Universal Technical Institute Inc (UTI) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the UTI second-quarter fiscal 2005 conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, May 4, 2005. At this time, I would like to turn the presentation over to Jill Peters with the Financial Relations Board. Please go ahead.

Thank you. Hello and thank you for joining us today for Universal Technical Institute's conference call. Management will discuss the results for its second quarter of fiscal 2005, which ended March 31, and then open the call up to your questions. The Company's earnings release was issued this afternoon and is available on its website at www.uticorp.com. Please also note that the Company's 8-K containing the earnings release was unintentionally filed earlier than planned today due to a technical problem.

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 performance and results to differ materially from those discussed in 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 consents 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. Kim?

Thank you, Jill, and good afternoon. Thank you for joining us to review Universal Technical Institute's second-quarter results for fiscal 2005. On today's call, I will begin with a brief overview of our Company and a summary of our second-quarter results. Then, I will update you on our expansion efforts as well as our OEM relationships. 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 UTI.

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% being recent high school graduates and the remaining 40% adult learners seeking career changes.

Approximately 72% of our total revenue comes from federally insured Title IV funds.

I'm pleased to announce our results for our second quarter of fiscal 2005. Net revenues for the quarter were 77.5 million, an increase of approximately 21.7% over the same period last year. Net income for the quarter was 9.2 million or $0.32 per diluted share. This is approximately a 14% increase from 8.1 million or $0.28 per diluted share for the same quarter last year. Our net income is in line with expectations due to our planned investment in sales and marketing to address newly created capacity at both our existing and future campuses. As a result, our sales and marketing costs have increased as a percentage of revenue for the quarter as compared to the prior year. This investment should support strong fall starts for the fourth quarter of fiscal 2005 and the first quarter of fiscal 2006.

Our average undergraduate enrollment for the quarter was 15,517, an increase of more than 19% year-over-year. Capacity utilization during the second quarter of fiscal '05 was approximately 83%, consistent with the first quarter. As a comparison, capacity utilization for the second quarter of fiscal '04 was approximately 90%.

We have increased capacity significantly over the last year to accommodate our growing student population. The expansion is planned to continue with our new campus openings in Norwood, Massachusetts and Sacramento, California, as well as our other program expansions at our Houston, Texas and Exton, Pennsylvania campuses.

At this point, I would like to transition to some specific facts about our new campus openings and program expansions. We're pleased that our newest campus in Exton continues to execute according to plan. Our student population is just under 800, which is consistent with our new campus model. This campus generated its first month of profit during the quarter, in line with expectations. Our operating trends at the Pennsylvania campus remain comparable to our core business in terms of student start and persistence rates. Furthermore, we are experiencing a stronger interest in the Ford FACT elective at this campus than we see at other campuses, which should favorably impact revenue growth during fiscal 2006.

The pilot of our blended e-learning program, branded FlexTech, continues to progress. We continue to incorporate feedback from our students and our instructors to enhance the training experience both online and in the classroom. We have approximately 50 students currently in the program. Students are very attracted to the flexibility the program offers. However, they favor the hands-on environment. We are testing new messages in our commercials and have developed specific marketing materials that reflect the advantages of this program in particular for working adults. As we progress through the remainder of our fiscal year, we plan to build the program to a total of 100 students. We expect to slowly increase the size of the program moving into fiscal '06 as we consider expansion opportunities at our other locations.

Moving to our future campuses, we closed on the purchase of our Norwood, Massachusetts facility during the second quarter of fiscal 2005. The retrofit process of the facility is well underway for our planned opening in the fourth quarter of fiscal 2005. We funded approximately 12.4 million through the closing of the purchase and may incur an additional 200,000 for enhancements to the property. Cost associated with the retrofit will span the remaining three quarters of fiscal 2005 and is anticipated to be approximately 12 million. We're funding this transaction with available cash on hand. We continue to work very closely with the Massachusetts Department of Education on licensing this campus to support a stage opening planned in the fourth quarter. The state has reviewed the first admission of our application and we have responded to their initial questions. We will work to schedule our site visit with the state closer to our occupancy day.

In addition, we are also working to complete the final portion of the ACCSCT accreditation application and we expect to submit it within the next month. We have increased local and regional advertising in this area for UTI's existing campuses and have had good response rate from the local areas. Although we cannot recruit specifically for the Norwood campus until licensed, we have a growing list of prospective students who have indicated a preference to attend the Norwood facility once it is licensed.

The management team at this campus is also forming. Our school director has relocated to the Norwood area to support the launch of the new facility. We have also hired his key management personnel, including an admissions director, education director, financial aid director, employment director, as well as the division controller. We will continue to build this team as we move closer to our opening time frame. We believe we're on target to open the Norwood facility in the fourth quarter of fiscal 2005 barring any unusual hurdles in the state licensure process.

Progress on our Sacramento, California campus continues as well. The permitting and architectural design process is ongoing. The permitting phase has proven to be very challenging, however. While we're making progress with the City of Sacramento, this portion of the process has taken several months longer than we originally planned. Nevertheless, we remain on target to begin training in Sacramento during the first half of fiscal 2006, as previously communicated, but believe it is more likely to occur during the second quarter of fiscal 2006.

Due to the unanticipated permitting delays and the likelihood that we may incur additional delays, we have developed a contingency plan to ensure training can begin as planned. We have identified an existing building close to our plan site that could accommodate our training until a new facility is completed, should this be necessary. The site would require limited improvements to house our training.

We continue to meet the milestones associated with the state licensure for our Sacramento campus as well. We submitted our state licensing application in February 2005. It typically takes 60 to 90 days for the state to complete their review process. We have also completed the first part of the application process with our accrediting body and are awaiting their comments. Student and employer interest in this new site remains strong, and we continue to see strong results from our recruitment efforts in the Northern California area for our existing UTI and MMI campuses.

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

At our Exton campus, we recently amended our lease to accommodate the expansion of our diesel program to this campus. The program expansion requires a 41,000-square-foot facility. And we're on target to begin teaching classes in the fourth quarter of fiscal '05.

We continue to work on our new campus expansion opportunities beyond fiscal 2005. Our plans include expanding program offerings at existing locations as well as opening new locations. I will keep you informed of our progress as we move forward over the next year. This summarizes the current national expansion progress and future plans.

Next, I'd just like to provide a brief update on our OEM relationships. As you may recall, we've been working with BMW to renew our agreement. Finalization of the contract proposed early in fiscal 2005 has been on hold until a new BMW management team is in place. Meanwhile, we began executing on our understanding of the proposed contract at the suggestion of BMW. One of the new components of this agreement is an elective program at our Ranch and Avondale campus. The new BMW training is in addition to the graduate-level training we're currently providing. The difference is that this training will be licensed and eligible for Title IV aid. Students who meet specific grade, attendance and other BMW criteria can opt to enroll in the elective.

There is no guarantee from BMW to provide employment in exchange for this training. However, BMW specialized knowledge and sophistication provides our students better employment opportunities. The size of this program will ultimately be driven by BMW's technician needs. The elective will be 12 weeks in length and the first class is planned to begin in the late third quarter of fiscal 2005 at the Avondale campus and is already underway at the Ranch campus.

Finally, the new management team is now in place at BMW and we are working to finalize the new multiyear agreement. I will keep you apprised of the progress.

As for Mercedes-Benz, we are beginning discussions on a multiyear, multidiscipline agreement. Because we are still in negotiation, I cannot disclose the disciplines included in the agreement; however, I can tell you we expect to provide training beyond the scope of service technician.

Porsche Cars of North America's agreement expires in August of this year. Negotiations are anticipated to begin in May. While we do not expect growth in this program, we're optimistic about renewing the agreement.

And 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. Jennifer?

Thank you, Kim. As noted in our press release, net revenues for the second quarter of fiscal 2005 were 77.5 million, up 21.7% from 63.7 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 second quarter of fiscal 2005 was 14.4 million, as compared to 13.5 million a year ago. Operating margin for the second quarter was 18.6%, down from 21.2% for the same quarter last year.

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 represent a higher percentage of revenue as compared to the prior year, equating to approximately $500,000 for the quarter. As we fill in capacity over the upcoming year, the margin impact related to occupancy costs is expected to return to historical levels as a percentage of revenue.

The other main contributor as a percentage of revenue was increased sales and marketing costs that equated to approximately $1.3 million for the quarter. The increase in sales and marketing costs relates to filling our newly created capacity at existing and upcoming locations and is not a result of any deterioration in cost per lead or sales performance.

I would also like to provide an update on preopening expansion costs for Norwood, Massachusetts and Sacramento of 750,000 and $190,000, respectively, as compared to preopening costs in Exton, Pennsylvania in the prior year of approximately $800,000.

Net interest income for the first quarter was $316,000, compared with net interest expense of $145,000 for the same period last year due to a lower average balance of total debt, favorable interest rates and higher interest income related to the investment of our excess cash. We currently have a letter of credit requirement with the Department of Education for 10% 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 $16.1 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 of 2006.

Our tax rate for the second quarter of fiscal 2005 was 37.9%, compared to 39.6% for the same quarter last year and 39.9% for the fiscal year ending September 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, which favorably impacted our state tax rate where we have expanded our presence. As a result of the lower-than-anticipated state tax rate, we expect our effective tax rate to be approximately 38 to 40% for fiscal 2005. Beyond 2005, our effective tax rate is expected to range from 40 to 41%.

Next, I will provide some details related to the growth on our per-student rate for the second quarter of approximately 2%. We believe this rate is lower than our annual tuition increase for the following reasons. First, as discussed in our last call, we have had an increase in our course retake rate. At UTI, students are allowed to repeat either one or two courses without paying for the course, depending on the program the student attends.

For the second quarter, we experienced an increase in our retake rates as compared to the prior-year period of approximately 1%, which equates to approximately $1 million of tuition revenue for the quarter. The primary reason for the increase in retake earnings is that we have elevated the requirements for our students for the courses that have significant electrical content. Our industry customers have suggested our students need a higher level of understanding in electronics. In response to their concerns, we have changed the sequence of curriculum, removing a portion of review prior to students taking our Ford FACT elective. In addition, the curriculum of our electronics courses that precede our Ford elective was also revised to better prepare students for the OEM programs and future employment.

In addition, we simultaneously implemented a new teaching methodology for our students and instructors called Accelerated Learning. Accelerated Learning is a total system for speeding and enhancing training, course design and delivery, as well as addressing participants' learning styles. There is a learning curve for this new teaching methodology for our instructors in all our courses. However, it has proven to be more challenging in our electronics courses. While we are addressing these challenges, we expect that our per-student tuition rates will be impacted for a quarter or two.

The second primary reason for our 2% student rate increase relates to a lower-than-normal amount of students taking two courses at the same time, which equated to approximately $800,000 for the quarter. Due to capacity constraints at some of our mature campuses, we have had a difficult time scheduling students to take two courses simultaneously. In one instance, we've dedicated additional space to accommodate students that are requesting to take two courses at the same time.

As we move into our third quarter, capacity constraints will be alleviated to some degree because our densities are traditionally lower during that time frame. When students are taking two courses, we earn revenue for both classes the student completes, yet the student is only counted once in our average undergraduate student calculation. We do not expected that this trend will continue at this rate, however. We do expect normal fluctuations based on student demand and class availability. As a result, we expect per-student rate increases will be at the low end or slightly below our typical tuition rate increase for fiscal 2005.

Turning now to our balance sheet, we increased cash and cash equivalents to 46.8 million at March 31, 2005, compared with 42.6 million at September 2004. Approximately 16.1 million of cash has been provided to our current lender to collateralize our letter of credit required by the Department of Education.

Capital expenditures for the six months ended March 2005 were approximately 22.1 million compared with approximately $8 million for the same period last year. This significant increase relates to our Norwood purchase of 12.6 million for the building and land and approximately 515,000 of capital expenditures related to retrofitting the facility. Our capital expenditures typically vary with our student population as well as planned program enhancements and expansion. Assets are typically 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% of total revenue. New and expanded facilities add to our ongoing or maintenance capital expenditures.

Now I will provide an update to our student statistics, which also contributed to our strong performance for this quarter. Our average undergraduate enrollment for the three months ended March 31, 2005, was 15,517 as compared to 13,006 for the three months ended March 31, 2004. Our average undergraduate enrollment for the six months ended March 2005 was 15,521 students, an increase of 20% from 12,931 students for the same period a year ago. Undergraduate enrollment at a point in time as of March 31, 2005, was 15,155 students, compared to 12,834 students at the end of the prior year.

Now I would like to spend some time discussing a new expansion opportunity. We're planning to expand our MMI Arizona location by 500 feet during the fourth quarter of fiscal 2005. We plan to incur approximately $3.6 million in property, plant and equipment to expand this facility during the fourth quarter of fiscal 2005, of which approximately 1.8 million relates to land. An additional investment of approximately 1.4 million related to training aids will be required in the first quarter of fiscal 2006 as the population grows. The expansion raises our anticipated capital spending range for fiscal 2005 to 50.5 million to 52.5 million.

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 new margin targets, quarter three 2005 revenue growth targets and a recent accounting pronouncement impacting UTI.

Our current target for fiscal 2005 year-over-year revenue growth ranges from 21 to 22%. We are reconfirming our revenue guidance for fiscal 2005. We're also maintaining our annual net income target range of 11 to 11.5% for fiscal 2005.

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

Next, I would like to focus on a recent accounting pronouncement that impacts UTI. In December of 2004, the Financial Accounting Standards Board issued a Statement of Financial Accounting Standard related to accounting for stock-based compensation. The pronouncement was made effective for interim or annual periods beginning after June 15, 2005. Recently, the FASB delayed implementation of the pronouncement and it is currently scheduled to impact us beginning in the first quarter of fiscal 2006. Accordingly, our estimates above do not include any effect of this new pronouncement.

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

Thank you, Jennifer. Before we take questions, I'd like to comment on some calendar items related to UTI. We held our first annual meeting on February 16 at our newly relocated Avondale campus. Two new board members, Linda Srere and I, were elected at the meeting to serve one-year and three-year terms, respectively. In addition, Conrad Conrad and Kevin Knight were reelected to serve three-year terms. Our existing auditors were also ratified.

We're scheduling several conferences over the next quarter and we look forward to seeing some of you during our travels. We will post any presentations made during the meetings on our Investor Relations section of our website. Before we take questions, just a friendly reminder to limit your questions to one per rotation in the queue. Operator, we would now be happy to take any questions.

(Operator Instructions). Mark Marostica, Piper Jaffray.

My question relates to conversion rates, a popular topic today. I wondered if you could comment on the conversion rates in the quarter, perhaps comparing them to the last two quarters and break up your answer into your target markets -- you know, your high school graduates, at 18- to 20-year-old student, and then your working adult targets.

Yes, I can. I'd be happy to do that. Our closing rates, and this would be the conversion rates, for the adult market, which is through our campus-based representatives, has remained stable. And those rates remain very strong even for our new sites. On the high school market, while we don't measure it in terms of closing rate due to the sheer number of students that are exposed to the representatives in the high schools, we have seen very good performance from our high school reps across the United States in all of our regions. So I would say that all of the indicators from a sales performance standpoint are strong.

Okay, thanks. And then one quick follow-up on the lead mix. Have you altered your lead mix at all over the last quarter?

The lead mix has changed over the last quarter, and this is specifically for the adult market, where we have moved more to the Internet. So you're seeing slightly above 50% of the leads coming from our Internet advertising, with the next highest medium being TV and followed by magazines, referrals, etc.

And at the risk of going too long here, it begs the question with others in your peer group having difficulty converting Web leads, it sounds like you guys have done a great job on that front. Any best practices or indications as to why that's the case?

I believe the reason is that we are able to target a specific audience in that we're very specialized in the training that we offer. So we are not forced to use broad banner advertising. And a number of the leads coming through the Internet perhaps are driven by a number of other marketing channels such as TV, magazine, representatives out and across the high schools, and they are simply captured as Internet leads. So I think that a lot of the leads coming through the Internet are basically using keyword searches and they are driving through our micro sites. And that's why we're continuing to see very strong performance from the Internet marketing efforts.

Greg Cappelli, Credit Suisse First Boston Corporation.

I want to thank you on behalf of all of us on the phone for actually meeting your enrollment growth expectations. It's refreshing -- not you guys, but from an industry perspective. Your thoughts I'd like to get on the U.S. auto market and how you guys might be impacted either negatively or positively if we continue to see slowing sales there.

That's a good question, Greg. We are in conversations on a regular basis with our partners in the automotive industry. And as you may expect, they have experienced or been under pressure. There is an effort to focus on cost-cutting. I can tell you that we have not felt any of that at this point with any of our programs. And due to the quality of the relationships that we enjoy, we are currently working with them so that we can make the best use of the facilities and the resources that they've employed in these programs to not impact the throughput of the students. So we're looking to create win-win contract negotiations with them so that it's actually more profitable for us, not increasing their costs significantly and addressing their immediate concerns.

And I'd say, based on the relationships that we have with them, we're very pleased with the progress. Just as a reminder, in terms of our total revenue that we would be receiving from the automotive industry or OEM partners, is basically 5% or less than our total revenues. So, just in terms of the relevance to the total revenue picture, it's not having any significant impact at this point in time.

Hey, Kim, just to clarify, do you know if in general they are trimming the level of mechanics to save costs at this point?

We have not had any indication of them trimming the number of technicians that they are currently looking for to train, and I think BMW is a good example of that. We have not cut back on the graduate-level program, and they have launched an elective program, which would ultimately increase the number of technicians going into the BMW dealerships. So we're not seeing that, but I do think training is a cost center for them, and so there is pressure on training costs.

Okay. One quick clarification also on the pricing that you talked about earlier. So basically from a peer price standpoint, if you take mix out for just a minute, you plan on raising prices more than 2%?

What we do, Greg, is twice a year, we basically increase our automotive programs 2.5%. And as a reminder, the 2.5% is based on the time they enroll, not the time they start. So we have consistently done that on the automotive side to equal 5% on annual basis and then roughly 2.5% on the motorcycle basis. And we would expect to increase those at the same level. What we're talking about is the current student population, where you've not seen year-over-year increases in the range of 3 to 5%. And what we were providing were the reasons we believe that is the case.

Howard Block, Banc of America Securities.

Good afternoon, and congratulations on another solid quarter. The question I have first is on the BMW program that you mentioned. Is this in sort of the Ford FACT and Toyota TPAT realm? Is that the same type of program?

Yes, it is the same type of program. I don't believe it will be as large in scale as Ford FACT, simply due to the volume of dealers that BMW has relative to Ford. But it's the same concept. It's a 12-week elective. And provided the students meet the grade/attendance requirement and some other special criteria from BMW, they can opt to take this program and simply pay the tuition with no obligation to go to work for BMW and no obligation from BMW to employ them.

Okay, and at any point in time, how many programs like this do you sort of have in the incubator, and over what period of time are you -- sort of forecast period do you have for these programs?

Well, we're in constant conversations with a number of OEMs, many that we do not have any relationship with today. And I wish I could give you a forward look as to how many are actually truly incubating. But it's very difficult to predict when these will come to be. It takes a long time to develop and evolve the relationships. And we continue to focus on them. But I can't say that we have X number at any given time in the hopper. We're just very proactive and responsive to the opportunities as they present themselves.

Okay, and do you track over the course of, let's say, a year sort of the average term per student or tenure or academic term?

Yes. I mean, it's typically 15.5 months right now, on average, we're seeing. And I'd say a couple of years ago, Howard, it was about 12 months. A year ago it was about 15 months. So we're seeing the trend towards longer programs. And again, I think that speaks to the passion of our students. They want all of the training and courses that they can get related to the subject matter.

Can I add one thing to that also?

Sure.

We're also at various stages of maturation with Ford throughout our system. We have -- it's more mature at our Avondale location because that's where it started. But we have some room to extend that program at most of our other locations. So we do expect that that will take it a little bit farther out as we look forward, and also Toyota being just at a single location today, we'll do the same.

Okay, but based on sort of the programs that you offer today and the vision that you have of new programs, we shouldn't expect that 15.5 months to ever become 18?

I don't know. I would say that getting to 18 would take many years if things remain the same as they are today. However, with the variation and changing needs of the industry, should an additional course or subject matter be added to it, that could be academic in nature, you could see a significant lengthening to the program. But I just can't speak to the timing of such.

Okay. I'll just sneak in one more before I jump back in the queue. If things slow in Sacramento, is it inconceivable to believe that some of the students in the pipeline could be channeled to Rancho Cucamongo or Arizona, and if so, what percentage roughly of students do think you sort of just lose until you have a real facility there?

We do not believe that we will lose any of the students and that's why we have a contingency plan. If we did not have a contingency plan, I do think the more you prolong a student starts from when they expected to, the more likely they are to not show to school. And that's why we have developed a contingency plan should we need it if there are other delays so that the students can begin as they would expect.

Mark Hughes, SunTrust Robinson Humphrey.

The capital -- capacity utilization in the second quarter, was that 90%? Was that what you were describing?

It actually was 83% for the current quarter. The comparative number a year ago for that same quarter was 90%.

Okay, yes. In terms of the proportion of starts that come in the second fiscal quarter, as a proportion of the total for the year, how important is the second quarter in terms of starts?

The second quarter is certainly not our strongest period. I would say it's our -- it would be third in order. Our fourth quarter tends to be our highest, almost identical to the first quarter of the fiscal year. So those are our two most significant quarters. We certainly do have a number of starts that occur during that period, and so they definitely are very important to us. It's just not the peak of our period.

Exactly. And then a final question, any more marketing spending associated with the MMI expansion? You described the additional CapEx; how about from a marketing perspective?

There's not a significant amount of marketing dollars that will be spent associated with that, simply because we have pent-up demand for students are already in the pipeline for that. What I will say, there will be some costs that will lead from an instructor perspective and student service professionals, because you'll need to bring them on board to be able to accommodate the extra student population. That's built into our model.

Jeff Silber, Harris Nesbitt Gerard.

With the kind of numbers your Company is putting up, I can imagine that you might be attracting some new competition. And I know there's a long lead time to do that. But I'm just wondering in the marketplace, are you seeing new competitors or maybe some old competitors kind of come back to life?

I would say that certainly we're seeing Corinthian focus on the automotive or in the technical space with the expansion of the Wyoming Tech brand. That's a brand that we have competed with for as long as I can remember in various regions of the United States. And I see that brand is growing in terms of its, presence, and so we're starting to see more campuses in the United States. I do believe that the offerings are different and that the demand, both from a student side and an employer side, seems to be able to support both of us today. In the future, that could change. But it's not something that I think any of us are feeling that there is a tough competitive environment.

The other would be Lincoln Tech, and certainly we've seen an expansion into the automotive and technical arena from them. And again, it's been a competitor that we've competed with for several decades. And, you know, I think the growing competition is healthy. It keeps all of us on our toes and makes our brand stronger and better in the process. But we're not feeling any negative impact.

Okay, great. And a quick follow-up for Jen. Jen, on the net income margin guidance for this year, I think you reiterated the 11 to 11.5%. If I remember correctly, last quarter, that included the stock-based compensation. I just want to make sure I have my facts correct. So now the 11 to 11.5% excludes stock-based comp, since you don't have to do that until next fiscal year. Is that right?

That is correct.

Okay, just wanted to double-check that. Thanks a lot.

And it also covers the extra costs for the expansion from an MMI standpoint that I discussed earlier, so (multiple speakers).

So they offset one another. Great.

Richard Close, Jefferies & Company.

Yes, I wanted to focus in on Sacramento and maybe Massachusetts. If you could just walk us through what the delays are, exactly, what are the potential downsides here with respect to -- is there any additional timing delays that could happen? What would happen at Massachusetts if you don't get the license? And walk us through that. And is it -- with the delays in California, is that in any relation to the state getting more strict with proprietary schools, or maybe a little additional details?

Sure. With Boston, I think from a construction standpoint, the real estate transaction is done; the permitting process is over. I feel pretty confident that there will not be any additional hurdles related to the retrofit and construction process in Boston. The only delays that could happen would be, as I said in the prepared remarks, an unusual licensing hurdle or accreditation hurdle. We've been in close contact with both the state and accrediting agencies and do not foresee any of those and are moving along as planned, as we have with all of our campus openings. So I don't see that as being a problem. But that would be the issue. And at any -- I guess what the risk might be there is simply a delay in starting the classes. It's not that you wouldn't get the license; it's that it might be delayed from an occupancy standpoint and getting them out to inspect the site.

However, we've not had that -- an issue such as that in any of the campuses that we have opened. So I don't anticipate it being that way.

Sacramento is a very different picture and that has much more to do with the land lease and the permitting process, and not, I guess, allowing us to begin construction on the building. And that's where the delays are. It has nothing to do with a focus on education coming into the area. In fact, Sacramento is inviting education -- is really looking to build that community. So it has to do with permitting and the land, and we're working as closely with them as we can to not incur any additional delays, but are confident that should there be delays, it will not derail our planned start in the second quarter of fiscal 2006.

Okay, but are you awaiting state license -- your state license in Sacramento, or--?

Yes, you actually do not receive the state license until the school is ready to open and they can inspect it and make certain that the equipment and building, etc., is there. And that's not atypical for any new campus opening. So it's just making certain that you fill out various stages of the application process as the process itself evolves. And we're on target in filling and completing both the state and accreditation applications, as we would at any other campus.

This would have mirrored exactly what happened at our Exton, Pennsylvania site, where we really didn't have the ability to have school licensure until they could walk through the facility. And it also had to be equipped, so that they could see the training materials were there and ready for the students at the point where they would begin their schooling.

One other additional point with respect to Sacramento. California is very familiar with UTI, as we have a campus in the Rancho Cucamonga area. So they are familiar with the curriculum. The curriculum is basically the same. And they're just looking to make certain that the facility is there and can accommodate our students loads and that there is sufficient equipment there. So, again, the focus there is not on licensing and accreditation. It is on permitting in the construction process.

Okay, that's very helpful. And then, Jennifer, if you could just revisit -- you said something about, I think, 1.3 million in higher sales and marketing, but that wasn't associated with lead costs. That's just new schools and new programs?

It's really looking at it on a common size basis for the quarter that that particular component was growing at a higher percentage of revenue simply because we're running some more advertising to fill in our vacant seats.

And that's just new programs and new schools?

It's new programs and new schools. Exactly.

And then on admissions reps, have you seen any change there? Obviously, that's a hot button right now in terms of quality of admissions reps, maybe tenure and all that. If you could talk a little bit about the retention of your sales force?

I think the retention of our sales force is very good. We have very, I'd say, strict monitoring practices. We try to keep our ratios between a manager and our representatives, I'd say, anywhere from 12 to 15 to 1, and in some instances it's 7 to 1 depending on the region and the number of reps or the number of enrollments typically being written out of that region. They are required to report on a weekly basis, relative to their high school visits, their number of appointments, etc. So there is very good contact with the representatives and we want to make certain that our recruitment efforts continue to stay and are respected for the quality that they are. So I'm not seeing deterioration in the quality of reps. And that's something that we will not allow to deteriorate. It's too important to our business.

And then one final question on the elective -- not the elective, but the retake rate, the increase there. You had mentioned the elevated requirements for electronics. Do you foresee any additional increase in requirements or performance for the students by some of your, I guess, the individuals that are -- employers that are hiring the students, where that would make your retake rate go up even higher, or maybe just additional detail there?

I do think that the retake rate will stabilize over time. And that comment must be offset with the fact that I do think we will get continuous feedback from our industry customers, because we're so focused on meeting their needs. And as technology changes, that drives our curriculum. And electronics, if you look historically, has been the course that we continue to add content and lengthen our programs to make certain that the students have a sufficient understanding and experience with electronics and computer technology.

This is a situation where we were working very closely with the OEMs. They raised the bar based on what they needed their technicians at all levels to understand. We integrated that back into our curriculum and believe that it is a short-term blip, but it does take time to correct it.

I think that the other thing, as Jennifer said earlier, it is compounded by the fact that we changed our instructor training and teaching methodology. And we believe that there will be long-term positive impact from that, but it is a change in the way they do things. And so we're learning as we go as to how to make the educational experience the best it can be for the students. And in doing so, we might take some minor setbacks with the instructors as they learn to do this.

The third piece is a good number of or percentage of our staff and our instructors are new. And with this type of growth, we are working as quickly as we can to train and acclimate those instructors to what they need to be doing in a classroom. And remember, these are primarily technicians who are now teaching. So I think that for us to see even a slight elevation speaks to the quality of our instruction overall that we're not seeing this at a much higher level. Historically, it's been higher than 11%, and this is relatively low at 6%.

Yes, this would be still our second-best year from a retake percentage standpoint. But year on year, it is still an uptick of a percent in this particular period.

Okay, and then maybe a final question I will slip in here. On the human capital side, you just talked a little bit about it. Do you find finding -- do you believe that being able to find qualified teachers, qualified administrators and all that is going to prevent growth going forward?

I don't think finding qualified people prevents growth. I think integrating and acclimating them to our culture and making them immediately productive is what could slow growth if we don't do that effectively. And that's where our focus is. It's finding the right people, training them for the right job and helping them add value as quickly as they can so that they can be productive to the overall Company. So it's not a matter of finding. It's a matter of utilizing the talent in the right way as quickly as we possibly can.

And that's really one of the reasons why we set our growth targets at a more measurable, paced rate, at 20 to 25% on an annual basis as opposed to some of the larger targets that we might have even achieved when we were a smaller business because of that integration factor.

Congratulations.

Michael Lasser, Lehman Brothers.

I'm just trying to get a better sense of perhaps some of the cost increases you might incur over the next couple of quarters as you enter new markets. Maybe you could offer a little bit more guidance or commentary on what you are anticipating for increases in selling and promotional expenses. I know for the third quarter, you are coming up against a pretty sizable increase in the last-year period. So any additional commentary you could provide would be helpful.

I think that what we're going to begin to see, in particular related to our Boston facility, is that we have not yet begun spending much of our advertising directly around that campus, because we're not licensed yet to advertise specifically for that school. And so you will see an uptick in the third and the fourth quarter specifically driving student population to the Boston area at the point where we are able to advertise directly for it. It will follow very similarly our new store model, but it will skew a little bit more into the third and fourth quarter than it did as we looked across fiscal '04 period, if that's helpful to you. So more will be concentrated in the third and fourth quarter.

It's helpful. And just as a quick follow-up, if you look out to the beginning of 2006, would you have to incur redundant costs should you have to go to your backup plan for the Sacramento location? Thank you.

Not necessarily from a recruiting standpoint, because we've really spent our -- where we're spending now to build that pipeline of students to accommodate those start dates that we've got out there. But what you would see if we took on a different phase is some capital expenditures associated with that site from a retrofit standpoint, and, you know, the lease costs that would be associated with a separate building. So there would be some cost, but it shouldn't have a significant impact for fiscal '06.

Howard Block, Banc of America Securities.

Hi, it's Derek here. A question on Massachusetts. While you haven't been approved to open your doors by the state, correct me if I'm wrong, but you have been approved to operate a sales department? Is that correct? And what does that mean -- you can advertise, you just can't actually enroll a student?

Yes, you are exactly right. We have been authorized to advertise and promote that the campus is coming, and just like we have in previous openings, because we advertise on a national basis. There are students who are currently enrolled or enrolling for some of our campuses that are already licensed that we would expect to transfer to Boston. So we are allowed to promote, etc., but we're not allowed to enroll specifically for the Norwood campus until we receive that license.

Great, and then in terms of the construction process for Norwood, how close is the facility to being in a presentable form for state licensing purposes?

I'd say that we're right on plan and that we would hope to have -- well, it's really, in terms of the -- it's not just that construction, it also has to do with getting the equipment, etc., in there. But my hope is that at the beginning of summer they are out there starting to take a look at it. So I'd say we're probably 30 to 45 days away from having it into a presentable fashion where the state can start to look at the facility.

Great. And then in Sacramento, when did you begin that permitting process and when did you submit your paperwork? And then perhaps what specifically is slowing it? Did they just have not a chance to review anything yet, or they want a lot of additional information?

You know, I can't give you the specific date that we've submitted it (multiple speakers).

It was either late December or early January -- late December, early January time frame.

It's just delays in every step of the process in trying to get this piece of the project to completion. And it's just sitting on people's desks waiting for review. It's those types of things. There's nothing that is big or worrisome; it's just taking a lot longer to get through each piece of the project. And we have somebody out there who is staying on top of it, working side by side, because we could not get it accomplished in the traditional way working strictly out of our home office. So we're just having to stay on top of it and push it through the system because we're not getting the response. And my guess is due to the volume of construction going on in the Sacramento area.

I had heard that from our group that they had had a number of files ahead of us that needed to be reviewed. And then they take you in the order that they are received. And if they have a backlog, it does extend the permitting process quite substantially.

Got you, great. And then just Jennifer, could you provide it, if you have it, the deferred revenue and accounts receivable for the -- in the quarter? And that would be it.

You bet. The receivable balance is 19,000,330. And the deferred balance is 35 million point six (ph).

Greg Cappelli, Credit Suisse First Boston Corporation.

Just so with the comments you just made on both Boston -- or Norwood, sorry, and California, what would you consider the drop-dead date of when you need to have licensing before you would consider it delayed?

You know, with Exton it was right up until -- it's like a week or so before we planned on opening our doors. And I would say August would be the time-frame for the Boston facility, and it would move into the end of the calendar year for Sacramento. But they will push it right up to the start date, and a delay might be three weeks. It doesn't necessarily mean an entire quarter.

Mark Hughes, SunTrust Robinson Humphrey.

Just so I'm clear, the costs that you gave, the extra cost for the expansion of 750 plus the 190 this year versus 800 last year. Are those all capital and, I guess, marketing expenses that you incurred in the quarter, or is that just the P&L expense -- the marketing expenses?

That's just the P&L expense.

Right, and so that equates to the 1.3 plus 500, I suppose -- or no, I'm sorry, I got that wrong -- the 1.3 million plus the 500,000 for occupancy costs, how does that relate to those expansion numbers?

The 1.3 million for sales and marketing costs was on a common size basis for the quarter. So if you were to look as a percentage of revenue, there was a higher amount quarter-on-quarter expense as compared to revenue for that quarter. So they are a little bit different, but also drivers of net income, and that's what we were trying to tie back to.

Right, and so that was the comparison year-over-year. These are the extra expenses we have this year, thus the little margin dilution?

Exactly.

(Operator Instructions). Management, at this time we appear to have no further participants who have cued to ask a question. If you would like to conclude with any remarks, please do so at this time.

I would just like to thank all of you for joining us on our call today and we look forward to seeing you out at some of the conferences or next time on the phone for our quarterly review. Thank you.

Thank you, ma'am. Ladies and gentlemen, at this time we will conclude today's teleconference. We thank you for your participation on the presentation. If you would like to listen to a replay of the conference, please dial 1-800-405-2236 or 303-590-3000 with an access code of 11028642. (Operator Instructions). We thank you for your participation on today's presentation. At this time we will conclude. You may now disconnect, and please have a pleasant evening.