Apollo Group (APOL)

April 15, 2009 EDUCATION SERVICES Henry Fund Research Apollo Group, Inc. (APOL) Iana Stahov iana-stahov@uiowa.edu 1-Year Stock Price Movement (as of 4/15/2009) Investment Recommendation Current Price Target Price Range BUY $63.81 $85.68-89.17 INVESTMENT THESIS (+)We anticipate strong growth for the Education Services industry due to its recession-resistant profile and shifts in the labor market: Recent layoffs, job retention concerns, and re-specialization needs will boost demand for education. Even postrecession, many manufacturing jobs could be lost as companies moved operations offshore. (+)United States’ shift from a manufacturing to a knowledge-based economy and wage gaps will spur demand for more education. Traditional schools will not be able to absorb the entire 19.1M fall 2011E enrollment1. With 25% of the growth coming from students >25y.o.1 which do not fit their profiles, online schools, such as APOL, will get most of it. Key Stock Statistics 52-Week Price Range Market Capitalization (B) Shares Outstanding (M) Institutional Ownership 5-yr. weekly Beta Dividend Yield Price/Earnings (ttm) Price/Book Price/Sales ROA (ttm) ROE(ttm) Projected 5-Year Growth $42.80-90.00 $10.26 160.83 86.3% 0.87 N/A 15.31 8.02 2.89 26.83% 62.77% 16.3% (+)Apollo Group has been aggressively improving the quality of its online degrees. It has committed to personnel and technological investments going forward2, and its University of Phoenix brand is the top most-recognized among online programs. (+)APOL’s target market (working adults >25y.o.) is most likely to pursue career growth, commit to finishing degrees, and have better credit. Flexibility in balancing work and life are met by online schools. (+/-)Recent entry in the global education market via Apollo Global will help capitalize on the global demand for U.S. education in underserved markets. At the same time, it will increase exposure to foreign regulation and exchange rate risks. (-)Traditional schools entering the online education segment pose significant threat. Their established reputation would provide a vast advantage over more pure-play online schools, such as APOL. (-) Reaching caps on cohort default rates (CDR) or Title IV funds as a percentage of revenues could disqualify APOL from those and significantly affect its business model. As of FYE 2008, it was at 77%2 in Title IV funding and at 7-8% CDR (2006 base). (-) Bad debt expense increases could significantly hurt margins, especially with more consumers losing financial strength and defaulting on loans. EPS ($) Year EPS 2006 $2.38 2007 $2.37 2008 $2.90 2009E $3.62 2009E $4.29 2009E $5.02 All earnings represent earnings from operations and have been filtered from net nonrecurring gains. Valuation Models Discounted Cash Flow Economic Profit Relative P/E Relative P/S $94.21 $94.21 $80.18 $87.89 Important disclosures appear on the last page of this report. Henry Fund Research EXECUTIVE SUMMARY THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Group: Revenue by Segment  (base: 2H 2009) Apollo Group, Inc. (APOL) is a market leader in the 1.7% 0.8% 0.1% U.S. Education Services industry. Its University of 3.1% Phoenix ranked as the largest private university with 120 “campuses”. APOL’s strong brand recognition Univ. of Phoenix comparing to other competing for-profit schools is a key Other Schools advantage, as students prefer known programs, Apollo Global especially when looking at a relatively new education Insight Schools 94.3% alternative, such as online degrees. Geographic Corporate spread, growing concentration of quality personnel and push for technological investments will further consolidate APOL as a quality provider of both online and offsite degrees ranging from Bachelor’s to Doctoral. Source: Apollo Group, Inc. Q1-2 2009 10-q, http://www.sec.gov Its new national marketing campaign “I am a Phoenix” will further support brand identity and differentiate it APOL schools classification, type, and year of acquisition or establishment are summarized below: from competitors’ multiple ads for online degrees. Besides its core internal strengths, we expect APOL to benefit from the recession-resistant profile and major positive dynamics in the Education Services industry. Laid-off or concerned about job prospects population will seek differentiation provided by furthering education. With major companies using the downturn to move operations abroad to cut costs, many manufacturing jobs will be lost and people will need to respecialize. Also, growing demand for education due to the shift to a knowledge-based economy and desire for higher wages will increase adults’ demand for education, an excess which traditional schools will not be able to meet. We expect APOL’s internal competencies and industry-wide future dynamics to greatly benefit the company, supporting our “Buy” recommendation. Business Segments Univ. of Phoenix (UOP) Other Schools Inst. for Prof. Dev't (IPD) Coll. for Fin. Planning (CFP) Western Int'l Univ. (WIU) Meritus Univ. (Canada) Insight Schools (services) Apollo Global, Inc. UNIAC (Chile) ULA (Mexico) Corporate Aptimus, Inc. (online ad Co.) Segment  Structure Wholly‐ Owned  Subsidiary Acquired/  Established JV, 80% stake 100% stake 65% stake acquired Sep. 2008 Oct. 2006 Oct. 2007 Oct. 2007 Source: Apollo Group, Inc. 2008 10-k, http://www.sec.gov COMPANY DESCRIPTION Apollo Group, Inc. is the largest private institution of higher education in the U.S. Its product offering primarily includes direct delivery of educational programs (high school, undergraduate, and graduate), but also services in setting up online curriculums for other schools. It has both online and onsite programs across the country, and it operates four major segments, as detailed below: University of Phoenix (UOP), Other Schools, Insight Schools, Apollo Global, and Corporate. The latter recently expanded with the acquisition of Aptimus, an online advertising company which will provide Apollo with a strong in-house advertising branch. All of Apollo Group’s schools are accredited and contribute to the following revenue mix: Apollo Global was established to extend APOL’s global footprint and capitalize on the global demand for education by acquiring international post-secondary schools. Apollo Global was set-up as a Joint Venture with Carlyle Group, Inc. (a large Private Equity firm) in Oct. 2007 with APOL as majority stakeholder at 80.1% (hence, consolidated in its financial statements). Apollo The University of Phoenix offers its programs worldwide through both online systems and onsite campuses and learning centers in 39 states, DC, and Puerto Rico, Alberta and British Columbia, Canada, Mexico, and the Netherlands. One of its competitive advantages lies in developed computer systems for all functions in the online education process (student tracking, marketing, faculty training, etc.). While systems replication is possible for a new entrant, UOP, however, has a strong brand-recognition. APOL is currently reviewed by the Department of Education for recertification, which expired in June 2007. Management commented the process is routine and nothing came up so far to endanger its recertification, and hence, access to Title IV funds. UOP is the largest recipient of such funds in the United States. While with very low probability of occurrence, denial of recertification would bar access to federal funds. 2 Henry Fund Research Global further acquired education companies in Chile and Mexico with a 100% and 65% stake, respectively. Insight Schools, acquired in Oct. 2006, offer “curriculum and administrative services to public schools to operate full-time online high school programs” in 10 states. It represents a growing segment with multiple start-ups. Within Other Schools, Western International University (WIU) offers undergraduate and graduate programs on Arizona campuses, online, and sites in China and India. IPD provides program consulting services to private colleges and universities to establish or expand their programs for working adults. CFP operates online and onsite in Colorado providing financial planning education programs such as Master’s of Science in three majors and various finance certifications. Meritus University offers online degree programs to working 2 adults in Canada and other sites . The following represents revenue breakdown by segment comparing 1H 2009 and FYE 2008 and YoY revenue growth. Revenue mix shift is primarily due to Apollo Global growth. The decline in Other Schools’ revenues is due to the strategic shift of the Associate’s degree from WIU to UOP initiated in 2006. Graduation or withdrawal from WIU Associate’s degree, thus, results in revenue declines for Other Schools segment. Revenues Univ. of Phoenix Other Schools Apollo Global Insight Schools Corporate TOTAL 1H 2009 $    1,742.5 $        57.6 $        31.1 $        14.3 $          1.7 $  1,847.1 FYE 2008 YoY Gr. $  2,987.7 95.1% 24.3% $       122.5 3.9% ‐8.6% $         13.4 0.4% 363.6% $          7.5 0.2% 176.6% $          9.8 0.3% ‐68.5% $  3,140.9 100% 24.6% 1.6% THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Degree Enrollment Mix (Q2 2009) 17.7% 42.9% Associate's  Bachelor's Master's Doctoral 37.8% Source: Apollo Group, Inc. Q2 2009 10-q, http://www.sec.gov Note: APOL reports its enrollment figures based on UOP total and WIU Associate’s degree only. Quarterly enrollment data provides detail on the seasonality of enrollment, particularly that it peaks in Q1 and Q3, so we should expect enrollment to pick up QoQ growth in Q3 09. Degree Enrollment Growth (QoQ) 20% 15% 10% 5% 0% Q2 06 ‐5% Q4 06 Q2 07 Q4 07 Q2 08 Q4 08 Q2 09 Associate's  Bachelor's Master's Doctoral Source: Apollo Group, Inc. 2008 10-k and 2009 Q1 & Q2 10-q. RECENT DEVELOPMENTS Reaction to APOL Q2 2009 Earnings Release: Apollo Group, Inc. recently reported better than expected Q2 2009 results beating analysts’ expectations by 18.5% with a $0.77 EPS. The primary drivers were more favorable renegotiated contracts with third party vendors and a 160bps decline in financial aid processing costs. Gross Margins added +460bps as a result. A negative contributor to results, Bad Debt expense, increased from 3.8% to 4.1% YoY as more students defaulted on loans. Markets overreacted as a result via a 1-day 15% stock price drop mostly due to investors’ low tolerance to any credit issues in light of the profile of this recession. The higher bad debt expense was anticipated, and we do not see that swaying our “Buy” recommendation on APOL. Our valuation model already incorporates a 5.0 % est. for Bad Debt in FY 2009 before falling to a traditional level of 4%. When students with Title IV funding withdraw from UOP or WIU, the schools “are sometimes required to return a portion of those 2 funds to lenders.” APOL, in turn, is entitled to collect these funds from students, but not all comply resulting in bad debt expense on its financials. 94.3% 3.1% 1.7% 0.8% 0.1% 100% Note: YoY Growth is based on 1H 2009 vs. 1H 2008. Source: Apollo Group, Inc. 2008 10-k, Q1-2 10-q, http://www.sec.gov APOL educational programs range from 1-day seminars to 4-year programs. Within UOP courses are 5-9 weeks long and students are billed when they first attend the class resulting in a receivable and deferred Students usually support their revenue record2. education through grants/ loans under Title IV programs (77% of APOL revenues), employers’ sponsorship and personal funds. Breakdown by product/ offered degree in Q2 2009 is presented further. Comparing to Q2 2008 enrollment mix, Associate’s degree gained 6.2% while Bachelor’s and Master’s lost 3.5% and 2.6%, respectively. Doctoral degree enrollment slightly declined. All degrees experienced double-digits enrollment growth with Master’s in mid-single digits. As of Q2 2009 (MRQ) APOL’s degree enrollment was 2 397,700 students . 3 Henry Fund Research Bad Debt Expense: Hist. & Forecast 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Apollo Group, Inc. 2006-08 10-K, http://sec.gov ; Analyst forecast THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Operating Margins:  By Segment 40.0% 20.0% 0.0% ‐20.0% ‐40.0% ‐60.0% ‐80.0% ‐100.0% Univ. of  Phoenix Other Schools Apollo Global Insight  Schools 1H 2008 1H 2009 Selling and promotional expense decreased 330bps to 25.8% in Q2 due to more effective recruiting and advertising efforts. General and Administrative 20bps rise to 8.1% of revenues is due to a one-time charge by the DOE for previous years’ miscalculations in UOP students’ eligibility for financial aid. The fee is expected to exhaust the matter, and we do not anticipate such events in the future. Organically, G&A would have also been down YoY. Source: Apollo Group, Inc. 2006-08 10-K, http://sec.gov ; Analyst forecast Note: Further graphical analysis of Education Services companies will be based on the top players by market cap (left to right). Apollo Group: Cost Structure 100% 80% 60% 40% 20% 0% FY 2008 Q2 2008 Q2 2009 3.3% 40.3% 43.4% 23.9% 6.9% 25.6% 29.1% 3.8% 15.7% 7.9% 8.1% 25.8% 4.1% 23.5% Industry earnings: Surprise EPS % Apollo Group was leading the largest education services companies in the surprise EPS % (positive across all firms), as shown below. The only outlier were Career Education (CECO) at +105% and Grand Canyon Ed. Co. (LOPO; 2008 IPO) at +500%, not represented below due to scale issues. Recent EPS Surprise % 25 20 Op. Income Gen. & Admin. Sell. & Promo. Bad Debt Exp. Instr. Costs 20 14 12 6 20 15 10 5 0 0 APOL ESI DV STRA EDU COCO CPLA 1 38.5% Source: Apollo Group, Inc. 2008 10-K, Q2 08 and Q2 09 10-q, http://sec.gov Source: YahooFinance, Analyst Estimates, http://finance.yahoo.com 2H 2009 operating margin expansion is expected to decelerate, as APOL pushed most of its investment plans for that period. Given increasing expectations and plans to boost service quality, APOL plans to hire more personnel to support growth, make strategic technological investments and focus efforts on its new national marketing campaign titled “I am a Phoenix.” We assess these efforts very favorably as APOL targets significant improvements in the quality of its services and related image. Lower operating margins in growing segments such as Apollo Group and Insight Schools all reflect costs associated with seeking new investment opportunities and new start-ups. Growing UOP margins will more than compensate for the other segments underperforming for a while. We expect these segments to also contribute positive margins in 23 years. Competitors’ global expansion initiatives: DeVry Inc. (DV) recently announced its acquisition of a majority stake (82.3%) in Fanor, a “leading provider of private education in northeast Brazil”6. This represents a global entry point for DV, and parallels APOL’s already more advanced global expansion initiatives. Career Ed. Corp. (STRA) reported high growth in its international segment (15.4%) YOY, which, along with Healthcare Education, helped offset other segments’ revenues declines. Its Jan. 07 acquisition of Instituto Marangoni (France, U.K. and Italy) has added to its international portfolio going from 4.7 to 6.3% of total revenues YoY7. Online degree ranking 2009 The Online Education Database (OEDb, http://oedb.org ) has released its 2009 ranking9 of accredited online programs using eight metrics: acceptance rate (AR), financial aid (FA), graduation rate (GR), peer Web citations (PW), retention rate (RR), scholarly citations (SC), student-faculty ratio (SF), and years accredited (YA). University of Phoenix was ranked #28 out of a 4 Henry Fund Research sample of 44 colleges. UOP ranked highest in SC (#2), PW (#6), and YA (#18). It ranked lowest (#40 or so) in FA, GR, and RR. It should be noted though the sample includes traditional schools with online degree offerings. Hence, it would be expected those to rank higher on faculty-to-student ratio, retention rate, and graduation rate when compared to UOP. Bad debt expense developments The largest for-profit schools posted anticipated hikes in bad debt expense as percentage of revenues. ESI (ITT Ed. Services Inc.) posted a significant increase predicting 2009 at 4-6% of bad debt. STRA (Strayer Ed. Inc.) and CECO stayed flat, somewhat due to lower enrollment (CECO Univ. revenues declined 0.2% YoY). APOL ESI STRA CECO FYE 07 3.3% 2.1% 3.3% 2.6% FYE 08/ MRQ 4.1% 4.3% 3.2% 2.6% 80% 70% 60% 50% 40% 30% 20% 10% 0% 76% THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Student Profile: Gender 67% 60% 40% 33% 24% APOL ESI STRA Male Female Source: 2008 10-k’s, http://sec.gov (APOL’s latest data available: Q1 2008 Earnings Call Transcript, Q&A Session). Student Profile: Race 80.0% 60.0% 40.0% 20.0% 0.0% 53.8% 46.2% 51% 49% 29% 71% Source: APOL 2008 10-k & Q2 09 10-q; ESI, STRA & CECO 08 10-k. APOL ESI STRA Student Profile The top four online education companies differ considerably in terms of their target markets by age, gender, and race. Both APOL and STRA target the 31y.o. and older market, but APOL’s average student age is 33-34y.o. (Q1 2008 Earnings Transcript) so it has considerable younger population as well. In terms of gender and race companies target: STRA - female minorities, ESI – males with no race emphasis, APOL – Caucasian males but with weak majority in both, as can be observed in the charts below. Caucasian Minorities Source: 2008 10-k’s, http://sec.gov INDUSTRY TRENDS Demand for education: Job security and respecialization needs With the unemployment rate at 8.5%, according to the March Employment Situation Report, and projected to grow as companies shed employees not being able to revive the consumer, we expect degree enrollment to continue increasing. Whether laid-off or insecure about future job prospects, people will seek ways to differentiate, such as earn a degree. Another impetus would be the persistent wage gaps between high-school diploma only and college graduates. Also, with companies pressured into cost cutting, many layoffs could be permanent as operations are moved to cheaper labor markets using the “threat to business viability” argument. As that occurs, we believe people will need to respecialize and gain a new set of skills to find employment. This provides an outlook for long-term growth in enrollment beyond the window of the current recession. Thus, our enrollment forecast, particularly for APOL, is continued robust growth (13.3% 5-yr. CAGR). Demand for education: U.S. shift to a knowledgebased economy The United States has been gradually shifting away from manufacturing and great industrials as core competencies to a more knowledge-based economy leading the know-how. There is an increasing push to rediscover the importance of advancing education to be able to compete in an increasingly globalized world. As Michael Porter remarked, “U.S. colleges and universities Student Profile: Age 70% 60% 50% 40% 30% 20% 10% 0% 60% 52% 45% 34% 14% 37% 24% 13% 25% 15% 19% 36% APOL ESI STRA CECO 21 and under 22 to 30 31 and over Source: 2008 10-k’s, http://sec.gov (STRA’s under 30y.o. data was estimated). Note: Some age ranges are approximated to best match disclosed data. 5 Henry Fund Research are precious assets, but we have no serious plan to improve access to them by our citizens. America now ranks 12th in tertiary (college or higher) educational attainment for 25- to 34-year-olds”4. We believe the impetus for advancing education to stay competitive in the job market will become a primary trend and drive long-term enrollment growth for non-traditional programs, such as online degrees. This will likely translate in continued increase in education subsidies, also emphasized in Obama’s agenda. % of 25-34y.o. with Higher Degrees THE UNIVERSITY OF IOWA Henry B. Tippie School of Management and we believe larger “moat” online education companies (top 5 by market share: APOL, ESI, DV, STRA, and CECO) are watching it. These programs are low-cost via lower capital expenditures and faculty/ staff salaries per student as class sizes are large. Further, traditional and for-profit schools are projected to grow at 5 very different rates : Ed. Institutions Est. Ann. Growth For‐profit Private 20.6% Not‐for‐profit Private 13.6% Public 4.7% Source: IBIS World Industry Report (Dec. 2008)5 Above-mentioned strong for-profit schools’ growth is supported by top 3 players’ enrollment data, as shown below. All have been posting increasing growth, even before the recession. This indicates that strong enrolment is not only due to this industry’s contracyclical profile, but to overall long-term trends. APOL seems to be leading in enrollment growth, as can be noted from Q2 2009 (MRQ) trends. We forecast its enrollment to grow at 13% 5-yr. CAGR leveling at 1% in terminal value. Current Revenue/student at APOL is about $8,200, projected to grow at 3.3% in FY 2009 (based on Q1-2), and at 1.6% 5-yr. CAGR. Source: Porter, M. “Why America Needs an Economic Strategy”, Business Week (Oct. 30, 2008), http://www.businessweek.com Enrollment Growth 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% ‐5.0% Demand for education: Quest for higher wages As more online programs are being marketed in various media channels, people find out about new opportunities to reach up on the labor ladder. If earlier they were not able to pursue a degree – either did not consider it or did not qualify for admission at chosen programs, they now have the opportunity of online degrees. Strategic advertisements emphasize the change in applicants’ wealth after the degree completion as their wages increase. For instance, working at $8/hour a worker earns $17,000/year. In contrast to that, the average salary of a new graduate from DeVry is over $45,000 with payback period 1 estimated at only two years . Expansion of online education For-profit institutions’ value proposition is to provide low-cost higher education to either customers that could not access it prior or did not have the time to engage in an onsite program. Thus, affordability and time are key points in their marketing efforts. Adults and lower income segments have been historically under-targeted by traditional schools5, and online education companies are now actively reaching for that underserved market. They are criticized for sometimes lowering admission requirements to get more enrollees. However, this offers opportunity for advancement to certain population segments the online programs are still assessed on the academic performance of their students to decide governmental funds qualification. It is a risky balance, APOL ESI DV 2006 2007 2008 MRQ Source: APOL, ESI & DV 10-k’s; APOL & DV 10-q’s (latest) http://sec.gov. Note: ESI FYE is Dec. 31 vs. APOL's Aug. 31 and DV's Jun. 30; ESI % was adj. to match periods. APOL Revenue Drivers (Enrollment & Revenue / student) 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% ‐5.0% 2006 2008 2010E 2012E 2014E Enrollment Growth Revenue/ student growth Source: APOL 2006-08 10-k’s, http://sec.gov; Analyst Forecast. Government regulation: Title IV funds eligibility Online programs’ candidates did not have access to Title IV funds until the clause was abolished in 2006. The new law increased qualification for such funds to a max. of 90% of revenues (cap #1). Reevaluation of online degrees as a feasible alternative to traditional schools has encouraged legislation changes. All three major forprofit schools (APOL, ESI, and DV) have shown an 6 Henry Fund Research increase in Title IV funds as a percent of revenues. This relates to both more awareness about funds availability for such degrees and schools trying to maximize federal and minimize private funding. Recent federal loan limits increases artificially inflated Title IV revenues share. Schools will be allowed to exclude that surge from their Title IV share of revenues. APOL, so far, reported their figures without that adjustment (UOP alone is at 82%), hence, we do not believe it is in danger of exceeding the limit. Plus, if needed, it could turn to private borrowing as it has almost no debt. Overall, we do not believe such heavy reliance on Title IV funds is risky because, with continued improvement of online programs quality, legislation will be more likely to become more supportive rather than not. As with any innovation, it will take time for online schools to gain larger acceptance. Online programs are not for everyone, but they do serve well segments that cannot get their education otherwise. THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Overall, about 70% of online programs’ revenue (tuition) is covered by Title IV programs that students apply for5. As a result, those schools are highly dependable on changes in respective legislation. We do not anticipate cuts in that direction, but, on the other hand, more focus on increasing accessibility to education in the U.S., even if it will imply subsidy cuts to other industries as the budget deficits widen. Education will become a priority. MARKETS AND COMPETITION Substitutes: Traditional &Traditional+Online schools The growing discussion on increased demand for education going forward has been focused on what schools will capture most of it: traditional or for-profit. It is projected that more than 25% of the estimated growth will be from students >25y.o.1 This demographic is not usually targeted by traditional schools focused on a younger audience for starting higher education degrees such as Associate’s or Bachelor’s. Thus, the excess Title IV Funds as % of Revenue enrollment will be captured by non-traditional schools 80% that are able to better accommodate the needs of older students. The flexibility of online degrees will fit their 70% APOL (UOP) lifestyles. Also, since an online program’s perceived 60% quality and age are key selection criteria, people will ESI 50% tend to go with more established brands in the business, DV 40% such as Apollo Group schools. Long-term, however, 2006 2007 2008 traditional schools might increasingly develop their own online programs threatening pure-play online schools’ Source: APOL, ESI, and DV 10-k’s, http://sec.gov market share. We believe this will not accelerate in the Another cap towards Title IV funds accessibility is the near term as traditional schools will be wary of diluting cohort default rate (CDR; % of students that default on their brand image by pursuing the online market. their loans in the 1st year). A school must not exceede 25% CDR for 3 years in a row or 40% in any given Threats: Other industries year. Data across key competitors below indicates that While not prominent at this point, online education all are far from reaching above cap. APOL kept its services companies could face competition from CDR at a steady level, but ESI, its next largest communications, entertainment, and information competitor has seen a surge in avg. CDR in 2006 technology industries. The latter could start leveraging (latest data available). DV’s CDR seems lower, but their their digital platforms with extensive global penetration to 5 data is lagged by 1 year (latest as of 2005). deliver “virtual universities” to foreign countries . Online programs are extensively exploiting economies of scale Cohort Default Rate as of now, but above mentioned industries could surpass 15.0% them in that aspect. 10.0% 5.0% 0.0% 2004 2005 2006 APOL (UOP) ESI DV Source: APOL, ESI, and DV 10-k’s, http://sec.gov We expect APOL’s rate to improve going forward due to reported continued investments in retention programs. The higher rate at WIU (27.4%) vs. UOP (7.2%) is due to the Associate’s degree. We expect it to decline as the degree is moved to UOP, where it would not significantly affect UOP’s CDR as a whole. Entry barriers: Industry “moat” The Education Services industry has a few key players, such as Apollo Group, ITT Education Services, DeVry Inc., etc. that dominate the market. As Warren Buffett would say, they have a relatively wide “moat” or ability to shield from “invading” new entrants. Entry barriers are high for other pure-play online schools because brand image and programs’ quality are hard to develop, and it takes time to gain customers’ credibility. However, entry barriers are rather low for traditional schools that might want to establish parallel online program. Two things would facilitate that entry: ease of online education programs replication and already established strong 7 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management positive image of their traditional programs. However, continue the trend due to economies of scale declining even with new schools’ entry, a pricing war is unlikely from current 43.6% to 42.5% terminally. as demand for education is fairly inelastic and other COGS % of Revenues factors play a large role: degree quality, convenience, 65% and access. 60% APOL Within the for-profit online schools sub-industry, we 55% ESI observe fairly dispersed P/E ratios ranging from 36x 50% DV (COCO, Corinthian Colleges) to 15.3x for Apollo Group. 45% APOL’s P/E ratio is comparable to S&P 500 at 15.6x. It 40% STRA 35% trades at a significant discount vs. to its peer group (20- 30% CECO 36x), which presents a unique opportunity to but the 25% COCO stock cheap. High valuations in the education services 2005 2006 2007 2008 TTM industry are warranted by its high avg. ROI of 26% Source: Morningstar Data. Key Ratios. http://morningstar.com (41.6% for top 3 firms by market cap; 52% for APOL.). APOL’s SG&A costs are expected to peak at 33.6% Historical P/E Ratio (2011E) and return to 32% terminally comparing to the 60 3-yr. avg. of 31%. This is due to marketing initiatives, S&P 500 50 which will be increasingly leveraged by the online APOL 40 business model. The trend has been similar across ESI 30 most competitors with SG&A picking up in 2007 and DV statying flat since. 20 STRA 10 0 2005 2006 2007 2008 TTM CECO COCO SG&A % of Revenues 60% 50% 40% 30% APOL ESI DV Source: Morningstar Data. Valuation Ratios. http://morningstar.com (hist.); MSN Money Deluxe Screener Data, http://moneycentral.msn.com (ttm) Competitors’ recent stock performance indicates that 20% STRA while ESI price has already accelerated, APOL is still at 10% CECO a good entry point. Plus, ESI’s signifficant debt, as will 2005 2006 2007 2008 TTM be discussed further, presents additional risk we do not Source: Morningstar Data. Key Ratios. http://morningstar.com recommend, given that most industry players have minimal debt, if any. Operating income trend reveals three players with higher margins: APOL, ESI, and STRA. APOL presents a nice upward trend since 2007, and we expect it to stay in the high bracket. Op. Income % of Revenues 40% APOL 30% 20% 10% ESI DV STRA CECO 0% 2005 2006 2007 2008 TTM COCO Source: YahooFinance. Relative Stock Performance. http://finance.yahoo.com Economies of scale Online education schools are able to benefit from large economies of scale comparing to traditional brick-andmortar schools. They are able to increase class sizes without additional capital expenditures or new faculty members. While education services companies’ COGS % level depends on accounts classification between COGS and SG&A, a downward trend in COGS% is noted across all large cap firms, except for smaller COCO and CECO. While APOL will continue investment initiatives, we expect its COGS to slowly Source: Morningstar Data. Key Ratios. http://morningstar.com Key costs per student: Historic and forecast Within instructional costs, FY08 employee salaries and faculty salaries were at $1,356 and $753/ student both projected to pick up growth in the post-recession years as APOL strives to increase its programs’ quality. Likewise, enrollement salaries/ student (now at $1,065) are projected to grow reflecting efforts in APOL’s global markets and increasing competition from traditional schools. Recent historic data and our forecast is below: 8 Henry Fund Research APOL Salaries Cost/ Student  Growth 20.0% THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Consumption. We expect a very flat bottom stretching over 2H 2009 and a more notable recovery in 1H 2010 with ann. real GDP above 1.5% by 2Q 2010. While 15.0% Exports, another component of GDP, have been fuelling 10.0% it for the last couple of years, given the global reach of 5.0% the recession and its lagging effect abroad, we do not 0.0% see that component significantly boosting U.S. GDP any ‐5.0% time soon. Standard and Poor’s predicts “the U.S. recession is likely to be the deepest – but also probably Employee Sal. Faculty Sal. Enrollment Sal. the shortest – of the three” (reference to Europe and Source: APOL 2005-08 10-k’s, http://sec.gov; Analyst’s hist. metric estimates Japan). The recently passed stimulus package would and forecast. have some beneficial impact over the long-term but we Both ROA and ROIC % present a very similar pattern see these effects only later in 2009-early 2010. The across competitors, with larger players featuring higher education services industry will benefit from a prolonged returns and gradually decreasing towards lower cap downturn with more adults turning to education to companies (again, scale is key in this business). differentiate and either get or secure a job. The economic recovery will not reverse that strong trend. ROIC % (by market cap: left to right) APOL had strong enrollment growth even before the 80 recession was suspected. Wider acceptance of online 60 degrees, people realizing its benefits, and U.S. shift to a knowledge-based economy will support its growth. 40 20 0 APOL ESI DV STRA EDU CECO COCO CPLA LOPE 0.8 1.5 0.1 -0.2 4.8 Real GDP Growth (incl. 9-mo. forecast) 4.8 2.8 0.9 Source: MSN Money Deluxe Screener Data, http://moneycentral.msn.com -0.5 -1.8 -4.8 -6.3 -0.5 Most education companies have 0 to insignifficant debt (incl. APOL) except for ESI (0.8 D/E), Grand Canyon Ed. (0.6 D/E – 2008 IPO) and DV (0.18 D/E). The latter has a slightly higher ROIC than APOL, but it is highly levered, reinforcing APOL as our pick among its peers. APOL has its share of constraints from various governmental regulations, particularly on Title IV funds. Hence, we believe its financing is adequate and adding debt-related risk is unnecessary. In terms of liquidity level, it is sufficient and fairly consistent across firms, with avg. 2.2 and a 1.7 for APOL (lowest 0.9 for DV). Hence, we are not concerned about APOL’s balance sheet going forward. Any off-balance sheet lease obligations have been accounted for in our model with a present value of ~$500M (27% of assets’ book value). D/E (by market cap: left to right) 1.00 0.80 0.60 0.40 0.20 0.00 APOL ESI DV STRA EDU CECO COCO CPLA LOPE Q3 06 Q1 07 Q3 07 Q1 08 Q3 08 Q1 09 Q3 09 Source: Historical data: FRED Database. Forecast: Analyst. Unemployment. Latest WSJ Economic Forecasting Survey (February) expects an 8.8% unemployment rate by 2009-end. We anticipate it to creep up sooner and higher as consumption is depressed, companies’ liquidity cushion is quickly depleted and they are forced into additional layoffs. Recession-resistant education services companies, such as APOL, will extract higher enrollment from a larger pool of unemployed. Civilian Unemployment Rate (%, seas. adj.) (incl. 6-mo. forecast) 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 9.0 8.5 Jan-09 Source: Historical data: FRED Database. Forecast: Analyst. Source: MSN Money Deluxe Screener Data, http://moneycentral.msn.com Consumer spending. While consumers are staying away from large purchases, the saving rate is expected 8 GDP. We expect the current economic downturn to be to increase to 5.8% in 2009 and drop to 3% in 2010-12 . a longer one, primarily due to the effect of massive In retrospective, this is beneficial if it helps boost the layoffs on the largest component of GDP – longer-term savings rate as the opposite is partly what ECONOMIC OUTLOOK 9 Henry Fund Research drove the current crisis. In the short-term however, is generates distress for both the producer and consumer. The recently passed $700B+ stimulus package is expected to boost spending. As consumers are still cautious, we expect somewhat increased discretionary spending, but anticipate professional training/ education-related expenses to become a priority given the soft labor market. The March 1 pt. increase in sentiment could indicate a starting trend, although we anticipate a very slow recovery as consumers remain cautious. University of Michigan: Consumer Sentiment (incl. 6-mo. forecast) THE UNIVERSITY OF IOWA Henry B. Tippie School of Management people that do not have the opportunity to access it by travelling will exploit the online opportunity. Two issues could stand in the way of that process: technological limitations in students’ home countries and still negative perception of the quality or validity of online degrees. Overall, the process of establishing a solid global online education system will take time, but we expect companies that start on this route early on, such as APOL with its Apollo Global segment, to benefit significantly down the road. With good implementation, it will bring the first-entrant returns. INVESTMENT POSITIVES Short-term, we expect the education services industry to capitalize on higher enrollment as people are laidoff or concerned about their job prospects and seek to advance professionally. 63.5 110.0 100.0 90.0 80.0 70.0 60.0 50.0 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 57.3 Jan-09 Source: Historical data: FRED Database. Forecast: Analyst. Medium-term, we expect many manufacturing jobs to not return, even as the recession is over, fueling the need to respecialize and develop a new set of skills. The convenience and flexibility of online degrees will allow adults with family obligations to pursue those. As global core-competencies are redefined and U.S. is increasingly shifting to a knowledge-based economy, we expect demand for education to increase, fuelled by government’s funding for the country to maintain its competitive position. Education companies, thus, will benefit from both consumer and regulation-driven trends. Apollo Global will provide the opportunity to capitalize on the global demand for U.S. education and consolidate APOL’s first-entrant footprint in target foreign markets. We strongly believe that is where most of the growth will lie going forward. University of Phoenix’ brand recognition is a strong advantage against smaller competitors and any potential new entrants. Establishing a solid reputation is particularly critical for online schools. APOL has been actively pursuing new investments and programs’ quality improvement. Strong balance sheet with minimal debt and low reliance on private loans (3% of revenues) give APOL a solid financial position. Market valuations are discounted from what APOL historically traded at: its shares are at 15.3x ttm EPS while its direct competitors trade at 20x and above. This represents a great buy opportunity as we anticipate the company to continue strong enrollment growth. CATALYSTS FOR GROWTH Enrollment base growth According to a 2007 report5, students taking at least one online course are estimated at 20% of the total number of higher education students. While growth has been slowing down, it is far away from the peak, as reported. For-profit institutions, such as Apollo Group represented 8% of student enrolment in 20065. All of its degree enrollment programs had higher YoY growth, except for Doctoral, as shown below: Degree Enrollment  Growth  (YoY) 70% 60% 50% 40% 30% 20% 10% 0% ‐10% 61% 41% 27% 19%16% 1% ‐4% ‐2% ‐1% 5% 37% 10% Associate's  Bachelor's Q2 07 Q2 08 Master's Q2 09 Doctoral Source: Apollo Group, Inc. 2008 10-k and 2009 Q1 & Q2 10-q. Global opportunities: Multi-media education Globalization of education facilitated by the spread of technological advancements paves the way for multimedia education. Through its extensive technological base and software innovation, United States is positioned to become a major supplier of online education to the rest of the world5. The quality of its curriculum is acknowledged world-wide and we believe 10 Henry Fund Research INVESTMENT NEGATIVES Higher levels of regulation and overall vulnerability to small changes in governmental funding programs expose for-profit schools to revenue risk. If the frequency of fraudulent practices in the online education services does not subside, more regulation could hurt growth prospects. Since Apollo Group is now under review for accreditation renewal (as scheduled), any problems with receiving that would be highly detrimental. It could limit access to Title IV funds and weaken its programs’ credibility. (No issues in this process have or seem likely to arise2.) Online education companies are sometimes involved in various litigations over their enrollment practices, the accuracy of academic performance reports, and intellectual property rights of the curriculum material. This could drag their reputations and increase associated costs. Ownership structure adds some risk as over 50% of voting class B shares (class A are traded) are owned by the founder (John Sperling) and almost all other shares by his son. THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Global these result in terminal revenue growth of 2.5%. Cost structure assumptions We drive our salaries estimates for employees, faculty and enrollment personnel from respective costs per student from prior years. Overall, our per-student estimates are based on stronger growth in the following years as Apollo Group expands operations globally and needs to staff its business units. As a % of revenues, however, economies of scale will take effect reducing instructional and Sales & Promo. costs to 42.5% and 24.9% from current 43.6% and 25.6%, respectively. General and Administrative costs, however, are projected to increase to 7.4% in terminal (vs. 6.9% now) due to more complex operations (cross-countries) in later years. Financial profile assumptions We expect APOL to maintain its target leverage at 3%, and continue its low reliance on private loans. P&E investments are not heavily driven by revenues as APOL mostly depends on leases for its fixed assets needs. We project the PV of Operating leases to grow at the assets’ growth rate going forward. The current WACC estimate (7.77%) is based on a low cost of debt estimate due to APOL’s very high interest coverage ratio (virtually no debt). Our market risk premium is at 5% (Henry Fund Analysts’ consensus going forward). The sensitivity analysis reveals that even if we assume a 9.7% WACC, the stock price is still slightly above the current price, and, if we assume only 1% terminal revenue growth, it is slightly under $80. Sell discipline Our sell discipline for Apollo Group, Inc. would be based on: significant increases on cohort default rates, Title IV revenues approaching 90% too closely, the emergence of other strong online brands, and unsuccessful growth in the global segment due to local skepticism about online degrees and technological incompatibility. Our buy discipline would be enforced by further strong trends in enrollment, leveraging of economies of scale in APOL’s cost structure, and new strategic acquisitions in stable foreign markets. VALUATION Our estimated APOL share value using the DCF/ EP valuation is $94.21. This represents a 5% premium over its peak price ttm ($90), registered right before it went into a downfall with the rest of the market. Our estimate carries a 48% premium over the current price of $63.81. We see that as a very favorable entry point in the stock given its leading market position and recommend a “Buy” on the stock. Other valuation techniques gives lower values, which is due to crossindustry lower than usually multiples. Based on a peer group of Education Services companies, we get a Relative P/E value of $80.18. The Relative P/S valuation returns a $87.89 current implied value. Our target average is at $87.43 with a +/- 2% range of $85.68 - $89.17. Revenue assumptions Our revenue forecast is based on revenue decomposition for UOP (96% of total) into enrollment base and revenue/ student. While the latter is projected to grow in FY 2009 (based on H1 09), we expect very low to no growth going forward to account for the difficult financial environment that might prevent tuition increases for online programs. Target terminal value is based on 1% growth in enrollment and 1.5% in revenue/student. Along with 3.5% terminal gr. for 11 Henry Fund Research REFERENCES 1. Young, T. (Mar. 6, 2009). Higher Education Equals Higher Moats. Morningstar http://news.morningstar.com/articlenet/article.aspx?id=2826 16#hide Apollo Group, Inc. 2008 10-k, Q1 2009 10-q, and Q2 2009 10-q, http://www.sec.gov Hough, J. (Mar. 17, 2009). 7 Soaring school stocks. http://www.smartmoney.com/investing/stocks/7-soaringschool-stocks/?cid=1122 Porter, M. (Oct. 30, 2008). Why America needs an economic strategy. Business Week, http://www.businessweek.com/magazine/content/08_45/b4 107038217112_page_2.htm IBISWorld Industry Report (Dec. 2, 2008). University Colleges in the U.S. IBIS Database, http://www.ibisworld.com DeVry Inc. completes acquisition of majority stake in Fanor. (Apr. 2, 2009). YahooFinance. http://finance.yahoo.com Career Education Corp. 2008 10-k, http://sec.gov Economic Insight. Vital Signs: Economic Growth Looks Even Weaker. Standard & Poor’s (Feb. 5, 2009). Net Advantage Database. OEDb’s Online College Rankings 2009. Online Education Database, http://oedb.org/rankings THE UNIVERSITY OF IOWA Henry B. Tippie School of Management 2. 3. 4. 5. 6. 7. 8. 9. IMPORTANT DISCLAIMER This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report. 12 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Group, Inc. Key Assumptions of Valuation Model Ticker Symbol Current Stock Price Marginal Tax Rate Normal Cash (% of Revenue) Target Leverage (% of Assets BV) Risk‐Free Rate Market Risk Premium Beta Cost of Debt Cost of Equity Cost of Preferred WACC Target Terminal Revenue growth Interest Income ‐ Interest Rate (L‐T) Interest Expense ‐ Interest Rate (L‐T) Non‐numeric assumptions: High revenue growth is projected to continue into the next three years, primarily fueld by Apollo Global segment and U.S. enrollment due to massive layoffs. APOL $ 63.81 39.6% 13.0% 3.0% 3.66% 5.00%     0.87 5.44% 8.01% N/A 7.77% 2.5% 3.5% 6.0% As of 4/15/2009 Derived from the income tax provision and adjusting only for operating recurring items 2‐yr. avg. cash bal. is 12.5% (excl. hike in 2008); in line with performed analysis on normal cash % across a peer group includes S‐T debt (no L‐T debt O/S) and capital leases 30‐Yr. T‐Bond (as of 4/15/2009) Henry Fund Analysts' consensus (13 analysts) Base: 5‐yr. weekly returns (Apr. 2004 ‐ 2009) Rating not available (did not publicly trade debt) Currently high interest rates are expected to return to nomal levels of 6.0% within 2‐3 years Displaced workers and those seeking to secure their jobs via an online/ onsite degree will become the bulk of Apollo Group's growing enrollment base. Education services is expected to be one of the most promising industries within consumer discretionary due to the growing shift to a knowledge‐based economy. 2009E OI margin is higher (1H 09 base) due to scale & efficiencies; however, as APOL expands globally, we expect faculty, marketing & enrollment costs/ student to increase. Treasury stock serves as a plug on the balance sheet ‐ in the event of excess cash it triggers share repurchases. Certain 2009E income statement and balance sheet inputs were derived from Q2 2009 financials (MRQ). 13 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Group, Inc. FYE August 31 ($ Millions) Revenues University of Phoenix1 % Growth 2006 $   2,074.4 3.0% 2007 $  2,537.8 22.3% 2008 $   2,987.7 17.7% 2009E $  3,694.1 24.3% 2010E $   4,359.1 18.0% 2011E $   5,004.1 12.0% 2012E $   5,614.6 8.0% 2013E $   6,041.9 8.0% 2014E $     6,285.9 4.0% Terminal $      6,443.9 2.5% Apollo Global % Growth $         ‐ N/A $         ‐ N/A $       13.4 N/A $       62.1 363.6% 176.6% $     136.7 120.0% 100.0% ‐7.0% $     246.0 80.0% 80.0% ‐5.0% $     344.4 40.0% $     413.3 20.0% $       454.7 10.0% $        470.6 3.5% Insight Schools % Growth $         ‐ N/A $          2.0 N/A $         7.5 275.0% $       20.7 $       41.5 $         74.7 $       112.0 ‐8.6% $     112.0 50.0% ‐2.0% $     134.4 20.0% 2.0% $       143.8 7.0% $        146.0 1.5% Other Schools % Growth 2 $     402.1 71.0% $       182.6 ‐54.6% $     122.5 ‐32.9% $     104.2 $         98.9 $         97.0 $         98.9 $           3.5 15.0% $       101.9 3.0% 4.0% $         103.4 1.5% 1.0% Corporate 3 $           1.0 ‐44.4% $           1.4 40.0% $           9.8 600.0% $           3.1 ‐68.5% $           4.0 12.0% $           4.3 8.0% $           4.6 8.0% $             4.8 $              4.9 $   6,991.0 4.4% % Growth Total  Revenues % Growth $   2,477.5 10.1% $  2,723.8 9.9% $ 3,140.9 15.3% $  3,892.1 23.9% $ 4,645.0 19.3% $   5,427.8 16.9% $ 6,172.4 13.7% $ 6,693.2 8.4% $    7,168.8 2.5% Notes: 1. UOP revenues incr. due to 12.1% incr. in Degreed Enrollment and some tuition increases, offset by a larger % of assoc. degree students with lower tuition. 2. Other Schools' revenue declined due to the shift of the assoc. degree program from the WIU to Univ. of Phoenix. 3. Corporate revenues increase is due to acquisition of the advertising company Aptimus for Apollo Group's marketing efforts UOP Revenue Drivers UOP Revenue1 % Growth Enrollment Base2 % Growth Revenue/Student3,4 Notes: 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E Terminal $     2,074 $       2,538 $     2,988 $       3,694 $     4,359 $     5,004 $     5,615 $     6,042 $       6,286 $        6,444 3.0% 22.3% 17.7% 23.6% 18.0% 14.8% 12.2% 7.6% 4.0% 2.5% 282,300 313,700 362,100 433,300    511,294    582,875    641,163    676,427      693,337       700,271 4.0% 11.1% 15.4% 19.7% 18.0% 14.0% 10.0% 5.5% 2.5% 1.0% $     7,348 $       8,090 $     8,251 $       8,526 $     8,526 $     8,585 $     8,757 $     8,932 $       9,066 $        9,202 ‐1.0% 10.1% 2.0% 3.3% 0.0% 0.7% 2.0% 2.0% 1.5% 1.5% 1. 2009E UOP enrollment and revenues are based on 1H09 actuals.  FY08 enrollment surge is followed by a stronger growth in FY09E, then normalized. 2. Reported enrollment incl. UOP and Associate's degree at WIU.  Since the latter has been moved to UOP, enrollment is a driver for UOP revenues only. 3. The revenue per student is a backed‐out estimate based on historical revenue and enrollment data. 4. Projected flat in FY09 due to limited room for tuition hikes in the current deflationary/tough financial environment; increases with inflation in 2010. 14 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Group, Inc. FYE August 31 ($ Millions) Instructional Costs Employee Salaries % of Revenues 2006 $     378.3 15.3% 2007 $     424.4 15.6% 2008 $     491.1 15.6% 2009E $     580.6 14.9% 2010E $     687.9 14.8% 2011E $     792.0 14.6% 2012E $     882.5 14.4% 2013E $     947.8 14.2% 2014E $       986.1 14.1% Terminal $    1,000.9 14.0% Faculty Salaries % of Revenues $     212.3 8.6% $     236.9 8.7% $     272.5 8.7% $     332.6 8.5% $     403.1 8.7% $     473.3 8.7% $     544.0 8.8% $     591.2 8.8% $       621.1 8.9% $        633.6 8.8% Classroom Lease % of Revenues $     194.3 7.8% $     205.2 7.5% $     214.2 6.8% $     253.0 6.5% $     301.9 6.5% $     352.8 6.5% $     401.2 6.5% $     435.1 6.5% $       454.4 6.5% $        466.0 6.5% Other Costs % of Revenues $     158.8 6.4% $     173.3 6.4% $     189.9 6.0% $     233.5 6.0% $     288.0 6.2% $     347.4 6.4% $     395.0 6.4% $     428.4 6.4% $       447.4 6.4% $        458.8 6.4% Bad debt expense % of Revenues $     101.0 4.1% $     120.6 4.4% 2.3% 0.5% $     104.2 3.3% 2.5% 0.7% $     194.6 5.0% $     209.0 4.5% $     217.1 4.0% $     246.9 4.0% $     267.7 4.0% $       265.7 3.8% $        272.4 3.8% Fin. aid proces. costs % of Revenues $         52.5 2.1% $       63.8 $       78.4 $ $       13.3 $       20.6 $ $  1,237.5 45.4% $ 1,370.9 43.6% $       77.8 2.0% 0.6% $     106.8 2.3% 0.6% $     135.7 2.5% 0.5% $     154.3 2.5% 0.5% $     167.3 2.5% 0.5% $       174.8 2.5% $        179.2 2.5% Share‐based compens. h b d % of Revenues $ $         12.4 0.5% $       23.4 $       27.9 $         $ $ $ 27.1 $       30.9 $       33.5 $ $ $  1,695.5 43.6% $ 2,024.6 43.6% $   2,345.4 43.2% 2011E   582,875 14.0% $     1,359 1.0% $          812 3.0% $     1,085 2.0% $ 2,654.9 43.0% 2012E   641,163 10.0% $     1,376 1.3% $         849 4.5% $     1,128 4.0% $ 2,871.0 42.9% 2013E   676,427 5.5% $     1,401 1.8% $         874 3.0% $     1,167 3.5% $         35.0 $ 0.5% $          35.8 $ 0.5% Total Instructional Costs % of Revenues Faculty & Staff Cost Drivers Enrollment Base % Growth Employee Sal./Student % Growth $   1,109.6 44.8% $   2,984.4 42.7% 2014E     693,337 2.5% $       1,422 1.5% $          896 2.5% $       1,185 1.5% $    3,046.8 42.5% Terminal      700,271 1.0% $        1,429 0.5% $           905 1.0% $        1,197 1.0% Faculty Sal./Student % Growth Enrollment Sal./Student % Growth 2006 2007 2008 2009E 2010E 282,300 313,700 362,100 433,300   511,294 4.0% 11.1% 15.4% 19.7% 18.0% $     1,340 $      1,353 $     1,356 $      1,340 $     1,345 7.5% 1.0% 0.2% ‐1.2% 0.4% $          752 $         755 $         753 $         768 $         788 4.6% 0.4% ‐0.3% 2.0% 2.7% $          901 $      1,021 $     1,065 $      1,055 $     1,063 18.4% 13.3% 4.3% ‐1.0% 0.8% 15 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Group, Inc. FYE August 31 ($ Millions) Selling & Promo. Costs Enrollment Salaries % of Revenues 2006 $     254.3 10.3% 2007 $     320.3 11.8% 2008 $     385.8 12.3% 2009E $     457.0 11.7% 2010E $     543.6 11.7% 2011E $     632.1 11.6% 2012E $     723.2 11.7% 2013E $     789.6 11.8% 2014E $       821.5 11.8% Terminal $        838.0 11.7% Advertising % of Revenues $     231.6 9.3% $     277.7 10.2% 2.1% $     322.5 10.3% 3.0% $     381.4 9.8% $     478.4 10.3% $     569.9 10.5% $     635.8 10.3% $     669.3 10.0% $       671.1 9.6% $        681.0 9.5% Other expenses % of Revenues $         56.5 2.3% $       58.0 $       93.5 $          3.1 0.1% $     132.3 3.4% $     162.6 3.5% $     195.4 3.6% $     222.2 3.6% $     241.0 3.6% $       251.7 3.6% 0.1% $        258.1 3.6% 0.1% Share‐based compens. % of Revenues $           2.3 0.1% $         3.6 0.1% $          4.5 0.1% $         5.3 0.1% $           6.2 0.1% $         7.1 0.1% $         7.7 0.1% $           8.0 $            8.2 $   1,752.3 25.1% 2014E $ 237.7 $       3.4% Total Selling & Promo. % of Revenues General & Admin. Costs Employee compensation l % of Revenues $     544.7 22.0% $     659.1 24.2% $     805.4 25.6% $     975.3 25.1% 2009E $ 136.2 $      3.5% 1.0% 0.6% 0.8% 1.2% $ 1,190.0 25.6% 2010E $     171.9 $ 3.7% 1.0% 0.7% 0.8% 1.2% $   1,403.7 25.9% 2011E $     190.0 $ 3.5% 1.2% 0.8% 0.8% 1.4% $ 1,588.2 25.7% 2012E $     209.9 $ 3.4% 1.2% 0.9% 0.8% 1.2% $ 1,707.6 25.5% 2013E $     227.6 $ 3.4% 1.2% 0.8% 0.8% 1.2% $    1,785.3 24.9% Terminal $        243.7 $ 3.4% 2006 2007 2008 $ $         51.7 $        71.9 $       93.8 $ $ 2.1% 0.5% 0.5% 0.9% 1.0% 2.6% 0.9% 0.6% 0.8% 1.2% 3.0% 0.9% 0.8% 0.8% 1.3% Share‐based compens. % of Revenues $         13.0 $        25.5 $       29.4 $         13.3 $        15.5 $       25.8 $         21.8 $        21.1 $       24.8 $         25.6 $        33.7 $       41.4 $       38.9 $       46.4 $         65.1 $       74.1 $       80.3 $       23.4 $       32.5 $         43.4 $       55.6 $       53.5 $       30.7 $       36.7 $         42.9 $       48.7 $       52.8 $       46.7 $       55.7 $         76.0 $       74.1 $       80.3 $         83.9 1.2% $          86.0 1.2% Legal & corp. insurance % of Revenues $         55.9 0.8% $          57.4 0.8% Admin. depreciation % of Revenues $         55.2 0.8% $          56.6 0.8% Other expenses % of Revenues $         83.9 1.2% $          86.0 1.2% Total General & Admin.  % of Revenues $     125.4 $     167.7 $     215.2 $     275.9 $     343.2 $     417.4 $     462.3 $     494.6 $       516.6 $        529.7 5.1% 6.2% 6.9% 7.1% 7.4% 7.7% 7.5% 7.4% 7.4% 7.4% 16 Henry Fund Research Apollo Group, Inc. FYE August 31 ($ Millions) THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Income Statement Net revenue % Growth 2005 $ 2,251.1 25.2% 2006 $  2,477.5 10.1% 2007 $ 2,723.8 9.9% 2008 $  3,140.9 15.3% 2009E $ 3,892.1 23.9% 2010E $  4,645.0 19.3% 2011E $  5,427.8 16.9% 2012E $ 6,172.4 13.7% 2013E $      6,693.2 8.4% 2014E $   6,991.0 4.4% Terminal $   7,168.8 2.5% Instructional costs & services Bad Debt Expense Other instructional costs & services Gross Profit % Gross Margin $      935.7 $       90.9 $      844.8 $ 1,315.4 58.4% $  1,112.7 $      101.0 $   1,011.7 $  1,364.9 55.1% $ 1,237.5 $     120.6 $ 1,116.9 $ 1,486.3 54.6% $  1,370.9 $ 1,695.5 $  2,024.6 $  2,345.4 $ 2,654.9 $      2,871.0 $   2,984.4 $   3,046.8 $     104.2 $    194.6 $     209.0 $     217.1 $    246.9 $         267.7 $      265.7 $      272.4 $  1,266.7 $ 1,500.9 $  1,815.5 $   2,128.3 $ 2,408.0 $      2,603.2 $   2,718.8 $   2,774.4 $  1,770.1 $ 2,196.6 $  2,620.4 $   3,082.3 $ 3,517.5 $     3,822.2 $  4,006.6 $  4,122.0 56.4% 56.4% 56.4% 56.8% 57.0% 57.1% 57.3% 57.5% Selling & promotional exp. General & administrative exp. Goodwill impairment Stock based compensation Total SG&A and other % of Revenue $      484.8 $       98.3 $       19.8 $      602.9 26.8% $      544.7 $      149.9 $        20.2 $      714.8 28.9% $     659.1 $     201.5 $     805.4 $     975.3 $  1,190.0 $  1,403.7 $ 1,588.2 $      1,707.6 $   1,752.3 $   1,785.3 $     215.2 $     275.9 $      343.2 $     417.4 $     462.3 $         494.6 $      516.6 $      529.7 $     860.6 31.6% $  1,020.6 32.5% 23.9% $        895 6 $ 895.6 $        792.4 3.4% $          47.2 $          34.2 7.4% 0.2% $ 1,251.2 32.1% 24.3% $   1 025 7 $ 1,025.7 $       960.6 2.2% $         53.5 $         50.4 8.0% ‐0.2% $  1,533.2 33.0% 23.4% $    1 235 7 $ 1,235.7 $    1,130.7 3.5% $   1,821.0 33.6% $ 2,050.5 33.2% $     2,202.2 32.9% $  2,268.9 32.5% $  2,315.1 32.3% Operating Income % OI Margin1 $      712.8 31.7% $        $ 692 8 692.8 $      650.0 26.2% $     625.7 23.0% $     749.5 $     945.4 $  1,087.2 $  1,261.3 23.2% $    1 438 4 $ 1,438.4 $    1,337.0 3.5% $ 1,467.0 23.8% $   1 543 1 $ 1,543.1 $   1,490.7 3.5% $         77.2 $         73.8 6.0% $      1,620.1 24.2% $   1,737.6 24.9% $   1,806.9 25.2% Interest income Cash, cash equiv. & inv'ts bal. Cash cash equiv & inv'ts bal Cash, cash equiv. & inv'ts bal. (avg.) Interest rate $        18.5 $         647 0 $ 647.0 $         669.9 2.9% $       31.2 $       689.2 $ 689 2 $       668.1 4.5% $       30.1 $       21.1 $        39.6 $       46.8 $       52.2 $           56.3 $         59.9 $         61.9 $        1,673.3 $ 1 747 8 $ 1 792 2 $ 1 673 3 $     1,747.8 $     1,792.2 $        1,608.2 $     1,710.5 $     1,770.0 3.5% 3.5% 3.5% $              84.5 $              80.9 6.0% $           90.2 $           87.4 6.0% $           95.1 $           92.7 6.0% Interest expense Debt balance (est.) Debt balance (avg.) Interest rate $         18.9 $         18.9 $          0.3 $         0.2 $          3.5 $         4.0 $          4.3 $          4.3 $         4.4 $              4.9 $           5.2 $           5.6 $          61.6 $         70.5 $          57.6 $         66.0 7.5% 6.5% ‐0.1% 0.0% $           23.1 $         21.1 $           21.0 $         22.1 Foreign currency trans./other, net1 % of Revenues $           (0.1) $           0.6 $            6.8 $        (6.0) $         (4.6) $          ‐ 0.0% 0.0% $         ‐ 0.0% $              ‐ 0.0% $           ‐ 0.0% $           ‐ 0.0% Interest income & other, net EBT Income tax expense (benefit)2 Effective tax rate Minority interest, net of tax $       17.0 $      729.8 $      285.1 39.1% $        18.1 $      668.1 $        253.3 37.9% $       31.6 $     657.3 $     248.5 37.8% $       33.4 $      11.1 $       30.6 $       42.5 $      47.7 $           51.4 $        54.6 $        56.4 $     782.9 $     956.5 $  1,117.8 $  1,303.8 $ 1,514.8 $      1,671.5 $   1,792.3 $   1,863.3 $       306.9 $     382.6 $      442.6 $     516.3 $     599.8 $         661.9 $        709.7 $        737.9 39.2% 40.0% 39.6% 39.6% 39.6% 39.6% 39.6% 39.6% $           (0.6) $          (0.6) $           (0.7) $           (0.8) $          (0.8) $               (0.9) $            (0.9) $            (1.0) Net income (loss)  Net income margin $      444.7 19.8% $      414.8 16.7% $     408.8 15.0% $     476.5 $     574.5 $      675.8 $     788.3 $     915.7 $      1,010.5 15.2% 14.8% 14.6% 14.5% 14.8% 15.1% $   1,083.5 15.5% $   1,126.4 15.7% Notes: 1. The spike in Other, net in 2008 relates to a one‐time gain from an unexercised option by a 3rd party; 2009 expense is based on Q1 2009 foreign curr. transaction loss of $2.5M. 2. The higher est. tax rate for FY 09 is based on Q2 2009 (add'l reserves for uncertain tax positions, further decr. in tax‐exempt interest, and incr. in non‐deductible foreign losses. Earnings Per Share Year‐end shares O/S EPS ‐ basic % Growth 2005          179.7 $          2.43 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E Terminal           173.0         166.3          158.9         158.8          157.5           157.0         154.3              152.4           149.4           146.7 $           2.38 $         2.37 $          2.90 $         3.62 $          4.29 $         5.02 $         5.94 $              6.63 $           7.25 $           7.68 ‐2.1% ‐0.4% 22.4% 24.8% 18.6% 17.0% 18.2% 11.7% 9.4% 5.9% 17 Henry Fund Research Apollo Group, Inc. FYE August 31 ($ Millions) THE UNIVERSITY OF IOWA Henry B. Tippie School of Management $        78.1 $        82.9 $        72.2 $        59.7 $         54.7 $        50.3 $        38.3 $        31.4 $        28.2 $        25.6 $           23.2 36% 35% 34% 36% 1.66% 37% 1.36% 1.47% 1.48% 1.50% 1.50% 1.49% 1.47% Balance Sheet Cash & cash equivalents Restricted cash & cash equivalents1 Short‐term investments Accounts receivable, net Deferred tax assets Other current assets 2005 $        225.7 $        224.1 $        201.6 $          15.0 $          23.1 2006 $        238.3 $          46.0 $        160.6 $          32.6 $          16.4 2007 $        296.5 $          31.3 $        190.9 $          50.9 $          16.5 $        632.2 $        402.0 $        134.0 $        364.2 $          22.1 $          29.6 2008 $        384.2 $            3.1 $        221.9 $          55.4 $          21.8 $        858.9 $        434.8 $          15.0 $        439.1 $          25.2 $          86.0 2009E $         486.5 $             1.9 $         271.9 $           66.2 $           27.0 2010E $        580.6 $          13.9 $        318.1 $          79.0 $          32.2 2011E $        651.3 $          27.1 $        371.8 $          92.3 $          37.6 2012E $        617.2 $          61.7 $        422.8 $          98.8 $          42.8 2013E $        669.3 $          66.9 $        458.4 $        107.1 $          46.4 2014E $        699.1 $          69.9 $        478.8 $        111.9 $          48.5 Terminal $           716.9 $            71.7 $           491.0 $           114.7 $            49.7 $        145.6 $        309.1 $        339.3 $        483.2 $         506.0 $        603.8 $        705.6 $        802.4 $        870.1 $        908.8 $           931.9 Total current assets Gross property & equipment Less: Accum. deprec. & amortiz. Construction in progress Property & equipment, net Long‐term investments Goodwill Intangible assets, net2 Deferred tax assets (non‐current) Other assets $       835.1 $     802.9 $     925.4 $  1,169.5 $        556.4 $        598.8 $        287.8 $        356.1 $          85.7 $        268.7 $        328.4 $          97.4 $          53.7 $          37.1 $          16.9 $   1,359.5 $         975.7 $         522.8 $           27.0 $         479.8 $           31.2 $           86.0 $  1,627.7 $      1,091.8 $        610.6 $          25.1 $        506.3 $          37.3 $          86.0 $  1,885.8 $      1,227.5 $        692.5 $          26.1 $        561.1 $          54.3 $          86.0 $  2,045.7 $      1,381.8 $        760.0 $          28.5 $        650.3 $          61.7 $          86.0 $  2,218.3 $      1,549.1 $        829.1 $          31.0 $        751.0 $          66.9 $          86.0 $  2,317.0 $      1,723.9 $        891.1 $          33.0 $        865.8 $          69.9 $          86.0 $    2,375.9 $      1,903.1 $           942.8 $            34.4 $           994.8 $            71.7 $            86.0 $            2.2 $          23.1 $           18.5 $          18.5 $          18.5 $          18.5 $          18.5 $          18.5 $            18.5 $          35.8 $          53.1 $          80.1 $          89.5 $         105.1 $        120.8 $        141.1 $        148.1 $        160.6 $        167.8 $           172.1 $          29.0 $          27.9 $          26.3 $          28.0 $           29.0 $          29.0 $          29.0 $          29.0 $          29.0 $          29.0 $            29.0 Total assets Accounts payable Accrued liabilities Current portion of L‐T liabilities Income taxes payable Student deposits Deferred revenue (current) $  1,302.9 $          40.1 $          61.3 $          18.9 $            9.7 $        249.7 $        138.2 $  1,283.0 $          61.3 $          73.5 $          23.1 $          47.8 $        254.1 $        135.9 $  1,449.9 $          80.7 $        103.7 $          21.1 $          43.4 $        328.0 $        167.0 $  1,860.4 $          46.6 $        121.2 $          47.2 $            6.1 $        413.3 $        231.2 $   2,109.2 $           58.4 $         140.1 $           53.5 $           11.7 $         467.1 $         272.4 $  2,425.6 $        116.1 $        167.2 $          61.6 $          23.2 $        557.4 $        278.7 $  2,775.8 $        135.7 $        190.0 $          70.5 $          27.1 $        597.1 $        325.7 $  3,039.3 $        185.2 $        216.0 $          77.2 $          30.9 $        679.0 $        308.6 $  3,330.4 $        200.8 $        234.3 $          84.5 $          33.5 $        736.3 $        267.7 $  3,554.0 $        209.7 $        244.7 $          90.2 $          35.0 $        769.0 $        279.6 $    3,747.9 $           215.1 $           250.9 $            95.1 $            35.8 $           788.6 $           286.8 Total current liabilities Deferred tax liabilities (non‐current) Total long‐term liabilities Less current portion  L‐T liabilities, less cur. portion $       518.0 $     595.8 $     743.8 $     865.6 $   1,003.2 $            2.7 $          97.0 $        106.0 $          93.3 $        193.1 $         (18.9) $         (23.1) $         (21.1) $         (47.2) $          78.1 $          82.9 $          72.2 $        145.9 $  1,204.2 $  1,346.0 $  1,496.8 $  1,557.0 $  1,628.2 $    1,672.3 $                  1.9 $               2.3 $               2.7 $               3.1 $               3.3 $               3.5 $                 3.6 $            199.2 $            212.6 $            193.4 $            172.8 $            162.6 $            168.7 $              173.5 $             (53.5) $             (61.6) $             (70.5) $             (77.2) $             (84.5) $             (90.2) $               (95.1) $            145.6 $            151.1 $            122.9 $             95.6 $             78.1 $             78.4 $               78.4 Total liabilities Minority interest Common stock & PIC Treasury stock Retained earnings Accum.other compreh. income (loss) $       596.1 $     678.6 $     816.0 $  1,014.2 $            0.1 $        (645.7) $      1,353.7 $           (1.1) $            0.1 $   (1,054.0) $      1,659.3 $           (1.0) $            0.1 $   (1,461.4) $      2,096.4 $           (1.3) $          12.0 $            0.1 $   (1,757.3) $      2,595.3 $           (4.0) $   1,150.8 $           12.0 $         156.6 $    (2,364.4) $       3,169.9 $          (15.6) $  1,357.6 $          12.0 $        325.6 $   (3,099.7) $      3,845.7 $         (15.6) $  1,471.6 $          12.0 $        508.1 $   (3,834.3) $      4,634.0 $         (15.6) $  1,595.5 $          12.0 $        705.3 $   (4,807.5) $      5,549.7 $         (15.6) $  1,638.5 $          12.0 $        918.2 $   (5,782.8) $      6,560.2 $         (15.6) $  1,710.2 $          12.0 $      1,148.2 $   (6,944.4) $      7,643.6 $         (15.6) $    1,754.3 $            12.0 $      1,396.7 $     (8,169.4) $      8,770.1 $            (15.6) Check Total shareholders' equity Total liab. & stockholders' equity $       706.9 $     604.4 $     633.8 $     846.2 $      958.4 $  1,067.9 $  1,302.9 $  1,283.0 $  1,449.9 $  1,860.4 $   2,109.2 $  2,425.6 TRUE TRUE TRUE TRUE TRUE TRUE $  1,304.2 $  2,775.8 TRUE $  1,443.8 $  3,039.3 TRUE $  1,691.9 $  3,330.4 TRUE $  1,843.9 $  3,554.0 TRUE $    1,993.7 $    3,747.9 TRUE Notes: 1. Funds from the federal and state governments for student grant and loan programs (e.g. Title IV) held in MMF; incl. funds that APOL might have to return if student drops out. 2. Most Intangible assets have an indefinite life (trademarks, accreditations, and designations) associated with the acquisitions of UNIACC and ULA.  They are not amortized. 3. P&E does not grow much with revenues as APOL leases the "majority of[their] administrative and educational facilities under operating lease agreements" (2008 Ann. Report) 18 Henry Fund Research Apollo Group, Inc. FYE August 31 ($ Millions) THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Cash Flow Statement CASH FLOWS FROM OPERATIONS: Net income (loss) Non‐cash adjustments Stock‐based compensation Bad debt expense Excess tax benefits from SO exercised Depreciation & amortization Deferred income taxes Accum. other compr. inc & other non‐cash Goodwill impairment Changes in Assets and Liabilities Receivables Other assets Accounts payable & accruals Income taxes payable Student deposits Deferred revenue Other liabilities Net Cash from Operations CASH FLOWS FROM INVESTING: Purchase ‐ property & equipment Purchase/dispos. ‐ land & buildings Acquisitions, net of cash Marketable securities, net Auction‐rate securities, net Restricted cash (change) Acquisitions ‐ intangibles & other Net Cash from Investing CASH FLOWS FROM FINANCING: Net borrowing (L‐T debt & lines of credit) Purchase of common stock Issuance of common stock Cash paid for cancellation of vested options Minority interest contributions Excess tax benefits from SO exercised Net Cash from Financing Exchange rate effect on cash & equiv. Change in Cash and Equivalents 2005 2006 2007 2008 $  476.5 $  212.8 $     53.6 $   104.2 $   (18.6) $     79.7 $      (6.6) $       0.5 $       ‐ $ (105.7) $      (7.3) $   (14.2) $     21.7 $     85.3 $     35.3 $     21.6 $  726.0 $   (92.5) $   (12.4) $   (93.8) $     25.5 2009E $  574.5 $  248.4 $   194.6 $       ‐ $     92.6 $    (27.1) $    (11.6) $       ‐ $  (244.6) $      (6.2) $     30.7 $        5.6 $     53.7 $     41.3 $        8.3 $  711.7 2010E $    675.8 $    268.7 $    209.0 $         ‐ $       87.8 $     (28.1) $         ‐ $         ‐ $   (255.3) $       (5.2) $       84.8 $       11.5 $       90.3 $         6.3 $         6.4 $    883.4 $   (114.3) $         ‐ $         ‐ $     (12.0) $       (6.0) $     (94.1) $         ‐ $  (226.4) $         7.1 $   (735.3) $    169.0 $         ‐ $         ‐ $         ‐ $  (559.2) $         ‐ 2011E $    788.3 $    265.7 $     217.1 $         ‐ $       81.9 $      (33.3) $         ‐ $         ‐ $    (270.7) $        (5.4) $       42.3 $         3.9 $       39.7 $       47.0 $      (24.7) $    886.0 $    (136.7) $         ‐ $         ‐ $      (13.2) $      (17.0) $      (70.7) $         ‐ $   (237.6) $         5.4 $    (734.6) $     182.5 $         ‐ $         ‐ $         ‐ $   (546.6) $         ‐ 2012E $      915.7 $      301.3 $        246.9 $           ‐ $         67.5 $       (13.1) $           ‐ $           ‐ $     (297.9) $         (5.2) $         75.5 $           3.7 $         81.9 $       (17.0) $       (25.1) $    1,033.0 $     (156.7) $           ‐ $           ‐ $       (34.6) $         (7.4) $         34.1 $           ‐ $      (164.6) $           4.5 $     (973.2) $        197.2 $           ‐ $           ‐ $           ‐ $      (771.6) $           ‐ 2013E $  1,010.5 $      316.2 $       267.7 $           ‐ $         69.1 $       (20.6) $           ‐ $           ‐ $     (303.4) $          (3.6) $         33.9 $           2.6 $         57.3 $       (40.9) $       (14.4) $  1,058.2 $     (169.8) $           ‐ $           ‐ $          (5.2) $          (5.2) $       (52.1) $           ‐ $    (232.3) $           4.2 $     (975.3) $       213.0 $           ‐ $           ‐ $           ‐ $    (758.2) $           ‐ 2014E $  1,083.5 $      315.9 $       265.7 $           ‐ $         62.0 $       (11.8) $           ‐ $           ‐ $     (286.1) $          (2.1) $         19.4 $           1.5 $         32.8 $         11.9 $           3.1 $  1,179.8 $     (176.8) $           ‐ $           ‐ $          (3.0) $          (3.0) $       (29.8) $           ‐ $    (212.5) $           3.0 $  (1,161.6) $       230.0 $           ‐ $           ‐ $           ‐ $    (928.6) $           ‐ Terminal $  1,126.4 $      317.1 $       272.4 $           ‐ $         51.7 $          (7.0) $           ‐ $           ‐ $     (284.6) $          (1.2) $         11.6 $           0.9 $         19.6 $           7.1 $           2.5 $  1,199.3 $     (180.7) $           ‐ $           ‐ $          (1.8) $          (1.8) $       (17.8) $           ‐ $    (202.0) $           2.4 $  (1,225.1) $       248.4 $           ‐ $           ‐ $           ‐ $    (974.3) $           ‐ $   444.7 $      414.8 $      408.8 $   175.7 $      180.0 $      196.0 $       19.8 $        27.7 $        54.0 $       45.4 $      101.0 $      120.6 $       41.2 $       (17.5) $         (4.0) $       54.5 $        67.3 $        71.1 $         6.8 $       (19.7) $       (46.0) $         8.0 $           0.9 $           0.3 $         ‐ $        20.2 $          ‐ $   (100.5) $      (3.8) $    (20.1) $      (2.1) $       64.0 $         7.9 $   565.7 $       (89.0) $           5.6 $        20.4 $         (1.6) $        11.5 $           1.9 $           7.3 $      551.0 $     (150.9) $         (1.9) $        31.2 $         (2.4) $        73.9 $        31.0 $           3.1 $      588.6 $   (103.8) $       (44.6) $       (61.2) $       (66.6) $       (43.4) $       (15.1) $   327.9 $    (41.2) $      216.2 $        46.0 $         (6.5) $       (58.2) $      (3.7) $         (2.9) $         (0.1) $   179.2 $        95.6 $    (131.9) $  (128.7) $       ‐ $       ‐ $        1.1 $      (6.0) $   (87.7) $  (102.4) $       ‐ $ (260.8) $ (236.0) $      (0.4) $      (2.3) $   (808.2) $     (514.9) $     (437.7) $ (454.4) $  (607.1) $       52.8 $        29.0 $           7.7 $   103.0 $   156.5 $         (6.3) $       ‐ $     12.1 $       ‐ $        17.5 $           4.0 $     18.6 $       ‐ $   (755.4) $    (474.8) $    (426.0) $ (321.0) $ (453.0) $      (0.6) $           0.1 $         (0.5) $      (0.3) $       ‐ $     (11.1) $      171.9 $   156.7 $        137.2 $   145.6 $      309.1 $        30.3 $        309.1 $      339.3 Cash: Beginning of the Year Cash: End of the Year $  143.9 $     22.8 $      97.9 $    101.8 $        96.8 $        67.7 $        38.7 $        23.1 $   339.3 $   483.2 $      506.0 $     603.8 $        705.6 $       802.4 $       870.1 $       908.8 $   483.2 $   506.0 $    603.8 $     705.6 $        802.4 $       870.1 $       908.8 $       931.9 Note: Receivables cash outflow is adjusted for annual bad debt expense. 19 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Group, Inc. Common Size Income Statement FYE August 31 2005 Net revenue Instructional costs & services Bad Debt Expense Other instructional costs & services Gross Profit Selling & promotional exp. General & administrative exp. Goodwill impairment Stock based compensation Total SG&A and other 1 Operating Income 2 Interest income Interest expense Foreign currency trans./other, net Interest income & other, net EBT Income tax expense (benefit) Minority interest, net of tax Net income (loss) Notes: 1. Depreciation expense is part of general and administrative expenses; it has not been reported separately prior. 2. Operating margin forecast has a slight decrease due to projected increased faculty salary costs and other SG&A related to new markets entry. 2006 100.0% 44.9% 4.1% 40.8% 55.1% 22.0% 6.1% 0.8% 0.0% 28.9% 26.2% 0.7% 0.0% 0.0% 0.7% 27.0% 10.2% 0.0% 16.7% 2007 100.0% 45.4% 4.4% 41.0% 54.6% 24.2% 7.4% 0.0% 0.0% 31.6% 23.0% 1.1% 0.0% 0.0% 1.2% 24.1% 9.1% 0.0% 15.0% 2008 100.0% 43.6% 3.3% 40.3% 56.4% 25.6% 6.9% 0.0% 0.0% 32.5% 23.9% 1.0% 0.1% 0.2% 1.1% 24.9% 9.8% 0.0% 15.2% 2009E 100.0% 43.6% 5.0% 38.6% 56.4% 25.1% 7.1% 0.0% 0.0% 32.1% 24.3% 0.5% 0.1% ‐0.2% 0.3% 24.6% 9.8% 0.0% 14.8% 2010E 2011E 2012E 100.0% 43.0% 4.0% 39.0% 57.0% 25.7% 7.5% 0.0% 0.0% 33.2% 23.8% 0.8% 0.1% 0.0% 0.8% 24.5% 9.7% 0.0% 14.8% 2013E 2014E Terminal 100.0% 42.5% 3.8% 38.7% 57.5% 24.9% 7.4% 0.0% 0.0% 32.3% 25.2% 0.9% 0.1% 0.0% 0.8% 26.0% 10.3% 0.0% 15.7% 100.0% 41.6% 4.0% 37.5% 58.4% 21.5% 4.4% 0.0% 0.9% 26.8% 31.7% 0.0% 0.0% 0.0% 0.8% 32.4% 12.7% 0.0% 19.8% 100.0% 100.0% 43.6% 43.2% 4.5% 4.0% 39.1% 39.2% 56.4% 56.8% 25.6% 25.9% 7.4% 7.7% 0.0% 0.0% 0.0% 0.0% 33.0% 23.4% 0.9% 0.1% ‐0.1% 0.7% 24.1% 9.5% 0.0% 14.6% 33.6% 23.2% 0.9% 0.1% 0.0% 0.8% 24.0% 9.5% 0.0% 14.5% 100.0% 100.0% 42.9% 42.7% 4.0% 3.8% 38.9% 38.9% 57.1% 57.3% 25.5% 25.1% 7.4% 7.4% 0.0% 0.0% 0.0% 0.0% 32.9% 24.2% 0.8% 0.1% 0.0% 0.8% 25.0% 9.9% 0.0% 15.1% 32.5% 24.9% 0.9% 0.1% 0.0% 0.8% 25.6% 10.2% 0.0% 15.5% 20 Henry Fund Research Apollo Group, Inc. Common Size Balance Sheet FYE August 31 $      2,477.5 $      2,723.8 $    3,140.9 $    3,892.1 $    4,645.0 $    5,427.8 $    6,172.4 $      6,693.2 $    6,991.0 $    7,168.8 2006 12.5% 9.6% 1.9% 6.5% 1.3% 0.7% 32.4% 24.2% 14.4% 3.5% 13.3% 2.2% 0.7% 0.0% 2.1% 1.1% 51.8% 2.5% 3.0% 0.9% 1.9% 10.3% 5.5% 24.0% 0.0% 3.6% 0.0% 0.0% 0.0% 0.5% 0.0% 0.2% 4.3% ‐0.9% 3.3% 27.4% 0.0% 0.0% ‐42.5% 67.0% 0.0% 24.4% 51.8% 23.7 2007 12.5% 10.9% 1.1% 7.0% 1.9% 0.6% 34.0% 23.2% 14.8% 4.9% 13.4% 0.8% 1.1% 0.1% 2.9% 1.0% 53.2% 3.0% 3.8% 0.8% 1.6% 12.0% 6.1% 27.3% 0.0% 2.9% 0.0% 0.0% 0.0% 0.4% 0.0% 0.1% 3.4% ‐0.8% 2.7% 30.0% 0.0% 0.0% ‐53.7% 77.0% 0.0% 23.3% 53.2% 25.6 2008 15.4% 12.2% 0.1% 7.1% 1.8% 0.7% 37.2% 27.3% 13.8% 0.5% 14.0% 0.8% 2.7% 0.7% 2.8% 0.9% 59.2% 1.5% 3.9% 1.5% 0.2% 13.2% 7.4% 27.6% 0.09% 2.4% 1.8% 0.7% 0.4% 0.3% 0.2% 0.3% 6.1% ‐1.5% 4.6% 32.3% 0.4% 0.0% ‐55.9% 82.6% ‐0.1% 26.9% 59.2% 25.8 1.2% 0.4% 2.5% 2009E 13.0% 12.5% 0.1% 7.0% 1.7% 0.7% 34.9% 25.1% 13.4% 0.7% 12.3% 0.8% 2.2% 0.5% 2.7% 0.7% 54.2% 1.5% 3.6% 1.2% 0.3% 12.0% 7.0% 25.8% 0.1% 1.9% 1.6% 0.5% 0.3% 0.3% 0.2% 0.3% 5.1% ‐1.4% 3.7% 29.6% 0.3% 4.0% ‐60.7% 81.4% ‐0.4% 24.6% 54.2% 25.5 0.9% 0.4% 2.5% 2010E 13.0% 12.5% 0.3% 6.8% 1.7% 0.7% 35.0% 23.5% 13.1% 0.5% 10.9% 0.8% 1.9% 0.4% 2.6% 0.6% 52.2% 2.5% 3.6% 1.2% 0.5% 12.0% 6.0% 25.9% 0.1% 1.6% 1.4% 0.5% 0.2% 0.3% 0.2% 0.3% 4.6% ‐1.3% 3.3% 29.2% 0.3% 7.0% ‐66.7% 82.8% ‐0.3% 23.0% 52.2% 25.0 1.0% 0.4% 2.5% 2011E 13.0% 12.0% 0.5% 6.8% 1.7% 0.7% 34.7% 22.6% 12.8% 0.5% 10.3% 1.0% 1.6% 0.3% 2.6% 0.5% 51.1% 2.5% 3.5% 1.2% 0.5% 11.0% 6.0% 24.8% 0.1% 1.4% 0.8% 0.5% 0.1% 0.2% 0.2% 0.3% 3.6% ‐1.3% 2.3% 27.1% 0.2% 9.4% ‐70.6% 85.4% ‐0.3% 24.0% 51.1% 25.0 1.0% 0.4% 2.5% 2012E 13.0% 10.0% 1.0% 6.8% 1.6% 0.7% 33.1% 22.4% 12.3% 0.5% 10.5% 1.0% 1.4% 0.3% 2.4% 0.5% 49.2% 3.0% 3.5% 1.2% 0.5% 11.0% 5.0% 24.3% 0.1% 1.3% 0.3% 0.5% 0.0% 0.2% 0.2% 0.3% 2.8% ‐1.3% 1.5% 25.8% 0.2% 11.4% ‐77.9% 89.9% ‐0.3% 23.4% 49.2% 25.0 1.0% 0.3% 2.5% 2013E 13.0% 10.0% 1.0% 6.8% 1.6% 0.7% 33.1% 23.1% 12.4% 0.5% 11.2% 1.0% 1.3% 0.3% 2.4% 0.4% 49.8% 3.0% 3.5% 1.2% 0.5% 11.0% 4.0% 23.3% 0.1% 1.2% 0.0% 0.5% 0.0% 0.2% 0.2% 0.3% 2.4% ‐1.3% 1.2% 24.5% 0.2% 13.7% ‐86.4% 98.0% ‐0.2% 25.3% 49.8% 25.0 1.0% 0.3% 2.5% 2014E 13.0% 10.0% 1.0% 6.8% 1.6% 0.7% 33.1% 24.7% 12.7% 0.5% 12.4% 1.0% 1.2% 0.3% 2.4% 0.4% 50.8% 3.0% 3.5% 1.2% 0.5% 11.0% 4.0% 23.3% 0.1% 1.2% 0.0% 0.5% 0.0% 0.2% 0.2% 0.3% 2.4% ‐1.3% 1.1% 24.5% 0.2% 16.4% ‐99.3% 109.3% ‐0.2% 26.4% 50.8% 25.0 1.0% 0.3% 2.5% Terminal 13.0% 10.0% 1.0% 6.8% 1.6% 0.7% 33.1% 26.5% 13.2% 0.5% 13.9% 1.0% 1.2% 0.3% 2.4% 0.4% 52.3% 3.0% 3.5% 1.2% 0.5% 11.0% 4.0% 23.3% 0.1% 1.2% 0.0% 0.5% 0.0% 0.2% 0.2% 0.3% 2.4% ‐1.3% 1.1% 24.5% 0.2% 19.5% ‐114.0% 122.3% ‐0.2% 27.8% 52.3% 25.0 1.0% 0.3% 2.5% THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Cash & cash equivalents Restricted cash & cash equivalents1 Short‐term investments Accounts receivable, net Deferred tax assets Other current assets Total current assets Gross property & equipment Less: Accum. deprec. & amortiz. Construction in progress Property & equipment, net Long‐term investments Goodwill Intangible assets, net2 Deferred tax assets (non‐current) Other assets Total assets Accounts payable Accrued liabilities Current portion of L‐T liabilities Income taxes payable Student deposits Deferred revenue (current) Total current liabilities Deferred tax liabilities (non‐current) Deferred rent and compensation Reserve for uncert. tax positions3 Credit facilities ‐ UNIACC & ULA Deferred vendor incentive Deferred rev. & sale‐leasebacks gain Capital lease obligations Other long‐term liabilities Total long‐term liabilities Less current portion  L‐T liabilities, less cur. portion Total liabilities Minority interest Common stock & PIC Treasury stock Retained earnings Accum.other compreh. income (loss) Total shareholders' equity Total liab. & stockholders' equity A/R days (DSO) Credit facilities (% of assets) Capital leases (% of assets) S‐T Debt (cur. Portion) (% of assets) Hist. 3‐yr  Hist. 5‐yr  Average Average 13.4% 12.1% 10.9% 10.6% 1.0% 5.4% 6.9% 7.5% 1.6% 1.2% 0.7% 0.8% 34.5% 37.6% 24.9% 24.0% 14.3% 13.3% 3.0% 1.8% 13.5% 12.4% 1.3% 5.1% 1.5% 1.6% 0.3% 0.2% 2.6% 2.4% 1.0% 1.2% 54.7% 60.6% 2.3% 2.3% 3.5% 3.4% 1.1% 0.8% 1.2% 1.0% 11.8% 11.7% 6.3% 6.3% 26.3% 25.6% 0.0% 0.0% 3.0% 2.7% 0.6% 0.4% 0.2% 0.1% 0.1% 0.1% 0.4% 0.6% 0.1% 0.0% 0.2% 0.1% 4.6% 4.0% ‐1.1% ‐0.8% 3.5% 3.2% 29.9% 28.7% 0.1% 0.1% 0.0% 0.3% ‐50.7% ‐36.2% 75.5% 67.7% ‐0.1% ‐0.1% 24.9% 31.8% 54.7% 60.6%            25.0            27.5 1.8% 1.5% 21 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Education Services Industry: Normal Cash % Analysis DV 2008 $     217.3 $   1,018.0 21.3% ($ Millions) Cash & Cash Equiv. Total Assets % of Total Assets DV DV 2007 2006 $   129.0 $  130.6 $   844.1 $  872.5 15.3% 13.8% 15.0% 15.6% CPLA 2008 $       31.2 $    179.6 17.4% CPLA 2007 $   60.6 $ 200.3 30.3% CPLA 2006 $   22.5 $ 129.3 17.4% STRA 2008 $     56.3 $   324.5 17.3% STRA 2007 $     95.0 $   343.7 27.6% STRA 2006 $      52.7 $   270.8 19.5% APOL 2008 $     483.2 $  1,860.4 26.0% APOL 2007 $     339.3 $ 1,449.9 23.4% APOL 2006 $     309.1 $ 1,283.0 24.1% Revenues % of Revenues % of Total Assets $   1,091.8 19.9% $   933.5 $  839.5 $    272.3 11.5% $ 226.2 26.8% $ 179.9 12.5% $   396.3 14.2% $   318.0 29.9% $   263.6 20.0% $  3,140.9 15.4% $ 2,723.8 12.5% $ 2,477.5 12.5% 2006 2007 2008 % of Revenues DV 15.0% 15.3% 21.3% DV 15.6% 13.8% 19.9% CPLA 17.4% 30.3% 17.4% CPLA 12.5% 26.8% 11.5% STRA 19.5% 27.6% 17.3% STRA 20.0% 29.9% 14.2% Average Peer Avg. APOL 17.3% 24.1% 24.4% 23.4% 18.7% 26.0% Peer Avg. 16.0% 23.5% 15.2% 18.2% APOL 12.5% 12.5% 15.4% 13.4% Ticker DV CPLA STRA APOL Company DeVry Inc. Capella Education Co. Strayer Educ. Inc. Apollo Group Inc. 2006 2007 2008 Note: Est. 13% of sales for normal cash (pro‐forma bal. sheet input) is warranted by above peer group comparison, APOL hist. data and future trends estimates. 22 Henry Fund Research Apollo Group, Inc. FYE August 31 THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Value Driver Estimation NOPLAT EBITA Less: Taxes on EBITA Marginal Tax Rate Total Income Tax Provision Plus: Tax Shield on Interest Expense Less: Tax on Interest Income Less/Plus: Tax on Nonop. Income/ Loss Taxes on EBITA Plus: Change in Deferred Taxes NOPLAT INVESTED CAPITAL Operating Working Capital: Plus: Normal Cash Plus: Restricted Cash Plus: Receivables Plus: Inventory Plus: Prepaid Expenses & Other Less: Accounts Payable Less: Accrued Expenses Less: Deferred Revenue (current) Net Operating Working Capital (+) Net Property and Equipment (+) Capitalized PV Operating Leases 1 (+) Net Intangibles & Other (-) Other Long-Term Operating Liabilities NET INVESTED CAPITAL ROIC (NOPLAT/Invested Capital) NOPLAT Invested Capital (Beginning) ROIC (NOPLAT/Invested Capital) FREE CASH FLOW NOPLAT Net Investment (change in invested capital) Free Cash Flow (NOPLAT - Net Investment) $ 2005 733 39.1% 285 8 293 7 447 $ 2006 670 37.9% 253 0 (7) 8 254 (35) 381 $ 2007 626 37.8% 248 0 (12) 237 (45) 344 $ 2008 749 39.2% 307 1 (12) 296 (11) 442 2009E $ 945 40.0% 383 2 (8) 376 (27) 543 2010E $ 1,087 39.6% 443 2 (16) 429 (28) 630 2011E $ 1,261 39.6% 516 2 (19) 499 (33) 729 2012E $ 1,467 39.6% 600 2 (21) 581 (13) 873 2013E $ 1,620 39.6% 662 2 (22) 642 (21) 958 2014E $ 1,738 39.6% $ 710 $ 2 $ (24) $ $ 688 $ (12) $ 1,038 Terminal $ 1,807 39.6% 738 2 (25) 716 (7) 1,084 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 293 226 202 23 (40) (61) (398) 244 269 341 78 775 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 322 238 161 16 (61) (74) (438) 165 328 336 83 746 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 354 296 191 17 (81) (104) (538) 135 364 379 2 72 809 $ 408 $ 384 $ 222 $ $ 22 $ (47) $ (121) $ (651) $ 218 $ 439 $ 487 $ 23 $ 83 $ 1,084 $ 506 $ 487 $ 272 $ $ 27 $ (58) $ (140) $ (751) $ 342 $ 480 $ 552 $ 19 $ 74 $ 1,318 $ 604 $ 581 $ 318 $ $ 32 $ (116) $ (167) $ (859) $ 392 $ 506 $ 635 $ 19 $ 75 $ 1,477 $ 706 $ 651 $ 372 $ $ 38 $ (136) $ (190) $ (950) $ 491 $ 561 $ 726 $ 19 $ 66 $ 1,731 $ 802 $ 870 $ 617 $ 669 $ 423 $ 458 $ $ $ 43 $ 46 $ (185) $ (201) $ (216) $ (234) $ (1,018) $ (1,037) $ 466 $ 572 $ 650 $ 751 $ 795 $ 871 $ 19 $ 19 $ 62 $ 62 $ 1,868 $ 2,151 $ 909 $ $ 699 $ $ 479 $ $ $ $ 48 $ $ (210) $ $ (245) $ $ (1,084) $ $ 597 $ $ 866 $ $ 930 $ $ 19 $ $ 61 $ $ 2,350 $ 932 717 491 50 (215) (251) (1,111) 612 995 981 19 61 2,546 $ $ 447 321 $ $ 381 $ 344 $ 775 $ 746 $ 49.2% 46.1% 442 $ 543 $ 630 $ 729 $ 873 $ 958 $ 1,038 $ 809 $ 1,084 $ 1,318 $ 1,477 $ 1,731 $ 1,868 $ 2,151 $ 54.6% 50.0% 47.8% 49.3% 50.4% 51.3% 48.2% 1,084 2,350 46.1% $ $ $ 447 $ 455 $ (8) $ 381 $ (29) $ 411 $ 344 63 281 $ $ $ 442 275 167 $ $ $ 543 234 308 $ $ $ 630 159 472 $ $ $ 729 254 475 $ $ $ 873 137 736 $ $ $ 958 283 675 $ 1,038 $ 199 $ 839 $ $ $ 1,084 195 889 ECONOMIC PROFIT Invested Capital (Beginning) ROIC WACC EP (Invested Capital*(ROIC-WACC)) $ $ 321 $ 775 $ 746 $ 809 $ 1,084 $ 1,318 $ 1,477 $ 1,731 $ 1,868 $ 2,151 $ 0.0% 49.2% 46.1% 54.6% 50.0% 47.8% 49.3% 50.4% 51.3% 48.2% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% (25) $ 321 $ 286 $ 379 $ 458 $ 528 $ 614 $ 738 $ 813 $ 871 $ 2,350 46.1% 7.8% 902 NON-OPERATING ASSETS Cash on Hand "Normal" Cash Excess Cash Short-Term & Long-Term Investments Non-Operating Assets Assets % Growth $ $ $ $ $ 146 293 321 321 -10.3% $ $ $ $ $ 309 322 100 100 -1.5% $ $ $ $ $ 339 354 53 53 13.0% $ $ $ $ $ 483 408 75 28 103 28.3% $ $ $ $ $ 506 506 33 33 13.4% $ $ $ $ $ 604 604 51 51 15.0% $ $ $ $ $ 706 706 81 81 14.4% $ $ $ $ $ 802 802 123 123 9.5% $ $ $ $ $ 870 870 134 134 9.6% $ $ $ $ $ 909 909 140 140 6.7% $ $ $ $ $ 932 932 143 143 5.5% Notes: 1. PV of Operating Leases is capitalized in the Invested Capital calculation, consistent with adding the respective liability balance to total debt and other debt-like obligations. PV of Operating Leases is grown from FYE 2008 at the growth rate of assets, assuming leased assets will show similar pattern. 23 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management (as of 4/15/09) Apollo Group, Inc. FYE August 31 AAA Yield 4.6% 5.0% 6.2% 7.2% 9.5% 13.6% AA A BBB BB BB‐ WACC Calculation Common Shares Outstanding (M) Current Price Market Value of Equity Preferred Shares Outstanding Preferred Price $          160.83 $          63.81 $          10,263 $              ‐ $              ‐ closing price as of 3/31/2009 10‐yr. UST 2.82% 2.82% 2.82% 2.82% 2.82% 2.82% Spread 1.8% 2.2% 3.4% 4.4% 6.7% 10.8% Source: Yield data on 10‐yr. instruments (Dec. 2008; Compustat) Market Value of Preferred Effective Tax Rate $            ‐ 39.6% $       541.8 $       10,804 3.66% 5.00% 0.87 30‐Yr. T‐Bond Henry Fund Analysts' consensus (13 analysts) adj. tax rate ST debt, cap. leases & PV op. leases O/S as of FYE 2008 Market Value of Debt & Leases (M) Market Value of Capital (E+P+D) Risk‐Free Rate Market Premium Beta Marginal Tax Rate Calc. Components U.S. Federal tax U.S. State and local Non‐ded. compensation Tax‐exempt interest Other, net Tax Rate Effective 35.0% 4.1% 0.0% ‐0.9% 1.0% 39.2% Marginal 35.0% 4.1% 0.0% 0.0% 0.5% 39.6% Base: 5‐yr. weekly returns (Apr. 2004 ‐ 2009); Industry avg. is 0.84 (Source: Damodaran, Jan. 2009) Cost of Equity Interest Coverage Ratio S&P Debt Rating Implied Default Spread 8.01% 214 AAA 1.78% based on FYE 2008 10‐k (EBIT/Interest) implied debt rating est. based on Dec. 2008 default spreads (Compustat Data) Cost of Debt Equity Weight Debt Weight 5.44% 95.0% 5.0% WACC 7.77% 24 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Group, Inc. Valuation Calculations FYE August 31 WACC CV Growth Rate CV ROIC Cost of Equity 7.77% 2.54% 46.1% 8.01% DCF Model      FCF      PV(FCF)      PV(FCF)      + PV(Non‐Oper)      ‐  PV(Debt)      ‐  PV(Cap. Leases)      ‐  PV(Op. Leases)      ‐  PV(ESOP)      ‐  PV(Other Liab.)      PV(Equity)      Shares Outst.      Target Price      Target Price 2009E $            308 $            286 2010E $            472 $            406 2011E $            475 $            379 2012E $            736 $            545 2013E $             675 $             464 2014E $            839 $            535 Terminal $         19,585 $         12,498 $            15,114 $                   103 $                    47 $                       8 $                   487 $                   402 $                    67 $            14,274 159 $              89.80     As of last FYE $              94.21     As of 4/15/2009 (growth at cost of capital) EP Model      ROIC      EP      PV(EP)      PV(EP)      Invested Capital      PV(Operations)      + PV(Non‐Oper)      ‐  PV(Debt)      ‐  PV(Cap. Leases)      ‐  PV(Op. Leases)      ‐  PV(ESOP)      ‐  PV(Other Liab.)      PV(Equity)      Shares Outst.      Target Price      Target Price 2009E 50.04% $            458 $            425 2010E 47.82% $            528 $            455 2011E 49.32% $            614 $            490 2012E 50.44% $            738 $            547 2013E 51.29% $             813 $             559 2014E 48.24% $            871 $            556 Terminal 46.13% $         17,235 $         10,999 $            14,030 $              1,084 $            15,114 $                   103 $                    47 $                       8 $                   487 $                   402 $                    67 $            14,274 159 $              89.80     As of last FYE $              94.21     As of 4/15/2009 (growth at cost of capital) 25 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Group, Inc. Market Data: As of Apr. 15, 2009 Relative Valuation: Peer Group in Education Services Sub‐industry Symbol ESI DV STRA CECO EDU COCO CPLA LOPE APOL Company Name ITT Educ. Services Inc. DeVry Inc. Strayer Educ. Inc. Career Educ. Corp. New Oriental E&T Group Inc. Corinthian Colleges Inc Capella Education Co. Grand Canyon Educ. Inc. Apollo Group Inc. Market Cap. (M) $                   3,893 $                  3,041 $                  2,374 $                  1,853 $                  1,915 $                  1,455 $                     842 $                     669 $               10,262 Shares O/S (M) 38.32 71.61 14.13 88.04 38.05 86.22 16.73 45.47 160.83 Beta 0.91 0.88 0.87 0.82 1.34 0.98 0.91 N/A 0.87 ROA (%) 34.9 11.5 24.2 5.0 15.3 5.7 15.2 6.5 26.8 ROIC (%) 66.7 16.5 41.7 6.7 19.3 7.5 18.4 9.8 47.5 EBT (%) 32.5 15.8 33.2 5.7 26.3 5.2 16.2 6.5 25.9 D/E 0.80 0.18 0.00 0.00 0.00 0.08 0.00 0.60 0.00 Price $   101.60 $     42.47 $   168.01 $     21.05 $     50.33 $     16.88 $     50.34 $     14.72 Mean Rec Moderate  Moderate  Moderate  Hold Hold Moderate  Moderate  Moderate  $     63.81 Moderate  Note: CECO and COCO are excluded from relative valuation estimates due to their very low ROA, ROIC, and EBT% comparing to the rest of the sample and DTV. Symbol ESI DV STRA CECO EDU COCO CPLA LOPE Price $                                     101.60   $                                         42.47 $                                     168.01   $                                         21.05 $                                         50.33 $                                         16.88 $                                         50.34 $                                         14.72 EPS 09E $                    6.59 $                    2.23 $                    6.99 $                    1.09 $                    1.58 $                    0.68 $                    2.22 $                    0.55 EPS 10E Est. 5‐yr Gr. (%) Sales 09E (M) $                    7.64 16.6 $        1,210.0 $                    2.80 22.5 $        1,430.0 $                    8.62 20.2 $            495.2 $                    1.56 13.3 $        1,720.0 $                    2.16 28.0 $            283.2 $                    1.03 23.6 $        1,270.0 $                    2.83 24.9 $            325.8 $                    0.85 33.0 $            252.5 Sales 10E (B) $       1,370.0 $       1,690.0 $          601.1 $       1,870.0 $          362.2 $       1,440.0 $          390.0 $          346.4 Average P/E 09 15 19 24 19 32 25 23 27 23 18 P/E 10 13 15 19 13 23 16 18 17 18 15 P/S 09 3.2 2.1 4.8 1.1 6.8 1.1 2.6 2.7 3.7 2.6 P/S 10 2.8 1.8 3.9 1.0 5.3 1.0 2.2 1.9 3.0 2.2 APOL $                                         63.81 $                    3.62 Valuation Model    Relative P/E (EPS09)    Relative P/E (EPS10)    P/S Ratio (Sales09)    P/S Ratio (Sales10) DCF/ EP Valuation Avg. Target Price: 16.3 $            3,892 $          4,645 Sales/share $            24.20 $          28.88 APOL Implied Price Average $                  84.29  $               80.18  $                  76.07 $                  89.28  $               87.89  $                  86.50 $               94.21 $               87.43 Current Price: $               63.81 Target Price  Range (+/‐ 2%): $               85.68 $               89.17 % Premium 34.3% 39.7% $                    4.29 26 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management DCF/ EP Valuation: Sensitivity Analysis Apollo Group, Inc. Terminal Revenue Growth 1.54% 2.04% 2.54% 3.04% $  129.74 $  143.90 $ 162.44 $  187.77 $ 114.16 $ 124.88 $ 138.47 $ 156.27 $  101.58 $  109.91 $ 120.20 $  133.25 $      91.23 $    97.83 $ 105.82 $  115.70 $      82.56 $    87.88 $ 94.21 $  101.88 $      75.20 $    79.55 $ 84.65 $    90.73 $      68.88 $    72.47 $ 76.64 $    81.54 $      63.39 $    66.40 $ 69.85 $    73.85 $      58.59 $    61.12 $ 64.00 $    67.31 $ 94.21 5.77% 6.27% 6.77% 7.27% 7.77% 8.27% 8.77% 9.27% 9.77% 1.04% 3.54% $  118.57 $ 105.49 $  224.45 $ 180.59 WACC Estimate $      94.71 $      85.69 $      78.03 $      71.46 $      65.75 $      60.75 $      56.34 $  150.34 $  128.23 $  111.37 $    98.09 $    87.38 $    78.55 $    71.16 $ 94.21 4.00% 5.50% 7.00% 8.50% 10.00% 11.50% 13.00% 13.50% 14.00% 0.57 0.67 $  100.53 $      99.48 $      98.42 $      97.37 $ 96.32 $  100.53 $      99.48 $      98.42 $      97.37 $ 96.32 $      95.26 $      94.21 $      93.86 $      93.51 $      95.26 $      94.21 $      93.86 $      93.51 Beta Estimate 0.77 0.87 $  100.53 $ 100.53 $    99.48 $ 99.48 $    98.42 $ 98.42 $    97.37 $ 97.37 $ 96.32 $ 96.32 $    95.26 $ 95.26 $    94.21 $ 94.21 $    93.86 $ 93.86 $    93.51 $ 93.51 0.97 1.07 Normal Cash (% of Sales) $  100.53 $    99.48 $    98.42 $    97.37 $ 96.32 $  100.53 $    99.48 $    98.42 $    97.37 $ 96.32 $    95.26 $    94.21 $    93.86 $    93.51 $    95.26 $    94.21 $    93.86 $    93.51 27 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Group, Inc. Operating Leases ‐ Present Value ($ Millions) Pre‐tax cost of debt Year 2009 2010 2011 2012 2013 Thereafter Yrs. to  Maturity 1 2 3 4 5 6 5.44% Lease  Commitment  $                 139 $                 123 $                 106 $                    77 $                    51 $                    71 $                 568 PV of Lease  Payment 1 $             132 $             111 $               91 $               63 $               39 $               52 $             487 Note: Represents present value of non‐cancellable operating leases (Source: 2008 10‐k, p. 118). 28 Henry Fund Research THE UNIVERSITY OF IOWA Henry B. Tippie School of Management Apollo Group, Inc. VALUATION OF OPTIONS GRANTED IN ESOP Ticker Symbol Current Stock Price Risk Free Rate Current Dividend Yield Annualized St. Dev. of Stock Returns (# Shares in thousands) Range of Outstanding Options Range 1 Range 2 Range 3 Range 4 Range 5 Range 6 Range 7 Total Number of Shares               1,862 1,530                             1,958               3,127 2,510               1,334                                 56 12,377 Average Exercise Price $         16.70 $         46.93 $         53.01 $         58.03 $         62.17 $         74.32 $         96.50 $         16.70 Average Remaining Life (yrs) 2.00 2.34 4.62 6.89 4.53 5.64 4.87 1.32 B‐S Option Price $         48.37 $         26.71 $         30.60 $         34.15 $         27.05 $         26.58 $         19.30 $         47.91 Value of Options Granted $                 90,058 $                 40,870 $                 59,913 $               106,788 $                 67,898 $                 35,456 $                   1,081 $               402,065 APOL $         63.81 3.66% 0.00% 44.20% As of 4/15/2009 30‐Yr. T‐Bond None Source: 2008 10‐k, p. 64 29