lori Daniels, member of the Arizona Senate
- Deborah Sue Shayo, New York Bar Association Director, Law, Youth and Citizenship Program
- Mary Elizabeth O'Brien, President and CEO, Baptist Health System (Ala.)
- Brian Jarvis, Chief of Police, Chester, NY
- Valerie Manning, President and CEO, Greater Phoenix, Ariz., Chamber of Commerce
- Elaine Hugunin, President, Better Business Bureau
- Shaquille O'Neal, accomplished pro basketball player
- Russell Pearce, member of the Arizona House of Representatives
Rich: I see from your resume that you received degrees from both Brigham Young University and University of Nevada at Las Vegas. Compare your experiences there with what a student could expect to experience at an Apollo Group school.
Todd: The two traditional universities I attended are beholden to very large constituent populations, and they serve a variety of factions, whereas the Apollo Universities are more single-focused in who we serve and in what we offer. For example, all of our academic programs are centered on educating people within professional disciplines, rather than in broad liberal arts fields, and our students are currently working, most of them full-time. As a result, our students attend classes in the evenings, either on one of our campuses or online. The academic experience here is very interactive and requires a high degree of engagement by the learner. That's why our classes are kept small. The amount of individualized attention and community-building that goes on in our campus-based and online classes is impossible to achieve in the large lecture halls that are found at most large universities. On the other hand, at our institutions, you will not find the on-campus life and extracurricular activities found at these traditional schools.
Rich: Can an Apollo Group student switch to a traditional college and have the credits transfer? How about vice versa?
Todd: Yes, they can, and they often do transfer credits in both directions without difficulty. We're providing regionally accredited higher education, which is evaluated and transferred in the same manner as other large public and private universities who share our accredited status. (Note: For-profit regionally accredited universities do not share the transfer-credit problems that plague nationally accredited institutions or vocational/trade schools).
Rich: Students compete for admission to traditional colleges. Are there a limited number of "slots" open for courses at Apollo Group's schools, or do you admit as many students as meet your minimum admission standards?
Todd: Like community colleges do, our Apollo institutions use open enrollment admissions criteria designed to provide access and opportunity to higher education. We therefore do not restrict enrollments to a few available slots. Access to education is embedded in our institutional mission. There is a need in this country for affordable and accessible education. For example, it is estimated that more than 400,000 college-ready students are denied access to four-year institutions as a result of financial barriers alone.
Rich: According to your most recent annual report, the U.S. Department of Education puts the post-secondary education market at $280 billion in revenue, and Apollo Group is the largest private institution of higher education. Yet at $2.25 billion in trailing-12-months revenue, it seems that you control less than 1% of the market. So how does the other 99% get divvied up?
Todd: If you consolidate the accredited for-profit universities like Apollo by ownership, there are only about 28 in the U.S., whereas there are thousands of for-profit vocational and trade schools. Post-secondary education is a big basket, and contains everything from training and vocational education to highly elite colleges.
Rich: I'm going to list a few of your competitors now, and ask that you rank them in order of whom you most admire:
ITT Educational Services
Todd: The majority of the companies listed above operate vocational/technical schools. Since we do not offer vocation/technical programs, we do not compete against [them]. The only school we compete against, on a limited basis, is Strayer.
Rich: Apollo Group has an interesting equity structure, with most investors owning Class A stock, but all voting rights reserved to Class B stock. How did that come about, and do you anticipate granting Class A holders the right to vote in the future?
Todd: The reason there are two classes of stock was because of a regulatory issue that existed at the time Apollo Group went public. At the time, a change in voting ownership may have triggered a need to reapply for U.S. Title Four eligibility. In the future, as the regulatory environment continues to evolve, it may open the opportunity to change the equity structure of the company.
Rich: Let's address the elephant in the classroom. Your industry faces accusations of lowering admissions standards, inflating job-placement statistics, and paying recruiters based on how many warm bodies they can put behind school desks -- all to grow profits. If these accusations were proven, most people would say, "That's horrible," but investors in the industry might just applaud the profits. As the CEO of a public, for-profit educator, how do you balance the need to keep your investors happy with the wider public's desire that you only admit qualified students, students' desire that you find them good jobs, and employers' desire that you give them quality hiring material?
Todd: To ask how we balance between profits and quality is to assume that we must make choices between the two. That's simply not the proper equation. We provide a rigorous education to every student, every time, and there is no debate about it, ever. This attention to quality is how we maintain accountability to our students and their employers, and ultimately to the shareholders. It's also behind the amazing growth of the organization. Many people are unaware that University of Phoenix has one of the most comprehensive and leading-edge academic institutional assessment systems in the U.S., which enables extensive analysis into the most detailed reaches of our operation for both internal decision-making and external scrutiny. We don't leave quality to chance; we establish the learning outcomes, and then we measure objectively whether [they] have been achieved. This system has won awards from the American Productivity and Quality Center, the Arizona Pioneer Award for quality (modeled after the prestigious Malcolm Baldrige National Quality Award), and the American Association of Higher Education, to name just a few.
Rich: The Motley Fool is "investors writing for investors," so we're always looking for potential investment ideas. Name a public company or two within the education industry that you really respect, and tell us why an investor might want to get to know this company better.
Todd: I believe there are several excellent education companies in the space. One in particular that I believe has a lot to offer is Strayer. [It has] a strong management team and [is] focused on areas in the education market that we believe provide good opportunities for growth.
Rich Smith does not own shares of any company mentioned here. The Fool has a disclosure policy.