Apollo Group (APOL) Q3 2011 Earnings Call June 30, 2011 5:00 PM ET
Operator
Good afternoon, ladies and gentlemen, and welcome to the third quarter fiscal 2011 earnings release conference call. [Operator Instructions] This conference call is being recorded today, June 30, 2011, 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 July 8 beginning approximately 2 hours after we conclude today. The replay number is (800) 642-1687 or (706) 645-9291 internationally. The conference ID for the replay is 71264066. I would now like to turn the call over to Beth Coronelli, Vice President of Investor Relations. Mrs. Coronelli, go ahead please.
Unknown Executive
Thank you. Thank you for joining us today to discuss our third quarter results. I'm also pleased to have joined the Apollo Group team. Participating on the call are Greg Cappelli, co-Chief Executive Officer and Chairman of Apollo Global; Chas Edelstein, co-Chief Executive Officer; and Brian Swartz, Senior President and Chief Financial Officer. Joe D'Amico, President and Chief Operating Officer, is also here and will be available during the Q&A portion of the call.
As we discuss our results today, unless otherwise noted, we will be comparing the third quarter of fiscal 2011, which ended May 31, 2011, to the third quarter of fiscal 2010. 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 that involve risks and uncertainties. Various factors could also 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.apollogrp.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 financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP and non-GAAP measures, is also available on our website. With that, I will turn the call over to Greg.
Gregory Cappelli
All right. Thank you, Beth. Good afternoon, everyone. I'd also like to take this time to welcome Beth Coronelli to the Apollo family as our new head of Investor Relations working closely with Jeremy Davis, who many of you already know. We think they're going to make a great team together. I'm going to provide just a brief update on the progress we're making with our key strategic initiatives, and that will be followed by Brian Swartz. He'll cover the financial quarterly results and our business outlook. And then Chas will close with an update on the regulatory environment and comment on some of the opportunities we see going forward.
First, in the third quarter of fiscal 2011, we continued to execute on the key initiatives that we set forth to enhance and differentiate the Apollo Group and the University of Phoenix. Collectively, these initiatives, which span the entire student life cycle, from first point of contact until after graduation, are intended to elevate the student experience, enhance student protections and improve student outcomes. As you can see, new degree enrollment continues to be adversely impacted by the key initiatives we put in place this past year, down about 40% over the prior year. And while it's still early, we are pleased to report that we've seen some signs of stabilization within the leading indicators that drive new degree enrollment during the quarter. In addition, we've also seen meaningful improvement in several important metrics. Those include a continued favorable shift in the mix for our enrollments towards higher degree level students and an increase in student retention rates, which we'll talk about more in just a minute.
Our focus is on providing a world-class experience for our students. This starts with our efforts to better identify students we think, can most effectively serve -- we can serve, and that can succeed in our rigorous programs of study. We've tailored our message to elevate the brand of University of Phoenix by showcasing the real-life success stories of many of our graduates. These efforts, in combination with our admissions initiatives, have resulted in the continued mix -- shift in the mix of our enrollments towards higher degree level students. In the third quarter, the percentage in new degree enrollment in the bachelor and graduate level programs is up over 1,100 basis points over the past year while the percentage of total degree enrollments in those programs is up over 700 basis points. We've also begun to see some early but tangible signs of student coming in with more college experience, an indication of higher-quality students as the average number of transfer credits has begun to trend up.
Now, we continue to build traction among employers by investing in our Workforce Solutions group. Corporate relationships are strategically very important to the University of Phoenix. We're pleased that we've added hundreds of new corporate educational partners over the past year, linking education to careers and aligning early learning outcomes with student and employer needs. We're developing relationships with employers who recognize the importance of maintaining a skilled and educated workforce for their own competitiveness and who value the quality of our programs. It's simply amazing to think of the fact that today in the United States of America, there are currently about 3 million job openings across the country, which we believe is directly related to not having the skills necessary to fill these critical positions. Just think of the impact on our economy if we simply filled those jobs, including the impact it would have on our unemployment rate. Our programs are designed to help deliver skills that are relevant to addressing the needs of today's changing workforce.
In terms of our approach to admissions, we're committed to student-centric advertisement, supported by new coaching and training of our advisors and their managers -- excuse me, advisement. We have further aligned the evaluation process and the compensation of our admissions advisory teams to our students' success. This includes the elimination of all enrollment factors in their evaluation compensation as of September 1, 2010. During the third quarter, we began to see some improvement in admission advisors' effectiveness, which we think is a result of our ongoing training and mentoring efforts.
Also supporting our student-centric admissions approach, we rolled out our free 3-week University Orientation program on November 1, 2010. That's to ensure that students with limited prior college experience better understand the time and effort required to be successful in our programs prior to actually enrolling in the University. We've now had a meaningful number of students go through orientation and make it through their first couple of classes. Of those who start orientation, we continue to see about 80% actually enrolling in the University of Phoenix, while approximately 20% opt out before incurring any debt. What's important, we believe that students who opt out are generally leaving us with a positive experience. For students who went to the orientation and go on to enroll in the university, we continue to see first course completion rates that are several hundred basis points higher than prior year levels. This success can be attributed to the University Orientation, first year sequence and other student-centric initiatives. Brian will share some additional information on how we look at retention of our students in his comments.
Now, let me spend just a minute to update you on the investments we're making in our learning and data platforms to enhance our students' academic and classroom experience. As of this week, Phoenix Connect has now been launched to the entire university population, effectively connecting our students and faculty into the leading academically focused social network. Since beginning the rollout, the feedback has been extremely positive and performance metrics indicate increased engagement, communication and interconnectivity among the University of Phoenix community. Students using Phoenix Connect spent 25% more time on the student site on average. We're seeing students and faculty use Phoenix Connect to engage with other like-minded colleagues for support, professional networking, academic collaboration and socialization. Over 750 new student-run interest groups have been created in Phoenix Connect since the launch, covering topics from honor societies to local area groups.
And on April 24, we launched the University of Phoenix iPhone app through the iTunes for the iPhone, iPad and iTouch -- iPad Touch. It quickly rose to the number one most downloaded free educational app in the iTunes store the first week it was available. Two months later, it's been downloaded about 80,000 times and is driving over 40,000 users to the student site weekly. Data also shows that students are logging in twice as often as nonmobile users. In launching this app, we aim to add flexibility to our students' lives and complement our existing online learning systems, enabling students to participate in classroom discussions, submit assignments and check grades anywhere, anytime.
And lastly, once students complete their education, we've begun to engage our 645,000 alumni in ways that we simply haven't done previously. We're gearing up for Homecoming 2011, with 78 different alumni events across the country this fall. We've started to open alumni chapters and anticipate forming 30 chapters over the next 2 years. We're using social media, including LinkedIn and Facebook and our alumni magazine to keep alumni connected to us. And importantly, we recently launched the mentorship program that has already matched about 6,800 students with an alumni mentor, providing valuable networking connections and career advice.
Our alumni are one of our greatest competitive advantages and they are speaking proudly about the value of their education. In self-selected survey data responses from over 27,000 alumni participating in the 2011 alumni survey, 98% would hire a fellow University of Phoenix grad. 70% have recommended University of Phoenix in the last year alone.
In closing, we realize that we still have a lot of hard work in front of us to accomplish all of our important goals. We think we're making progress. We're excited about the opportunities to further differentiate the University of Phoenix, as well as the Apollo group. Our responsibility is to be a thought leader and an active participant in the dialogue around improving access to education in the nation, as well as globally. And we're focused on delivering a world-class experience at every stage of the student life cycle through the efforts we discussed, messaging and branding, admissions, financial aid, the classroom experience and even after graduation. We believe our actions will, over time, further elevate the brand and reputation of the university, improve retention and completion rates, reduce enterprise risk and position us for stable, long-term growth.
So with that, let me turn the call over to Brian.
Brian Swartz
Thanks, Greg and good afternoon, everyone. I'd like to start by reviewing our third quarter financial results, then I'll update you on our 90/10 trends, provide you with some information on a new retention metric and then I'll spend a few minutes on the outlook for the business.
During the third quarter, revenue decreased 8%. The decrease was primarily the result of a 16% decline in degree enrollment for the University of Phoenix to roughly 398,000 students, which was partially offset by selected tuition price increases and a favorable mix towards higher degree level students. New degree enrollments for the University of Phoenix were down just over 40% this quarter, primarily driven by the implementation of our strategic initiatives, along with increased competition. As a reminder, University Orientation impacts enrollments at the associate and bachelor's level, while the changes we've made to the admissions function are affecting enrollment at all degree levels, including our masters and doctoral programs.
Income from continuing operations was $212 million or $1.51 per share, compared to income of $177 million or $1.16 per share in the year ago quarter. During the third quarter, we recorded a $2 million pretax charge for post-judgment interest and future estimated legal costs related to a securities class action lawsuit and recorded a tax benefit of $10 million resulting from the resolution with the IRS regarding the deductibility of payments made to settle a lawsuit in fiscal year 2010. Excluding these items, as well as the other items mentioned -- excuse me, the other items in the prior year that are detailed in our press release, income from continuing operations decreased 23% to $204 million and our operating margin declined 500 basis points to 28.2%. Our EPS was $1.45 per share compared to $1.74 per share in 2010.
Now, I'll spend a few minutes discussing each of the expense categories. First, instructional and student advisory increased 410 basis points as a percentage of revenue as we continue to invest in the student experience, which resulted in higher compensation expense, as well as investments to enhance our curriculum, product development and delivery platform. Marketing increased 170 basis points as a percentage of revenue, due primarily to higher advertising costs, as we are seeing higher prices in both online and traditional media, and increased competition for higher quality students. Admissions advisory expense declined 60 basis points as a percentage of revenue, due to lower headcount during the quarter, resulting from both the reduction of force, which took place at the end of the first quarter, as well as proactive management of replacement hiring for regular attrition. This decline was partially offset by slightly higher average wages. G&A expense increased 150 basis points as a percentage of revenue, which was primarily due to increased costs associated with a significant investment we are making in technology infrastructure.
Bad debt expense was significantly lower again this quarter, both sequentially and year-over-year. Bad debt expense as a percentage of revenue was 3.2%, down 220 basis points from the prior year. The decrease was primarily attributable to reductions in University of Phoenix gross accounts receivable as a result of lower new enrollments, a mix shift towards higher degree level students and improved student retention, attributable in part, to the effect of our University Orientation initiative. We also continue to see improvement in collection rates, as a result of the initiatives we put in place to improve our collections process.
Depreciation and amortization increased 50 basis points as a percentage of revenue due to increased depreciation from information technology, network infrastructure and software, which was partially offset by a decrease in amortization of intangible assets. Share-based compensation totaled $20 million in the third quarter and we expect the total for the full year to be approximately $70 million. Our effective tax rate was 38% in the third quarter. Excluding the $10 million settlement with the IRS that I previously mentioned, our effective tax rate was 40.8% and we expect that it will be about 41% in the fourth quarter of 2011.
Turning briefly to the balance sheet and cash flows, we continue to maintain a well-capitalized balance sheet. At the end of the third quarter, we had unrestricted cash and cash equivalents in excess of $1.4 billion. This amount is $400 million higher than the end of the last quarter. The increase was primarily driven by 2 important transactions during the third quarter. First, the Department of Education released us from our cash collateralized $126 million letter of credit, which was previously required to be posted in connection with the findings in our February 2009 program review. And second, we received $169 million in proceeds from the sale leaseback of our principal office building in Phoenix. Excluding Apollo Global, our days sales outstanding for the quarter decreased to 23 days from 30 days at the end of both last year and the end of the third quarter in the prior year. The decline was primarily due to the lower University of Phoenix gross accounts receivable. During the third quarter, our adjusted free cash flow increased by 6% to $374 million compared to $355 million in the prior year, primarily as a result of the decrease in restricted cash from the release of the letter of credit I previously mentioned. As a reminder, we define adjusted free cash flow as cash flow from operations, less CapEx and changes in restricted cash. If we were to exclude the favorable benefit from the letter of credit, adjusted free cash flow in the third quarter would have decreased 30% to $248 million.
Regarding capital expenditures, we continue to anticipate CapEx in 2011 will be roughly flat with 2010 levels. During the third quarter, we utilized $167 million in capital to repurchase 4.1 million shares of stock at an average price of about $40 per share. We have approximately $358 million remaining under our current share repurchase authorization.
Before I discuss our business outlook, I'd like to cover 2 additional topics. First, I am pleased to share that through the third quarter of 2011, the 90/10 percentage for University of Phoenix, excluding any impact from the temporary relief provisions, is about 100 basis points lower than it was in the first 9 months of fiscal 2010. We attribute this reduction primarily to a lower mix of associate students. Based on the current trends, we believe our 90/10 percentage for fiscal 2011 will be lower than the prior year, which was 88%, excluding any temporary relief provisions. Also, and importantly, as of today, we do not expect our 90/10 percentage for fiscal 2012 to exceed 90%.
Second, as we said we would provide on our last call, we are now sharing with you an important new metric we believe is indicative of our retention rate trends at the University of Phoenix. We have been tracking a broader, more comprehensive metric based on the average credits earned per student or what we refer to as ACEPs. ACEPs measures the average number of credits earned by newly enrolled students over a defined period of time. We believe the most relevant indicator of early student success today is our 26-week ACEP metric for our undergraduate student population, which is where most of our initiatives are currently focused. By definition, this metric is reported 2 quarters in arrears. Our 26-week ACEP metric for our newly enrolled undergraduate students in the first quarter of fiscal 2011 versus the prior year, increased 12%. This improvement, which reflects student staying enrolled for a longer period of time, and thus successfully earning more credits, follows year-over-year increases in the 5% to 10% range for the previous quarters during fiscal 2010.
It is important to note that while we continue to see improvement in retention rate trends for students going through the University Orientation, there is a limited benefit in the current first quarter of 2011 results from our University Orientation program, as it was rolled out on November 1, 2010. The primary drivers for the year-over-year improvement were the implementation of student-centric initiatives, including first year sequence, which was rolled out in February 2010 and a favorable mix shift from Associate to Bachelor degree students. We hope to see additional improvement in the ACEPs metric in the future that will reflect retention gains as students go through our orientation program.
Finally, I'd like to spend a minute and provide some commentary on our business outlook. Our business continues to be in a period of transition. Our current new enrollment trends suggest that the year-over-year decline in our new enrollments for the fourth quarter will be similar to the decline we experienced in the third quarter of 2011. As Greg mentioned earlier, we are experiencing signs of stabilization within key leading indicators in new enrollment. Those leading indicators include increases in admission advisor efficiency and higher registration rates per advisor. As a result of the decline in new enrollments during 2011, coupled with a large number of students who are graduating or otherwise leaving the university, we continue to expect increasing declines in both total enrollment and revenue for the fourth quarter of 2011 and we expect that total enrollment and revenue growth rates will remain negative throughout 2012. We do expect new enrollments to grow again in 2012 and also expect to achieve higher retention rates for those new students.
As we move through this period of transition in our business, we continue to responsibly manage our cost structure to appropriately align it with the business results, while maintaining our high quality standards. We are continuing to make strategic investments for the long-term. In total, we remain on track to deliver approximately $100 million in run rate savings by the end of 2011, largely driven by the combination of proactive management of our headcount and lower bad debt expense. Since the end of our last fiscal year, we have managed our headcount down as of the end of the third quarter by approximately 11%. As a reminder, it was down 8% at the end of the second quarter and 5% at the end of the first quarter.
Based on our current view and anticipated future trends in new enrollments, retention rates and expenses, as well as this year's tuition price increase of approximately 3% to 5%, which goes into effect tomorrow, we are reaffirming our outlook for fiscal years 2011 and 2012 that we provided last quarter. For fiscal 2011, revenue of $4.65 billion to $4.75 billion and operating income, excluding any special charges of $1.15 billion to $1.2 billion. And for fiscal '12, revenue of $4 billion to $4.25 billion and operating income, excluding any special charges of $675 million to $800 million. And with that, let me turn the call over to Chas.
Charles Edelstein
Okay, thanks, Brian. I'd like to take a moment first to provide an update on the regulatory environment. As you're aware, the U.S. Department of Education this month made public the final regulations effective July 1, 2012, on metrics for determining whether an institution's academic programs prepare students for gainful employment. The regulation established 3 annual program-level metrics: debt repayment rate; debt to discretionary income ratio; and debt to total earnings ratio, with various consequences for failing to meet the standards for a single year, 2 out of 3 years or 3 out of 4 years.
We have targeted our degree programs to provide academic instruction that is relevant and valued in today's dynamic workforce. Importantly, we believe substantially all of our academic programs successfully prepare students for gainful employment as defined by the final gainful employment standard. We share the Department of Education's goal of ensuring students receive a quality education for their investment and we are fundamentally committed to providing appropriate student protections, including transparency, which supports informed decision-making. We're supportive of thoughtful and consistent policies and regulation which seek to protect students. We'll continue to work constructively with the administration and Congress to ensure that regulations apply to all institutions and do not unintentionally diminish access to higher education.
Our commitment to providing access to quality higher education is well aligned with President Obama's stated goal of producing a greater number of college graduates in order to once again have the highest rate of college attainment in the world. We just completed a 3-week city program with NBC's Education Nation Initiative in Los Angeles, Chicago and Philadelphia. We'll be finishing in New York in September to engage policy makers, thought leaders, educators and the public in a thoughtful dialogue about the issues confronting education in this country.
With 2/3 of the jobs being created today requiring some level of higher education and only approximately 1/3 of today's labor force having earned a bachelor's degree, there remains an enormous need for higher education. It will certainly be necessary to close the skills gap for the U.S. to remain globally competitive. We believe it will require the combined efforts of all types of institutions in order to meet the President's ambitious but achievable educational goal. We intend to continue to play a leadership role and being part of that solution.
Over the past several quarters, we've implemented significant changes within our organization and are pleased to see that those changes are beginning to have the intended favorable impact on both the mix of our student base and the retention rates of our students. As we move past this period of transition, here is what you can expect from us going forward: first, maintain our priority to differentiate University of Phoenix among students, alumni, employers and regulators by building upon our academic quality, providing a world-class student experience and aligning our programs with students' and employers' desired learning and life outcomes; and second, to focus on expanding Apollo Group in 2 primary areas. One is our Apollo global business, where we plan to continue our geographic expansion over time. The other area is our plan to increase the services we offer to sectors of higher education where we can help other institutions remain competitive by increasing their enrollments and/or their efficiencies through lowering their costs. We're already providing such services through our Institute for Professional Development subsidiary.
We're very excited by the opportunities we see before us, both domestically and globally, and we believe that the recent initiatives we put in place are not only in the best interest of our students but support our strategic goals of positioning our company for sustainable, long-term growth while reducing enterprise risk. We are grateful for the support we've enjoyed from our employees, our faculty, our students, our alumni and our shareholders as we work toward the realization of our important mission. With that, I'll turn the call over to the operator so that we can take your questions.
Operator
Good afternoon, ladies and gentlemen, and welcome to the third quarter fiscal 2011 earnings release conference call. [Operator Instructions] This conference call is being recorded today, June 30, 2011, 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 July 8 beginning approximately 2 hours after we conclude today. The replay number is (800) 642-1687 or (706) 645-9291 internationally. The conference ID for the replay is 71264066. I would now like to turn the call over to Beth Coronelli, Vice President of Investor Relations. Mrs. Coronelli, go ahead please.
Unknown Executive
Thank you. Thank you for joining us today to discuss our third quarter results. I'm also pleased to have joined the Apollo Group team. Participating on the call are Greg Cappelli, co-Chief Executive Officer and Chairman of Apollo Global; Chas Edelstein, co-Chief Executive Officer; and Brian Swartz, Senior President and Chief Financial Officer. Joe D'Amico, President and Chief Operating Officer, is also here and will be available during the Q&A portion of the call.
As we discuss our results today, unless otherwise noted, we will be comparing the third quarter of fiscal 2011, which ended May 31, 2011, to the third quarter of fiscal 2010. 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 that involve risks and uncertainties. Various factors could also 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.apollogrp.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 financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP and non-GAAP measures, is also available on our website. With that, I will turn the call over to Greg.
Gregory Cappelli
All right. Thank you, Beth. Good afternoon, everyone. I'd also like to take this time to welcome Beth Coronelli to the Apollo family as our new head of Investor Relations working closely with Jeremy Davis, who many of you already know. We think they're going to make a great team together. I'm going to provide just a brief update on the progress we're making with our key strategic initiatives, and that will be followed by Brian Swartz. He'll cover the financial quarterly results and our business outlook. And then Chas will close with an update on the regulatory environment and comment on some of the opportunities we see going forward.
First, in the third quarter of fiscal 2011, we continued to execute on the key initiatives that we set forth to enhance and differentiate the Apollo Group and the University of Phoenix. Collectively, these initiatives, which span the entire student life cycle, from first point of contact until after graduation, are intended to elevate the student experience, enhance student protections and improve student outcomes. As you can see, new degree enrollment continues to be adversely impacted by the key initiatives we put in place this past year, down about 40% over the prior year. And while it's still early, we are pleased to report that we've seen some signs of stabilization within the leading indicators that drive new degree enrollment during the quarter. In addition, we've also seen meaningful improvement in several important metrics. Those include a continued favorable shift in the mix for our enrollments towards higher degree level students and an increase in student retention rates, which we'll talk about more in just a minute.
Our focus is on providing a world-class experience for our students. This starts with our efforts to better identify students we think, can most effectively serve -- we can serve, and that can succeed in our rigorous programs of study. We've tailored our message to elevate the brand of University of Phoenix by showcasing the real-life success stories of many of our graduates. These efforts, in combination with our admissions initiatives, have resulted in the continued mix -- shift in the mix of our enrollments towards higher degree level students. In the third quarter, the percentage in new degree enrollment in the bachelor and graduate level programs is up over 1,100 basis points over the past year while the percentage of total degree enrollments in those programs is up over 700 basis points. We've also begun to see some early but tangible signs of student coming in with more college experience, an indication of higher-quality students as the average number of transfer credits has begun to trend up.
Now, we continue to build traction among employers by investing in our Workforce Solutions group. Corporate relationships are strategically very important to the University of Phoenix. We're pleased that we've added hundreds of new corporate educational partners over the past year, linking education to careers and aligning early learning outcomes with student and employer needs. We're developing relationships with employers who recognize the importance of maintaining a skilled and educated workforce for their own competitiveness and who value the quality of our programs. It's simply amazing to think of the fact that today in the United States of America, there are currently about 3 million job openings across the country, which we believe is directly related to not having the skills necessary to fill these critical positions. Just think of the impact on our economy if we simply filled those jobs, including the impact it would have on our unemployment rate. Our programs are designed to help deliver skills that are relevant to addressing the needs of today's changing workforce.
In terms of our approach to admissions, we're committed to student-centric advertisement, supported by new coaching and training of our advisors and their managers -- excuse me, advisement. We have further aligned the evaluation process and the compensation of our admissions advisory teams to our students' success. This includes the elimination of all enrollment factors in their evaluation compensation as of September 1, 2010. During the third quarter, we began to see some improvement in admission advisors' effectiveness, which we think is a result of our ongoing training and mentoring efforts.
Also supporting our student-centric admissions approach, we rolled out our free 3-week University Orientation program on November 1, 2010. That's to ensure that students with limited prior college experience better understand the time and effort required to be successful in our programs prior to actually enrolling in the University. We've now had a meaningful number of students go through orientation and make it through their first couple of classes. Of those who start orientation, we continue to see about 80% actually enrolling in the University of Phoenix, while approximately 20% opt out before incurring any debt. What's important, we believe that students who opt out are generally leaving us with a positive experience. For students who went to the orientation and go on to enroll in the university, we continue to see first course completion rates that are several hundred basis points higher than prior year levels. This success can be attributed to the University Orientation, first year sequence and other student-centric initiatives. Brian will share some additional information on how we look at retention of our students in his comments.
Now, let me spend just a minute to update you on the investments we're making in our learning and data platforms to enhance our students' academic and classroom experience. As of this week, Phoenix Connect has now been launched to the entire university population, effectively connecting our students and faculty into the leading academically focused social network. Since beginning the rollout, the feedback has been extremely positive and performance metrics indicate increased engagement, communication and interconnectivity among the University of Phoenix community. Students using Phoenix Connect spent 25% more time on the student site on average. We're seeing students and faculty use Phoenix Connect to engage with other like-minded colleagues for support, professional networking, academic collaboration and socialization. Over 750 new student-run interest groups have been created in Phoenix Connect since the launch, covering topics from honor societies to local area groups.
And on April 24, we launched the University of Phoenix iPhone app through the iTunes for the iPhone, iPad and iTouch -- iPad Touch. It quickly rose to the number one most downloaded free educational app in the iTunes store the first week it was available. Two months later, it's been downloaded about 80,000 times and is driving over 40,000 users to the student site weekly. Data also shows that students are logging in twice as often as nonmobile users. In launching this app, we aim to add flexibility to our students' lives and complement our existing online learning systems, enabling students to participate in classroom discussions, submit assignments and check grades anywhere, anytime.
And lastly, once students complete their education, we've begun to engage our 645,000 alumni in ways that we simply haven't done previously. We're gearing up for Homecoming 2011, with 78 different alumni events across the country this fall. We've started to open alumni chapters and anticipate forming 30 chapters over the next 2 years. We're using social media, including LinkedIn and Facebook and our alumni magazine to keep alumni connected to us. And importantly, we recently launched the mentorship program that has already matched about 6,800 students with an alumni mentor, providing valuable networking connections and career advice.
Our alumni are one of our greatest competitive advantages and they are speaking proudly about the value of their education. In self-selected survey data responses from over 27,000 alumni participating in the 2011 alumni survey, 98% would hire a fellow University of Phoenix grad. 70% have recommended University of Phoenix in the last year alone.
In closing, we realize that we still have a lot of hard work in front of us to accomplish all of our important goals. We think we're making progress. We're excited about the opportunities to further differentiate the University of Phoenix, as well as the Apollo group. Our responsibility is to be a thought leader and an active participant in the dialogue around improving access to education in the nation, as well as globally. And we're focused on delivering a world-class experience at every stage of the student life cycle through the efforts we discussed, messaging and branding, admissions, financial aid, the classroom experience and even after graduation. We believe our actions will, over time, further elevate the brand and reputation of the university, improve retention and completion rates, reduce enterprise risk and position us for stable, long-term growth.
So with that, let me turn the call over to Brian.
Brian Swartz
Thanks, Greg and good afternoon, everyone. I'd like to start by reviewing our third quarter financial results, then I'll update you on our 90/10 trends, provide you with some information on a new retention metric and then I'll spend a few minutes on the outlook for the business.
During the third quarter, revenue decreased 8%. The decrease was primarily the result of a 16% decline in degree enrollment for the University of Phoenix to roughly 398,000 students, which was partially offset by selected tuition price increases and a favorable mix towards higher degree level students. New degree enrollments for the University of Phoenix were down just over 40% this quarter, primarily driven by the implementation of our strategic initiatives, along with increased competition. As a reminder, University Orientation impacts enrollments at the associate and bachelor's level, while the changes we've made to the admissions function are affecting enrollment at all degree levels, including our masters and doctoral programs.
Income from continuing operations was $212 million or $1.51 per share, compared to income of $177 million or $1.16 per share in the year ago quarter. During the third quarter, we recorded a $2 million pretax charge for post-judgment interest and future estimated legal costs related to a securities class action lawsuit and recorded a tax benefit of $10 million resulting from the resolution with the IRS regarding the deductibility of payments made to settle a lawsuit in fiscal year 2010. Excluding these items, as well as the other items mentioned -- excuse me, the other items in the prior year that are detailed in our press release, income from continuing operations decreased 23% to $204 million and our operating margin declined 500 basis points to 28.2%. Our EPS was $1.45 per share compared to $1.74 per share in 2010.
Now, I'll spend a few minutes discussing each of the expense categories. First, instructional and student advisory increased 410 basis points as a percentage of revenue as we continue to invest in the student experience, which resulted in higher compensation expense, as well as investments to enhance our curriculum, product development and delivery platform. Marketing increased 170 basis points as a percentage of revenue, due primarily to higher advertising costs, as we are seeing higher prices in both online and traditional media, and increased competition for higher quality students. Admissions advisory expense declined 60 basis points as a percentage of revenue, due to lower headcount during the quarter, resulting from both the reduction of force, which took place at the end of the first quarter, as well as proactive management of replacement hiring for regular attrition. This decline was partially offset by slightly higher average wages. G&A expense increased 150 basis points as a percentage of revenue, which was primarily due to increased costs associated with a significant investment we are making in technology infrastructure.
Bad debt expense was significantly lower again this quarter, both sequentially and year-over-year. Bad debt expense as a percentage of revenue was 3.2%, down 220 basis points from the prior year. The decrease was primarily attributable to reductions in University of Phoenix gross accounts receivable as a result of lower new enrollments, a mix shift towards higher degree level students and improved student retention, attributable in part, to the effect of our University Orientation initiative. We also continue to see improvement in collection rates, as a result of the initiatives we put in place to improve our collections process.
Depreciation and amortization increased 50 basis points as a percentage of revenue due to increased depreciation from information technology, network infrastructure and software, which was partially offset by a decrease in amortization of intangible assets. Share-based compensation totaled $20 million in the third quarter and we expect the total for the full year to be approximately $70 million. Our effective tax rate was 38% in the third quarter. Excluding the $10 million settlement with the IRS that I previously mentioned, our effective tax rate was 40.8% and we expect that it will be about 41% in the fourth quarter of 2011.
Turning briefly to the balance sheet and cash flows, we continue to maintain a well-capitalized balance sheet. At the end of the third quarter, we had unrestricted cash and cash equivalents in excess of $1.4 billion. This amount is $400 million higher than the end of the last quarter. The increase was primarily driven by 2 important transactions during the third quarter. First, the Department of Education released us from our cash collateralized $126 million letter of credit, which was previously required to be posted in connection with the findings in our February 2009 program review. And second, we received $169 million in proceeds from the sale leaseback of our principal office building in Phoenix. Excluding Apollo Global, our days sales outstanding for the quarter decreased to 23 days from 30 days at the end of both last year and the end of the third quarter in the prior year. The decline was primarily due to the lower University of Phoenix gross accounts receivable. During the third quarter, our adjusted free cash flow increased by 6% to $374 million compared to $355 million in the prior year, primarily as a result of the decrease in restricted cash from the release of the letter of credit I previously mentioned. As a reminder, we define adjusted free cash flow as cash flow from operations, less CapEx and changes in restricted cash. If we were to exclude the favorable benefit from the letter of credit, adjusted free cash flow in the third quarter would have decreased 30% to $248 million.
Regarding capital expenditures, we continue to anticipate CapEx in 2011 will be roughly flat with 2010 levels. During the third quarter, we utilized $167 million in capital to repurchase 4.1 million shares of stock at an average price of about $40 per share. We have approximately $358 million remaining under our current share repurchase authorization.
Before I discuss our business outlook, I'd like to cover 2 additional topics. First, I am pleased to share that through the third quarter of 2011, the 90/10 percentage for University of Phoenix, excluding any impact from the temporary relief provisions, is about 100 basis points lower than it was in the first 9 months of fiscal 2010. We attribute this reduction primarily to a lower mix of associate students. Based on the current trends, we believe our 90/10 percentage for fiscal 2011 will be lower than the prior year, which was 88%, excluding any temporary relief provisions. Also, and importantly, as of today, we do not expect our 90/10 percentage for fiscal 2012 to exceed 90%.
Second, as we said we would provide on our last call, we are now sharing with you an important new metric we believe is indicative of our retention rate trends at the University of Phoenix. We have been tracking a broader, more comprehensive metric based on the average credits earned per student or what we refer to as ACEPs. ACEPs measures the average number of credits earned by newly enrolled students over a defined period of time. We believe the most relevant indicator of early student success today is our 26-week ACEP metric for our undergraduate student population, which is where most of our initiatives are currently focused. By definition, this metric is reported 2 quarters in arrears. Our 26-week ACEP metric for our newly enrolled undergraduate students in the first quarter of fiscal 2011 versus the prior year, increased 12%. This improvement, which reflects student staying enrolled for a longer period of time, and thus successfully earning more credits, follows year-over-year increases in the 5% to 10% range for the previous quarters during fiscal 2010.
It is important to note that while we continue to see improvement in retention rate trends for students going through the University Orientation, there is a limited benefit in the current first quarter of 2011 results from our University Orientation program, as it was rolled out on November 1, 2010. The primary drivers for the year-over-year improvement were the implementation of student-centric initiatives, including first year sequence, which was rolled out in February 2010 and a favorable mix shift from Associate to Bachelor degree students. We hope to see additional improvement in the ACEPs metric in the future that will reflect retention gains as students go through our orientation program.
Finally, I'd like to spend a minute and provide some commentary on our business outlook. Our business continues to be in a period of transition. Our current new enrollment trends suggest that the year-over-year decline in our new enrollments for the fourth quarter will be similar to the decline we experienced in the third quarter of 2011. As Greg mentioned earlier, we are experiencing signs of stabilization within key leading indicators in new enrollment. Those leading indicators include increases in admission advisor efficiency and higher registration rates per advisor. As a result of the decline in new enrollments during 2011, coupled with a large number of students who are graduating or otherwise leaving the university, we continue to expect increasing declines in both total enrollment and revenue for the fourth quarter of 2011 and we expect that total enrollment and revenue growth rates will remain negative throughout 2012. We do expect new enrollments to grow again in 2012 and also expect to achieve higher retention rates for those new students.
As we move through this period of transition in our business, we continue to responsibly manage our cost structure to appropriately align it with the business results, while maintaining our high quality standards. We are continuing to make strategic investments for the long-term. In total, we remain on track to deliver approximately $100 million in run rate savings by the end of 2011, largely driven by the combination of proactive management of our headcount and lower bad debt expense. Since the end of our last fiscal year, we have managed our headcount down as of the end of the third quarter by approximately 11%. As a reminder, it was down 8% at the end of the second quarter and 5% at the end of the first quarter.
Based on our current view and anticipated future trends in new enrollments, retention rates and expenses, as well as this year's tuition price increase of approximately 3% to 5%, which goes into effect tomorrow, we are reaffirming our outlook for fiscal years 2011 and 2012 that we provided last quarter. For fiscal 2011, revenue of $4.65 billion to $4.75 billion and operating income, excluding any special charges of $1.15 billion to $1.2 billion. And for fiscal '12, revenue of $4 billion to $4.25 billion and operating income, excluding any special charges of $675 million to $800 million. And with that, let me turn the call over to Chas.
Charles Edelstein
Okay, thanks, Brian. I'd like to take a moment first to provide an update on the regulatory environment. As you're aware, the U.S. Department of Education this month made public the final regulations effective July 1, 2012, on metrics for determining whether an institution's academic programs prepare students for gainful employment. The regulation established 3 annual program-level metrics: debt repayment rate; debt to discretionary income ratio; and debt to total earnings ratio, with various consequences for failing to meet the standards for a single year, 2 out of 3 years or 3 out of 4 years.
We have targeted our degree programs to provide academic instruction that is relevant and valued in today's dynamic workforce. Importantly, we believe substantially all of our academic programs successfully prepare students for gainful employment as defined by the final gainful employment standard. We share the Department of Education's goal of ensuring students receive a quality education for their investment and we are fundamentally committed to providing appropriate student protections, including transparency, which supports informed decision-making. We're supportive of thoughtful and consistent policies and regulation which seek to protect students. We'll continue to work constructively with the administration and Congress to ensure that regulations apply to all institutions and do not unintentionally diminish access to higher education.
Our commitment to providing access to quality higher education is well aligned with President Obama's stated goal of producing a greater number of college graduates in order to once again have the highest rate of college attainment in the world. We just completed a 3-week city program with NBC's Education Nation Initiative in Los Angeles, Chicago and Philadelphia. We'll be finishing in New York in September to engage policy makers, thought leaders, educators and the public in a thoughtful dialogue about the issues confronting education in this country.
With 2/3 of the jobs being created today requiring some level of higher education and only approximately 1/3 of today's labor force having earned a bachelor's degree, there remains an enormous need for higher education. It will certainly be necessary to close the skills gap for the U.S. to remain globally competitive. We believe it will require the combined efforts of all types of institutions in order to meet the President's ambitious but achievable educational goal. We intend to continue to play a leadership role and being part of that solution.
Over the past several quarters, we've implemented significant changes within our organization and are pleased to see that those changes are beginning to have the intended favorable impact on both the mix of our student base and the retention rates of our students. As we move past this period of transition, here is what you can expect from us going forward: first, maintain our priority to differentiate University of Phoenix among students, alumni, employers and regulators by building upon our academic quality, providing a world-class student experience and aligning our programs with students' and employers' desired learning and life outcomes; and second, to focus on expanding Apollo Group in 2 primary areas. One is our Apollo global business, where we plan to continue our geographic expansion over time. The other area is our plan to increase the services we offer to sectors of higher education where we can help other institutions remain competitive by increasing their enrollments and/or their efficiencies through lowering their costs. We're already providing such services through our Institute for Professional Development subsidiary.
We're very excited by the opportunities we see before us, both domestically and globally, and we believe that the recent initiatives we put in place are not only in the best interest of our students but support our strategic goals of positioning our company for sustainable, long-term growth while reducing enterprise risk. We are grateful for the support we've enjoyed from our employees, our faculty, our students, our alumni and our shareholders as we work toward the realization of our important mission. With that, I'll turn the call over to the operator so that we can take your questions.
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