Greater Expectations

todd-nelson.jpg Near the edge of a parking lot, snow has been pushed into low-lying mountains with peaks darkened by car exhaust. Where the asphalt isn’t caked with ice, it’s been streaked and frostbitten by rivers of flowing wind.

The Midwest has been ravaged by Mother Nature this winter. Blasts of arctic weather killed power to millions of houses, cancelling flights and crippling cities. Major metropolitan areas like Denver were buried in snow no more than 48 hours ago, and temporary ghost towns emerged on the plains.

For at least a day now, the sun has come out from behind the curtains of clouds that begin congregating in November each year
and stay until March. Planes are landing, slanting down through the sky showing no traces of its previous threats. The roads have been cleared, though some cars still sit in medians along the interstate at the ends of great stretches of tire tracks, windblown and abandoned. They served as a reminder to motorists of the previous days’ road conditions. Businesses have reconvened at the usual
hour. Traffic has thickened, and the schedules of important people have been resumed.

Todd Nelson is one of those important people. With his head cocked to a cell phone, he sits on the low end of a chair shaped like a woman’s stiletto – a sharp contrast to his polished demeanor and dapper suit. Behind him, the snow heaps fill up the glass at the front entrance of the ad agency where he has meetings for the morning. Nelson has come to Kansas, of all places, the temperatures biting instantly as he stepped off of the plane from his native Arizona.

At his left is the conference room where the board he has been meeting and continues its session. His jaw tightens. A hand moves to his forehead as the phone conversation intensifies. For a man used to setting his own schedule and answering to no one, he seems especially impassioned. The executive’s departure from Apollo Group one year ago left him financially secure enough to cease working and live comfortably for several lifetimes.

Since January of 2006, Nelson has been working with companies that provide services to the education industry. His knowledge
makes him one of the most respected names in proprietary education. What he knows – or even what he believes – can cause reverberations throughout the sector … and everyone wanted in. In mid-February, word came from Education Management
Corporation that Nelson had been named its new CEO.

They stopped him in hotel lobbies, monopolized his time on elevators, and called on Saturday mornings. They knew his brilliance from a reputation established at the University of Phoenix, whose parent company, Apollo Group, reached iconic heights. This is the man who found ways to make a school in Arizona a household name nationally and emblazoned the Phoenix logo into everyone’s mind.

Now EDMC, which owns The Art Institute of Pittsburgh and more than 70 other postsecondary schools, is banking that Nelson can work the same magic for them. The company went private in a $3.4 billion acquisition in June and has embarked on a growth phase. Among Nelson’s responsibilities will be overseeing a recent increase in marketing and admissions spending and rolling out new programs and campuses at a rapid rate.

In actuality, what Nelson has to share now has little to do with the past and more to do with his vision. What his followers really want is a crystal ball to use in making decisions during one the most oscillating times in the history of proprietary education.

“The calls I get are more about the industry as a whole,” Nelson said. “My response is typically that I believe the industry has great potential for continued growth. The market is far more complex today. To take advantage of the opportunities, it will take far better organization, including reaching out to outside sources for assistance.”

After his departure from Apollo, Nelson unintentionally crafted a role for himself as savant for proprietary education. He continued
to closely follow the sector as a potential investor and champion of its causes. On the conference circuit, he gave away bits and pieces of philosophies, but never enough to bring down the house of cards he helped super-glue together at Apollo. Several job opportunities were offered to him, from the private and public sectors, all of which he declined until EDMC came through with an extraordinary offer last month. During his abbreviated “retirement” from Apollo, Nelson’s schedule was freed to visit new places, including recent trips to EDMC’s home base in Pittsburgh.

Phenomenal Phoenix

phoenix-rising.jpg Apollo, the nation’s largest operator of for-profit colleges, achieved phenomenal growth and soaring stock under Nelson’s leadership from 2001-2005. He was at the helm of University of Phoenix during
what investment analysts have called one of the most successful initial public offerings in the history of any company. Apollo’s consolidated enrollment of educational programs earned it the title of the largest private institution of higher education in the United States. The school conglomerate today offers educational programs and services at 58 campuses and 102 learning centers in 36 states, Puerto Rico, and Vancouver, British Columbia.

Nelson more than proved his wherewithal within the company over the course of nearly two decades. He joined Apollo in 1987 as the Director of the University of Phoenix’s Utah campus. He was named Executive Vice President of the university in 1989, appointed Vice President of Apollo Group, Inc. in 1994. Four years later, he was named President of Apollo Group, Inc. and appointed Chief Executive Officer in 2001. Nelson’s addition as Chairman of the Board was announced in 2004.

His appointment as CEO came after proving his effectiveness through the company’s solid financial record. Throughout his tenure as President, Apollo experienced remarkable growth, with revenue increasing from $279 million in fiscal 1997 to a projected $961 million in fiscal 2002. According to a press release from Apollo Group at the time of Nelson’s promotion, the company, through its subsidiaries – the University of Phoenix, the Institute for Professional Development, Western International University, and the College for Financial Planning – had grown to a combined degree enrollment of 116,800 students at 160 locations in May, 2001. That was a jump from 64,400 students at 111 locations in February, 1998.

However, Nelson was put on the defensive in September 2005, when Apollo agreed to pay a $9.8 million settlement with U.S. Education Dept. concerning compensation practices at the University of Phoenix – allegations that Nelson termed “misleading and inaccurate”.

The situation smoothed out as stocks quickly rebounded and Apollo’s school group continued their extensive growth. Its strategy involved the further development of its online program, a market which is far from saturated. Apollo has also recently announced the targeting of high school graduates for the first time. In foreign markets, where experts see huge demand for U.S.-style education, Apollo has barely begun to scratch the surface of its possibilities.

On Jan. 11, 2006, Apollo Group announced Nelson’s amicable resignation and departure, with Nelson citing the pursuit of personal investment opportunities as his reasoning. Apollo Group’s founder, John Sperling, immediately took over as interim chairman of the board. Brian Mueller, the CEO of Apollo’s University of Phoenix Online subsidiary, was appointed company president.

At the Core

Before his involvement with Apollo Group, Nelson held several key management positions in the financial and training industries. Each position further developed his do-unto-others management style, yet lacked a connection to an important driving factor behind Nelson’s personal and professional goals: the mission of higher education.

What drives Nelson today is his passion for the industry and his belief that sharing knowledge is critical for the development and improvement of society. His string of accomplishments at University of Phoenix is indicative of that passion, as well as his vision.

“At the core of running a company, the ultimate report card is how well it does in translating into student performance and student success,” said Jerry Herman, Managing Director with Stifel Nicolaus. “One metric (for Todd’s accomplishments) is that his organization is responsible for conferring degrees to more students than anybody in the U.S. With 300,000 students, they dwarf most of the other players that are trying to service the needs of students.”

Stifel Nicolaus is an investment firm that has followed Apollo since it went public in the mid-1990s. For more than a decade,
Herman has been familiar with Nelson’s innovations. Herman was there when Nelson successfully raised capital for University of Phoenix through its landmark IPO. He worked alongside Nelson as tracking stocks were created for University of Phoenix online and while Nelson oversaw the growth of its online division.

Certainly, Nelson’s accomplishments with Apollo Group and University of Phoenix are rather impressive. And what the future holds for EDMC should be no less than impressive, given his track record. In the eyes of investors, though, there is a more important factor distinguishing Nelson from the bevy of higher education execs.

“Longevity is No. 1,” Herman said. “He has been in the business for 20 years and affiliated with Apollo for a very long time.”

Coming onboard with EDMC – a company he said is “in position to become to preeminent global higher education company” –
Nelson still looks to use his experience and past success to shape the education industry as a whole. Guru-like status within the proprietary education field was attributed to him almost by default as he went about searching for his own investment opportunities. But that wasn’t enough for Nelson, who now finds himself deeply submerged again at the leading edge of proprietary
education.

at-a-glance-nelson.jpg “Having run a company the size of Apollo Group, his experience will be a tremendous benefit,” said John McKernan, who Nelson will succeed in the CEO post. McKernan will become Executive Chairman and remain Chairman of the Board.

Strong Leadership

Like the new professional course Nelson has plotted, the career college sector is facing a similar pattern of expansion and change. Investment analysts are dubbing the sector’s financial performance of late as a “slowdown,” meaning a definite cooling off of the growth from 2000 to 2005. Rising Internet lead costs, regulatory issues and the flood of Wall Street investors buying up colleges have been linked as factors in the changing tide. The latter issue is one Nelson has addressed time and again in speaking engagements.

“In general, the merger and acquisitions concept in proprietary education is really very good,” Nelson said. “It allows for efficiencies to be created in companies. In some instances, consolidating front- end or back-office processes can lower costs and improve student service. But it can go too far. When it’s not strategic – part of a roll up – and just for the purposes of growth, it can be detrimental.”

The biggest challenge facing proprietary education in 2007, and perhaps beyond, Nelson said, involves non-profits. Traditional four-year colleges are entering into territories that have historically belonged to for-profit colleges, which he said is “creating more confusion in the marketplace” for potential students.

“We need some strong leadership for the industry,” Nelson said. “I’m not sure where it’s going to come from, whether it’s CCA or not, but we are facing some issues when there is a lot of money focused on the sector – whether it’s private equity or venture capital. When that happens, that presents a challenge to find ways to keep the standards high. We have to be sure we’re not opening the door to places where they are interested in just financial returns and not educational returns.”

New Challenges

The issues facing proprietary education have changed as the sector has continued to shift shapes with the influence of investor money and the advent of new technologies. Legitimacy might be the sector’s continued struggle, but there have been new, intense discussions at for-profit education conferences about the rising cost of Internet leads and branding or differentiation. These challenges could potentially make lasting impacts on all schools, from independently owned career college chains to juggernauts like Corinthian Colleges and Apollo.

“The inconsistency of the cost of leads as it relates to the quality of leads is a continuing issue,” Nelson said. “You can still buy high-quality leads for $10 and get garbage leads for $100. That correlation with quality and price you pay is a challenge. So finding a high-quality source of leads is a major concern. There is also a tremendous amount of clutter out there in the different choices of schools for potential students. The ability to differentiate the quality of the schools using the Internet as an advertising tool can be very difficult. Those are probably two of the bigger concerns or challenges.”

However, Nelson said finding ways to bring consistency to a college’s message will become a larger issue along with its overall quality of presenting its branding by using the Internet as medium vs. just exposure.

“Unfortunately, branding is going to play a larger role,” Nelson said. “I say unfortunately because it’s not an easy thing to overcome. It is easier for ground-based schools to differentiate themselves because you have to physically be there to compete against them. Whereas the Internet allows any size online school to compete directly with the large schools.”

Political Gain

Those factors – Internet lead cost and branding – are tangible issues that many colleges either saw or have seen coming at them. What haven’t been so predictable are the happenings in Washington with the change of guard from Republican to Democrat in the House and Senate. The change in power sparked an immediate reaction among investors as numerous for-profit education companies closed lower at the stock market. All have since rebounded.

Still, questions remain about the long-range impact the new leadership will have on proprietary schools. Career colleges have undeniably flourished under the Republican-controlled government. Warranted or not, there are those in the sector who are skeptical of the Democrats and what they might do in the driver’s seat on big ticket items, like financial aid and the regulatory environment.

What the Democrats’ influences will remain unknown, Nelson said. In the last couple of years, Democrats have opposed some of the regulatory changes that would benefit for-profit education. Now that they are in control of Congress, Nelson said his hope is that both parties will recognize the great service for-profits are doing for education in the nation by pushing for a level playing field for all of higher education.

“They’ll see this need,” Nelson said. “There are strong Democrats and Republicans on the committee who have tremendous insight and want what is best for education in our country.”

Last Call

Nelson’s plane lands at Sky Harbor International Airport in Phoenix, Ariz. The temperatures are more desert-like than when he departed three days ago. Before he can make his way to his car, his cell phone rings. Another person wants his time and his insights. He treats them cordially as he steps on the reflections of steel beams and window glass in the tile. This has become the pace of his life, now breakneck, and he proved to himself it would be that way with our without his new involvements with EDMC.

For more than a year, Nelson remained hushed about his business endeavors both to the news media and in professional discussions. Even many of his business colleagues could only speculate about the opportunities he must have. Their hope was that he would share what he knows and continue to contribute to the advancement of the sector, which is a core quality Nelson will bring to his new position.

“He’s incredibly resourceful and a quality individual with an extensive and impressive resumé,” Herman said. “Todd has very substantial knowledge to offer to the industry. His understanding of it is invaluable. There are a lot of things he can do to move career colleges forward.”

The world now knows what comes next for Todd Nelson, and it will be hard to envision it not being a wise or lucrative future. At a time when the outlook for proprietary education is clouded, the expectations for him are as high and wide as the Arizona landscape,
where snow falls only in the mountains and the future is as dependable and familiar as the desert weather.

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