Universal Technical Institute Inc (UTI) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the UTI first-quarter 2005 conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Wednesday, February 2, 2005. I would now like to turn the conference over to Jill Fukuhara of the Financial Relations Board.

Hello and thank you for joining us today for Universal Technical Institute's conference call. Management will discuss the results for its first fiscal quarter of 2005 which ended December 31, 2004 and then open the call up to your questions. The Company's earnings release issued after the market closed today is available on its website at www.UTIcorp.com.

Before we begin, we would like to remind everyone that except for historical information presented the matters discussed today may contain forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and are subject to a number of risks and uncertainties that could cause actual performances and results to differ materially from those discussed in the forward-looking statements. Factors that could affect the Company's actual results include changes to Federal and State educational funding, construction delays for new or expanded campuses, possible failure or inability to obtain regulatory consent and certifications for new campuses, potential increased competition, changes in demand for the programs offered by the Company, increased investment in management and capital resources, and the effectiveness of the Company's recruiting, advertising, and promotional efforts.

Further information on these and other potential factors that could affect the Company's financial results may be found in the Company's filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

On today's call are Kimberly McWaters, President and Chief Executive Officer, and Jennifer Haslip, Chief Financial Officer. At this time I will turn the call over to Kim.

Thank you Jill. Good afternoon. Thank you for joining us to review our first-quarter results for fiscal 2005. On today's call I will begin with a brief overview of our Company and a summary of our first-quarter results. Then I will update you on our expansion efforts and also provide comments on my conversations with industry leaders of the Detroit Auto Show. Jennifer will then provide a detailed review of our financial results as well as our forward-looking guidance.

In closing, I'd like to address some current topics related to the scheduled investor conferences and our upcoming annual shareholders meeting. Universal Technical Institute is a leading for profit provider of technician training for the automotive, diesel, collision repair, motorcycle, and marine industries. We offer undergraduate degrees, diploma, and certificate programs at eight campuses and 22 manufacturer specific training facilities across the United States. Our student population is primarily male with approximately 60 percent being recent high-school graduates and the remaining 40 percent adult learners seeking career changes. Approximately 72 percent of our total revenue comes from the federally insured Title 4 funds.

I'm pleased to announce a strong finish to the first quarter of 2005. Net revenues for the quarter were 73.3 million, an increase of approximately 24 percent over the same period last year. Net income for the quarter was 9.8 million or 35 cents per diluted share. This is roughly a 32 percent increase from the 7.5 million or 30 cents per diluted share for the same quarter last year.

Our average undergraduate enrollment for the quarter was 15,525, an increase of nearly 21 percent year-over-year. Capacity utilization during the quarter was 83 percent, compared to 75 percent during fourth quarter of fiscal 2004. We have increased capacity significantly over the last year to accommodate our growing student population and the expansions is planned to continue with our new campus openings in Norwood, Massachusetts and Sacramento, California as well as with program expansions at our Houston and Exton facilities.

At this point I'd like to transition into the new campus opening and program expansions. We are pleased that our newest campus in Exton, Pennsylvania continues to execute according to plan. Our student population is slightly better than 700, which is consistent with our new campus model. As a result, we anticipate our first operating profit during the second quarter of fiscal 2005.

Our operating trends remains comparable to our mature campuses in terms of student starts as well as persistent rates. However, we are experiencing a stronger interest in the Ford Pat elected at this campus than we have traditional seen at any other campuses which should favorably impact revenue growth during fiscal 2006.

During the fourth quarter of fiscal 2004, we began our automotive training program at our Orlando campus. There are approximately 380 students in this program, increasing the capacity utilization rate to 76 percent. Because the total enrollment has now exceeded the 60 percent capacity threshold, we will no longer report separately on the student population for this program, which is consistent with our past practices.

During our last conference call, we also highlighted the relocation of our Rancho Cucamonga campus in Southern California and that increased capacity by 800 seats, taking the total capacity to 2100. I'm pleased to report that we made great progress in filling the additional capacity. As of January 14, our student population at this campus was greater than 1700 students or at 80 percent capacity. Because of this achievement, we will no longer report separately on the student population at this campus as well.

The pilot of our blended e-learning program branded FlexTech is well underway. The first class of students taking FlexTech have now completed four courses. The feedback from our student as well as our instructors during this initial phase of this year-long pilot has been very valuable. We continue to incorporate both student and instructor feedback into the curriculum as well as the delivery methodologies. Our plan is to complete the modifications to a specific course before the next group of students begins.

While students appreciate the flexibility with the online program, they truly value and enjoy the hands-on time and the lab interface with the instructor. We continue to train more of our instructors in preparation for teaching the remaining FlexTech courses. Our next start is scheduled for spring. As we progress through the remainder of our fiscal year, we plan to build a program to a total of 100 students.

We have initiated the FlexTech licensing process at other campus locations and will expand the program based on student demand as well as regulatory approval. Although our marketing efforts have been limited thus far due to the size of the pilot program, in general that has been a little more difficult generating student interest in the program than we originally expected. And there are two primary reasons for this. The first is that students typically have an initial perception that this training can not effectively occur online and that their hands-on time is jeopardized.

The second is that the program does not include Hotrod U., our very popular high-performance courses, and many do not want to miss out on these hands-on courses. As a result, we have changed advertising messages and sales processes to address the concerns and to date we have seen improvement in overall student interest in the program.

Moving to our future growth strategy, we expect to close on the purchase of our Norwood, Massachusetts facility during the second quarter of fiscal 2005. We received approval today on our last permit which was the only remaining requirement to close. Concurrent with the closing, we anticipate funding approximately 11.8 million and then beginning the retrofit of the building. Costs associated with the retrofit will span the remaining three-quarters of fiscal 2005. We are funding this transaction with available cash on hand.

We continue to work very closely with the Commonwealth of Massachusetts Department of Education on licensing this campus to support our planned opening in the fourth quarter of this year.

Progress continues on our Sacramento, California site as well. The permitting and architectural design process is well underway. We plan to open this campus during the first half of fiscal 2006 and we expect to submit our state licensing application in March. Student and employer interest in the new site remains strong and we continue to see strong recruitment efforts in the Northern California and Pacific Northwest areas.

The expansion of our collision repair and refinish program at our Houston campus is progressing as well. We anticipate adding the 400 seats of capacity to this program during the fourth quarter of 2005. The expansion includes a new three-week course in custom paint as part of the program.

We are also working on the creation of our diesel program at the Exton campus, which requires a 41,000 square foot facility to accommodate the new program. We anticipate teaching classes in this program in the fourth quarter of fiscal '05 as well.

We continue to work on new campus expansion opportunities beyond fiscal 2005 and I promise to keep you informed of our progress as we move forward over the next year. This summarizes the current national expansion progress as well as future plans.

Next I'd like to comment on the continuous evolution of our customer centric strategy and business model. This is one of the distinctive attributes that clearly differentiates UTI. Five years ago when I became President, we made a major shift in our customer orientation and identified industry as our customer. Industry includes originally equipment manufacturers, dealers, and other employers who hire our graduates. We committed the financial and human resources to gain a much better understanding of their needs and how we could add value to their business.

Our first priority was the OEMs and their dealer networks. Their sole focus at the time was increasing the number of technicians recruited, trained, and placed in their dealerships. Since then we have worked together to address their technician staffing needs.

Two weeks ago I met individually with the CEOs of BMW and Porsche, the President of Ford Customer Service Division, and senior level executives of Audi, Chrysler, Honda, and Mercedes-Benz at the Detroit Auto Show. I must say it was satisfying to validate the effectiveness of our business model and strategy with our customers at the highest levels.

In summary, our customers express confidence in UTI and are pleased with our recruitment ability, training programs, and most importantly the quality of our graduates. Further they were very interested in exploring new business opportunities to address other vital training needs within their dealerships. It appears our customer centered strategy is working and this is critical because it allows us to grow our business based on true customer demand.

Now I'd like to turn it over to Jennifer Haslip, our CFO, to review our financial results and forward-looking guidance in more detail.

Thank you, Kim. As noted in our press release, net revenues for the first quarter of fiscal 2005 were 73.3 million, up 24.2 percent from 59 million reported in the same quarter last year. Revenue growth was driven primarily by higher student enrollment as well as modest tuition increases and program extensions for the quarter.

Our operating income for the first quarter of fiscal 2005 was 15.5 million as compared to 14 million a year ago. Operating margin for the first quarter was 21.1 percent, down from 23.7 percent for the same quarter last year.

During our last conference call, I highlighted the expected decline and provided details on various contributing cost categories. I will briefly cover the significant areas contributing to the decline in margin. First we expanded several of our locations during the fourth quarter of fiscal 2004 and added our new Exton, Pennsylvania facility. As a result, occupancy costs representing higher percentage of revenue as compared to the prior year equating to approximately $900,000 for the quarter. As we're filling capacity over the upcoming year, the margin impact related to occupancy costs is expected to return to historical levels as a percentage of revenue.

Second, tool expense for the first quarter of fiscal 2004 was $800,000 lower, resulting from a favorable change in estimates. And third, we incurred higher costs as compared to the prior year quarter related to being a Public Company of approximately $600,000 which includes D&O insurance, Board fees and Sarbanes-Oxley expenses.

The above variances were partially offset by lower preopening cost for Norwood, Massachusetts and Sacramento locations of 330,000 and 35,000 respectively as compared to preopening costs in Exton, Pennsylvania in the prior year of approximately $700,000.

Net interest income for the first quarter was 217,000 compared with net interest expense of 790,000 for the same period last year due to a lower average balance of total debt, favorable interest rates, and higher interest income related to investment of our excess cash. We currently have a letter of credit requirement with the Department of Education for 10 percent of our financial aid received during our preceding fiscal year. The letter of credit requirement is currently 14.4 million and is collateralized by a restricted investment of 15.9 million.

We have filed our fiscal 2004 audit with the Department of Education and are awaiting their review to determine if the letter of credit requirement will be removed. Although our composite score has improved significantly, the Department of Education may elect to require the continuation of our letter of credit at their discretion for a period through June, 2006.

Our tax rate for the first quarter of fiscal 2005 was 37.3 percent, compared to 40.2 percent for the same quarter last year and 39.9 percent for the fiscal year ended September 30, 2004. The lower effective rate for the three-month period in 2005 as compared to the same quarter a year ago is primarily attributable to a tax incentive related to our Norwood facility purchase as well as favorable state tax rates where we have expanded our presence.

As a result of the lower than anticipated state tax rates, we expect our effective tax rate to be approximately 38 to 40 percent for fiscal 2005. Beyond 2005, our expectation is our effective rate will range from 40 to 41 percent.

Next I will provide some color related to the outperformance for our fiscal quarter 1 results compared to our guidance provided in our last conference call. Our previous guidance indicated we planned to achieve 29 cents per diluted share or slightly better for the first quarter of fiscal 2005 as compared to our reported results of 35 cents per diluted share. The favorability is primarily attributable to three cost categories as well as better-than-expected revenue.

On the cost side, first we had a lower than planned compensation cost resulting from flight delays and adding new planned positions primarily in our general and administrative category. Second, we had lower than planned fringe costs primarily as a result of unusually low medical costs related to our self-funded health insurance plan. Costs associated with our self-funded health insurance do vary from month-to-month and I believe it would be optimistic to expect these costs to remain at their existing levels. Third, we had a favorable effective tax rate as I previously described.

Turning now to our balance sheet, we increased cash and cash equivalents to 45.8 million at December 31, 2004, compared with 42.6 million at September 30, 2004. Approximately 15.9 million of cash has been provided to our current lender to collateralize our line of credit required by the Department of Education. We received verbal notification yesterday that we had been approved by the Department of Education for Exton, Pennsylvania branch locations. We are now focused on transitioning loans from Universal Technical Institute to Title 4 funded loans and this should occur over the next quarter.

Capital expenditures for the three months ended December 31, 2004 were approximately 3.1 million compared with approximately 3.5 million for the same period last year. Our capital expenditures typically vary with our student populations as well as planned program enhancements and expansions. Assets are placed in service slightly ahead of when they are required for training purposes.

We expect capital expenditures to increase over the coming quarters as we upgrade current equipment, expand existing facilities, and open new locations. We anticipate ongoing capital expenditures to range from 5 to 6 percent of total revenue. New and expanded facilities add to our ongoing or maintenance capital expenditures. We expect to expend approximately 11.8 million of capital expenditures related to our Norwood, Massachusetts building which is expected to close during our second quarter of fiscal 2005. And we believe that we will be able to adequately fund these activities with cash generated from operations.

Now I will provide an update to our student statistics which also contributed to our strong performance for the quarter. Our average undergraduate enrollment for the three months ended December 31 was 15,525 students, an increase of 20.8 percent from 12,856 students for the same period a year ago. Undergraduate enrollment at December 31, 2004 was 14,809 students compared with 12,282 students at the end of the prior year.

Next I will update forward-looking guidance for our fiscal year ending September 30, 2005, which is broken down into the following categories. Fiscal year 2005 expected revenue growth and annual margin targets, quarter 2, 2005 revenue growth targets, and a recent accounting pronouncements impacting UTI. Our current targets for fiscal 2005 year-over-year revenue growth ranges from 21 to 22 percent.

We are raising the revenue guidance range by 1 percent as a result of the favorable average student population anticipated during fiscal '05. We are raising our annual net income target range to 11 percent to 11.5 percent and the expectation is that our previous guidance moves to 10.5 to 11 percent. We are raising guidance primarily due to favorable first-quarter results combined with favorable average student population and a better than planned tax rate for fiscal 2005.

Turning to our second fiscal quarter of 2005, we anticipate year-over-year revenue growth ranging from 20 to 21 percent as compared to the second quarter of fiscal 2004.

Now I would like to focus on our recent accounting pronouncement that impacts UTI. In December of 2004, the Financial Accounting Standards Board issued a statement of financial accounting standards related to accounting for stock-based compensation. The pronouncement is effective for interim or annual reporting periods beginning after June 15, 2005. We estimate the effect of adopting this standard to range from approximately 1.1 million to 1.3 million for the fourth quarter of fiscal 2005 on a pretax basis. This estimate includes the anticipated impact of additional equity award of approximately 575,000 options which are anticipated to be granted during the second quarter of fiscal 2005.

The fiscal 2005 estimates discussed previously include the expected impact of this pronouncement which all occur during the fourth quarter of our fiscal year. When we report our fourth-quarter results, the impact of adopting this pronouncement will be shown separately to provide visibility and comparability of our data.

Now I will turn it back to Kim for a quick summary.

Thanks Jennifer. Before we take questions, I'd like to comment on a few calendar items for UTI. First is we have recently filed our first annual report and related proxy materials with the Securities and Exchange Commission and we will be hosting our first annual meeting on February 16, 2005 at our newly relocated Avondale campus. We are also scheduling several conferences over the next quarter as well as a variety of investor field trips in the upcoming months and we look forward to seeing some of you during our travels. We will post any of the presentations made during these meetings on our Investor Relations section of our website.

In closing, it has been an incredible first year as a Public Company. As an organization we've proven to ourselves that we can operate in a different environment with new stakeholders and stay true to who we are at the very core.

And with that, I would be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS) Richard Close with Jefferies & Company.

Congratulations. Kim, I was wondering if you could maybe elaborate a little bit more with respect to interest at your customer/clients looking to expand opportunities. You just touched on that briefly. If you could maybe talk about timing, potential timing on added services you're going to offer?

I would be happy to. I would say the overall consensus from those that I spoke with is that there is a great need for service adviser training and just as comparison, there's typically one service adviser for every five technicians in the dealership. There is also a request for service operations management and sales consultant training as well. They are looking to create career passing opportunities for technicians as well as other key positions within the organization and see UTI as a potential provider of those types of education.

I would say that most the recent development is the Mercedes-Benz service adviser program. We have completed our pilot with Mercedes-Benz and are in the final stages of contracts. The contract has been negotiated. We are awaiting signatures for that to begin a program for service adviser training specific to Mercedes-Benz. This program would recruit new students, typically not coming out of the UTI system. They will be recruited from colleges as well as those currently being employed in a sales capacity to be considered candidates for this type of training. A percentage of it is conducted online and a percentage of it is conducted on-site and all of the tuition is sponsored by the dealers as well as the OEMs.

So we are excited about that and believe that there is potential to do similar type of training whether it is branded by an OEM or it's under the UTI umbrella brand to provide value to the other OEMs and their dealer networks.

Okay, and then just a follow-up on some of your commentary. At the beginning you talked about the Pennsylvania facility and operating profit I guess in the second quarter of '05, and then you mentioned the Ford program favorably impacting fiscal '06. Maybe if you could give us some quantification on that?

I can tell you that the student's interest in Ford is stronger there. I think it is because their choices are limited meaning that there is not a diesel program at that campus but there is a strong connection to the Ford brand in the Midwest and in the East Coast. And as far as the revenue impact for that quarter, I'm going to let Jennifer answer that specifically.

I would say that that will impact revenue slightly for the FY '06 period and helps us on the elongation of our program which tends to be 1 to 2 percent in total of our topline revenue growth, so it is supportive to that but it won't create that entire amount.

Okay and then adding the diesel program there, how much does that impact do you in adding programs impact the enrollment or is it just in elongation?

It will do both. I would say the greatest impact will be the elongation of the program but we will attract some that are interested in diesel and diesel only. And I would say that that is just a smaller percentage of the overall benefit that adding diesel to the Pennsylvania campus brings us.

Thank you.

Michael Lasser with Lehman Brothers.

Nice job in the quarter. Given that we are approaching the season of year when many high school seniors are thinking about their postgraduate plans, can you talk a little bit about how your high school recruiting season is shaping up and what is the typical lag time between when a high school student would sign up for a program and then begin a program?

We have had a very strong recruitment year on the high school front. I have been very pleased with rollout of the new marketing campaign, the Reese (ph) activity from the high school instructors, the students, the parents. The results are very favorable and if you look -- I would say the lag time typically is going to be anywhere from three to nine months. It could be as much as 12 months if we had signed people in the summer or early fall. And they are in their final year of high school and we try to get them as early as we can. So some could have a very long lag time before they actually show at UTI but we do put a tremendous amount of effort in staying in contact with those students to ensure that they do show up to school, and that begins the minute they apply to come to school here. So that is all looking very strong and very favorable on the high school recruitment front.

Revenue per average enrollment, if you look at that metric it came in a little bit lower than 3 percent or the minimum level you talk about tuition increases. Could you offer some commentary on what was going on there?

Sure, basically the rate was lower for three primary reasons. The first part relates to NTI and that we did not a raise our tuition prices two years ago and we are continuing to see students cycle through on that program. The first fiscal quarter of '05 as well as the remainder of the year will be impacted by that and it's one of the reasons why we had talked about going 3 to 5 percent in that tuition rate increase range. In previous quarters the higher overall rate at NTI when we initially opened it overcame the year where we did not raise tuition rates.

Second we had a slight uptick in retake rates during the quarter and that metric consistently is below 6 percent for the quarter, however, on a comparable basis there was a slight increase and students are allowed to retake at no cost two classes during their program which is customary in our industry. And then lastly, industry training related to Honda Coast Guard training was delayed outside of the quarter because of budgetary constraints in their organization. It was really those three things that contribute to the overall lower percentage on that.

Of the students in the FlexTech program, are any of those -- did any of those transfer from a full-time program?

What was the question?

The students in the FlexTech program?

There were no transfers from the current program.

Is that a possibility in the future or a way to increase capacity?

Absolutely, it is a possibility. The same subject matter is being covered. It's just in a different format; however, for the pilot we are working with a select group of students so we're not doing that at this point in time.

We have seen the reverse though, where students initially came on looking to potentially go on to FlexTech programs but then looked at the rest of the programs and they have been attracted by the advertising from FlexTech but ultimately it worked better for them to go during the day and so we have seen the reverse at times.

Two last questions. In the annual report you discussed 700,000 estimate for SFAS-123. I assume that was an after-tax estimate versus the pre-tax estimate that you provided in the press release?

Actually, no, that is not the case. That estimate that was in our annual report reflects what had been granted through our fiscal year end 2005 so it doesn't take into account new grants and that is really the difference.

Okay and the Toyota elective, any update there on how it is doing at Glendale and the possibility that it would be rolled out to other campuses?

All indications are very positive from the students as well as the employers. They are very limited however in terms of the number of graduates that we have out there at this point. Probably the best news is that we have received a signed agreement to extend our contract with Toyota for three years. That contract at this point is still limited to Glendale Heights and as I said before, it is going to be a matter of time before we can prove ourselves and the quality of our graduates to the dealers and the expansion will be driven by Toyota, not by UTI.

So what we need to focus on is making certain that we are training the graduates to their specs and that we are meeting the dealer needs. And that will determine how the expansion rolls out.

And with that, I'm going to ask in light of time to limit the number of questions that each person has to ask so that we can make certain to cover everyone on the call.

Greg Cappelli of Credit Suisse First Boston.

Just in the neck of time for my question. Thanks for taking it. I wanted to ask one about what you are seeing on the cost of lead front and just in conversions and whatnot. We've heard from some of the other companies that it is more expensive to advertise and in some cases to get leads, so could you give us an update there?

I would say we're seeing similar trends relative to increases in cost as it relates to television advertising; however, we have been able to offset that with our Internet lead generating process. And so if you look year-to-year, I would say we're down 20 cents. We are very flat. So we have not seen any significant increases only because we are able to offset it with our Internet.

Okay and just one maybe comment if you could give us some color on how attrition has been trending. Obviously you've brought on a lot of new capacity. I know that you are funneling some students to different areas of the country as well. Is attrition where you want it to be and has it remained stable?

It is remaining stable year-on-year. It is very flat across the system.

I will add, Greg that we are always looking at areas for improvement and the campuses that are trending below what we call the target, special focus is on those. And those tend to bounce around.

Okay, that makes sense. Just one clarification. Jen, could you just on the tool expenses that you talked about -- could you review that one more time? What caused that to happen?

Sure, basically we had a change in estimate related to our tool expenses and it goes to the snap-on tool accrual that we make on a monthly basis.

Got it, thanks a lot.

Howard Block with Banc of America Securities.

Good afternoon. Congratulations, a very nice quarter. First question is if we're looking at this growth sequentially, could we attribute it maybe in the following order of magnitude to in terms of enrollment to Orlando, Exton, Rancho Cucamonga, jump in whenever you want?

I'm not sure I understand question.

If you look at the population, how it grew from let's say December average enrollment to -- I'm sorry September to December -- it would seem that Orlando, Rancho Cucamonga and Exton were the campuses that probably grew the most sequentially.

That is correct.

Are there any beyond those three that offer any material sequential growth?

I would say those were the biggest contributors. We did have strong results in our Glendale Heights facility as well. So that would be the other. And I would envision as you look forward that we will continue to see Exton and Rancho filling their capacity. Orlando will fill in but they have smaller starting classes and don't start every period, so it will grow a bit more slowly.

Okay, I also wanted to follow-up on the favorable comment you made about the Ford program in Philly. To what extent is the students' expression of interest in that program, contractual? Meaning to what sense do you really have visibility in '06 for an incoming student expressing I guess an interest in that elective or how does that work?

At a mature campus the majority will commit as part of the enrollment process, so we do have visibility. At Exton, it's a combination of both. There are those who are newer to the enrollment process are committing upon contract but we have also done an up sale process to encourage those students at the campus to consider taking Ford. So it's two factors working at the Exton campus but going forward it's going to be primarily based on what they commit to at the time they sign the enrollment paperwork.

Jennifer, maybe just to clear up a little bit of housekeeping. Did you disclose what the accounts receivable were or could you?

I sure can. For September 30, 2004, it was 20,124; for the December period, it was 21,732.

How about deferred revenue?

Deferred revenue was 34,523,000 for the September '04 period and 35,512,000 (ph) for the December 31 period.

Just to clarify on the startup expenses and I think you said that Norwood was -- was it 300,000 below Exton? So what were the startup expenses then in the quarter? Was it 500,000?

The startup expenses in the quarter were really 330 related to Massachusetts and 35,000 relating to Sacramento and that compares to close to 700 in Pennsylvania for the prior year quarter.

Got you. Thank you very much.

Mark Hughes with SunTrust Equitable Securities.

Thank you very much. Jennifer, did you give Q2 guidance on margins? I think I got revenue at 20 to 21 percent. Did you describe margins?

We have not historically provided margin guidance on a quarterly basis.

And then the capacity utilization I think you described 83 percent. I think in the last call, you had suggested that included 500 seats relative to the Internet program. Is that still the case for this quarter?

That is the case. Yes. It includes the 500 FlexTech students.

Thank you very much.

Trace Urdan with Robert W. Baird.

The first question, Jennifer, I think for you. I just wanted to clarify on this letter of credit if it is removed what the financial impact of that would likely be?

The financial impact for that would likely be a couple hundred thousand dollars of interest savings that we would have for the remainder of the fiscal year. So it is a good benefit to us but it is something because we collateralized that LC this last year, we did significantly reduce the fees that we are paying on that.

Thank you, that is very helpful. And then ironic positioning here on the call but I wanted to ask this about this item that some people have written about with the Automotive Services Association survey that showed that some of the independent dealers had seen a drop in average hourly earnings and how you reconcile that piece of data with what you see in your own marketplace?

Yes, that survey is looking again at the aftermarket or the independents, and I am not surprised by what they said in this report. It's the same thing that they said in the last several years report and those are typically smaller shops that have different needs for technicians but I don't think it is reflective of the overall trends in the marketplace. And it certainly does not represent what our customers are telling us both at the OEM dealer level as well as other employers who are hiring our graduates. So it is not anything that is negatively impacting our business and like I said, the trends relative to that survey have not differed year-over-year and we still do not feel any impact from it.

I appreciate it. I haven't heard you make those comments before so I apologize if you are repeating yourself.

That's fine.

Is there a broader trend here where these smaller independents are seeing some share shift away back to the dealers or is that taking it too far?

I think they are just typically smaller businesses. Many are family-owned. I don't think that it is a case of them losing business to the dealers. In fact, I would expect for that segment of the market to increase at the quality of its technicians to become truly competitive with the dealers and that is going to tie-in with this Right-To-Repair Act that is going to allow the independent shops to have access to proprietary technical information to repair these vehicles.

And if the independent shops wants to effectively compete with the dealers, they're going to have to raise the quality of their technicians in their shops to do it. And I think they are beginning to realize that so it may not just be a quantity of technicians. It is also about the quality of technicians required to meet the new service demands of the increasing technology.

Thank you very much.

Mark Marostica with Piper Jaffray.

Nice job in the quarter. First question here at what point do you consider adding capacity to a campus? At what capacity level will it or should it be at before you consider that?

Basically we try and keep our sites right around 90 percent from a maturity standpoint and when they begin to creep up above that and we start to see a backlog, we will evaluate whether it is the right choice to either add space at that site or allow a different opportunity to exist at that location.

How many are currently above the 90 percent level?

During the quarter I would say most of our mature campuses are definitely above that -- at or above that in particular during the first quarter of the year, which tends to be at a peak time for our students.

Just a follow-on, compared to the average capacity of 83 percent where you are at currently, where do you expect to be based on your expansion plans by the end of the fiscal year?

I would say that we are going to wind up right back in that 75 percent range, maybe a little under, maybe a little over depending upon how student population trends for the remainder of the year.

Fair enough. Thanks, I'll turn it over.

(OPERATOR INSTRUCTIONS) Jeff Silber of Harris Nesbitt.

Let me add my congratulations as well. Jennifer, you were talking earlier about the average increase in revenue per student. Can you give us an explanation why that trended down a little bit as to the year-over-year growth? Should we be modeling that 3 percent rate for the rest of year?

I would say 3 to 4 would be a good range to be in.

Great. And in terms of startup costs, you gave us a number for the quarter that just ended. What do you have budgeted for the current quarter for the rest of the year?

It would -- it would really follow our new store model which would basically be about 6 million in costs for the full year and that has about a million of revenue and that is for the Boston facility. And then there was about 2 million of costs related to the Sacramento site that was included.

Those members again are for fiscal '05 in total?

They are fiscal '05.

One more question. On the stock based compensation, the 1.1 to 1.3 million -- I know you're not giving guidance for fiscal year '06 but should that be something we should expect to continue at that rate on a quarterly basis next year?

I'm sorry, can I ask you to repeat that?

No problem. The stock based compensation expense of 1.1 to 1.3 million at the end of the current fiscal year. If I were trying to model that for next year, should we use the same quarterly run rates?

I would say that definitely it does roll through the following year but there is some complexity in the calculation as new grants get made after the June 15 implementation date. And it really is dependent upon what we grant in upcoming coming fiscal years and we have some choices to make internally as to whether it will be options or restricted stock and we are under evaluation right now for that. So we believe we will be able to add a little bit more color to the '06 timeframe in our next call.

I appreciate that, thanks.

A follow-up from Howard Block with Banc of America Securities.

Kim, I was wondering has your campus in the Sacramento area as well as the one in Boston, you're just going to start to find -- your recruiters are going to start to find themselves I would guess facing high school students who have heard from the Lincoln Tech recruiters on the east end Wyo Tech recruiters on the west and I think it's going to happen at an increasing rate over the next couple of years. What kind of feedback are you getting from the field in terms of competitive advantages or challenges vis-à-vis those names?

I would say that the competitive strengths of those two companies, Lincoln and Wyo haven't changed significantly and the feedback remains relatively the same. The value proposition for UTI with the strategic relationships and the enhanced employment opportunities seems to overshadow what is happening with Lincoln Tech and Wyoming Tech from a student's perspective. They are both doing well from what we can tell and they are certainly attracting students in those markets. But I do think UTI offers some key differentiations that are attractive to students and therefore we have not seen a negative impact in our recruitment model. And I think as we expand our national footprint that will only strengthen our presence in those territories.

I need to clarify one thing that I just told you just a second ago and it would be on the Sacramento costs for this fiscal year. It is really closer to 4 million and I misspoke when I said 2.

I think that was Jeff, but whenever. I'm done anyway. Thanks a lot.

A follow-up from Mark Marostica with Piper Jaffray.

Just a clarification on your comments concerning the stock based comp. Does your net income margin guidance for fiscal '05 include the impact on the stock based comp in Q4?

It does.

Thank you.

Management, we have no further questions at this time. Do you have any concluding comments?

I just would like to thank everyone for participating on the call and we will talk to you next time.

Thank you. Ladies and gentlemen, this concludes the UTI first-quarter 2005 conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3000 or 800-405-2236 and enter the PIN code, 11020465. (OPERATOR INSTRUCTIONS) We thank you for your participation. You may now disconnect.