Universal Technical Institute Inc (UTI) 2006 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Universal Technical Institute Inc.'s Fiscal First Quarter 2006 Conference Call. [OPERATOR INSTRUCTIONS] A replay for this call will be available for 90 days at www.uticorp.com or alternately, the call will also be available through February 15th of 2006 by dialing 1-800-405-2236 or 303-590-3000 and entering the passcode of 11051945 followed by the pound sign. At this time I would like to turn the conference over to Ms. Jennifer Haslip, Chief Financial Officer of Universal Technical Institute. Please go ahead ma'am.

Thank you. Hello and thank you for joining us today for Universal Technical Institutes quarterly conference call. During the call we will discuss the results of our fiscal first quarter, ended December 31, 2005 and then open the call up to your questions. The company's earnings release was issued after the market closed today and is available on UTI's 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 performance and results to differ materially from those discussed in the forward looking statements.

Factors that could effect 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 [and so] 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 statement whether as a result of new information, future events or otherwise.

In addition, the company adopted statement of financial accounting standards number 123R, which was effective October 1, 2005. SFAS 123R requires the company to recognize equity based compensation expense for all stock option and other equity based awards. Prior to its adoption the company accounted for stock based awards to employees in accordance with accounting principals [ward] opinion number 25.

As a result of the company's adoption of 123R, the company's conference call includes certain financial measures that may be deemed non-GAAP financial measures under the rules of the Securities and Exchange Commission. These non-GAAP financial measures are provided to enhance the reader's overall understanding and provide greater comparability of the company's interim and annual financial performance for fiscal 2006. This information should be considered in conjunction with the company's financial results prepared in accordance with GAAP. At this time I would like to turn the call over to Kim McWaters, Chief Executive Officer. Kim?

Thank you Jennifer. Good afternoon ladies and gentlemen. Thank you for joining us to review our first quarter fiscal 2006 results. On today's call I'll begin with a company overview and a review of our first quarter. And then I'll provide an update on our campus expansion efforts and other operational initiatives. Jennifer will then provide a more detailed review of our financial results as well as update our forward-looking guidance. I will then provide some closing comments and open the call up for your questions.

Universal Technical Institute has enjoyed 40 years of success as a respected quality brand in the education sector. We provide recruitment, training and placement services to the automotive truck, collision repair, and motorcycle and marine industries. We have 10 geographically diverse campuses serving more than 16,000 students. Our student population is primarily male with approximately 60% being recent high school graduates and the remaining 40% adult learners pursuing career changes. In addition, we have 20 manufacturer sponsored training centers providing both graduate level training and corporate training for automotive and diesel manufacturers throughout the United States.

We are pleased to announce another strong quarter of earnings that include significant expansion of several of our campuses. Net revenues for the first quarter were 85.5 million, up 17% from the prior year. Net income for the first quarter was 10.9 million, excluding equity based compensation, an 11% increase from the prior year. Expansion losses included in the quarter for fiscal 2006 were 1.2 million higher than the prior year quarter and were primarily related to our Sacramento, California campus.

As we fill in capacity during fiscal 2006 we expect that operating margins will begin to improve as compared to the prior year. Our expectation is that margin improvement will occur primarily during the fourth quarter of fiscal 2006. Average undergraduate enrollment for the first fiscal quarter of 2006 was 17,427 students, compared to the same quarter a year ago of 15,525, an increase of approximately 12% year-over-year. Our average undergraduate student population was approximately 1% lower than our internal expectations for two primary reasons.

First, we had a small impact from the Gulf Coast hurricanes that impacted several of our southern campuses. As we expected show rates from these regions have been negatively impacted. The decline in show rate in the coastal region equated to approximately 60 less students in the first quarter. We expect this trend to continue for the next couple of quarters as these areas rebuild and local job opportunities remain strong. We anticipate conditions in the Gulf states to continue to negatively impact our ability to recruit and show students in this region as effectively as we have historically.

Second, we had more students who opted to take a break from school during the holidays than planned for. Because a large percentage of our students relocate to attend school, this is the one chance they have to return home during their program. Therefore, students took a leave of absence or intentionally withdrew during the course to maximize their holiday break. This impacted both our average and ending student counts for the first quarter.

We ended the first quarter at approximately 76% capacity utilization, including the new capacity created with the opening of our Sacramento, California campus and the expansion of our diesel program in Exton, Pennsylvania. This compares to 83% utilization in the same period a year ago.

Next I will provide a brief update on new campus openings and campus expansions. In October 2005 we started our first class of students at our newest campus in Sacramento California. Today the student population at this campus is approximately 150 students, which is in line with our expectations. Our plan is to remain in the current temporary facility until the summer and then relocate to our permanent site, located approximately 1 mile from our temporary location. Construction is underway, however the substantial amount of rain has slowed our progress. We expect to occupy the new building during the summer barring anymore unusual delays.

To ensure we can accommodate our growing student population and deliver a quality educational experience, we are increasing our training square footage at the temporary facility. The expansion will also provide a small buffer for any further construction delays. We expect to incur approximately $4 to $500,000 of additional capital expenditures related to the temporary campus.

Our admissions and operational teams have done a fantastic job with the facility and are working very diligently to ensure the satisfaction of our students in anticipation of a state of the art facility. The permanent campus, once fully constructed, will accommodate automotive, diesel and collision repair training for a total capacity of 2,100 students.

At our Norwood, Massachusetts campus we have reached a student population of approximately 500 students since opening in late June 2005. We have experienced lower student persistent rates at this campus than we would have expected. We believe this is attributed to lack of consistent leadership at this campus with a relatively new management team and staff. Our school director position has been vacant for several months.

Despite the best effort of our campus team and continuous home office support, this vacancy has negatively impacted operational results. Recently we have seen improvement in key operating trends, including student and employee satisfaction, which we believe will translate into improved performance at this campus over the next few months. We are focused on selecting a new campus director, as this remains a top priority.

At our Exton, Pennsylvania campus we have approximately 1,310 students currently enrolled in the program. Average undergraduate enrollment for this location is slightly ahead of our new campus model. The campus can accommodate up to 2,420 students including the recent expansion of 500 seats for our diesel program. We expect over time that approximately 25 to 40% of automotive students will add diesel to their program, however it typically takes several years to achieve that level.

Next I'd like to update you on our FlexTech program, our blended e-learning initiative. Our current student population in Avondale remains at approximately 100. student outcomes remain strong and we have high satisfaction levels with both students and instructors.

Of our 40 graduates, seven have been accepted into our manufacturer specific training program, continued improvement in our advertising and recruitment efforts remains a key focus. It has been difficult to recruit students into FlexTech, as most believe they are more suited for the traditional programs. However, once students are in the program they really enjoy the learning experience. We remain optimistic that with time and a growing base of students who find success in the program, we will be able to grow the popularity of the program. We do anticipate taking this program to other schools once we receive regulatory approval.

In addition, we're excited about the numerous e-learning application our investment in FlexTech has created. First we are using e-learning for student tutoring purposes. It is having a noticeable impact on educational outcomes at our Avondale and Norwood campuses in the electronic courses. We believe this will ultimately have a positive impact on retake and persistent rates. In addition, it creates excitement among the larger groups of students to endorse the training methodology that should help our overall recruitment efforts into FlexTech.

The second application for e-learning is a variation of FlexTech that would not be considered distance education. This variation would allow students to complete the online portion of their training at a UTI campus in a supervised, yet self paced, computer lab. This would create flexibility for students and cost efficiencies for the company. In addition, it would allow us to expand the program to states where we are currently prohibited from offering e-learning under distant education regulations. We believe this will be a multiyear process but we'll keep you updated as we make progress with our regulatory agencies.

The third e-learning application we are piloting currently is a high school e-learning course branded Universal Auto Tech 1. It is a basic course designed for anyone who operates a car. This gives our educational representatives a product to take into the high schools at a time when vocational education is being de-emphasized. This online course is being offered free to select high schools for the first two years of adoption as a way to cement UTI's commitment to vocational education and the industry. In addition, we believe it will create a state of readiness for students to experience a UTI education in an e-learning modality.

As previously mentioned, we are in the final stages of completing our national footprint expansion project. We have identified several opportunities for expansion beyond fiscal year 2006. We expect our future campuses at maturity to range from 700 to 2,000 student capacities, designed to meet the needs of employers and students in select local metropolitan areas.

In addition, we plan to expand existing campus program offerings and develop new offerings throughout our campus system. We expect to be able to provide more detail on future expansion plans once we complete our research. This should occur during the third quarter of fiscal 2006. This summarizes our national footprint expansion progress and future plans.

Next, I'd like to provide an update on our show and persistent rates relative to the prior year. I'm pleased to say that our operational efforts to improve retake rates and persistence rates are working. We have stabilized our persistence rates and they remain consistent with our last earnings call report. Our retake rates have also stabilized compared to historical periods.

Our show rates for the last seven months, June 2005 through December 2005, indicated 120 basis points of deterioration as compared to the same period a year ago. December's show rate was the main contributor to the 70 basis point decline since our previous report. Excluding the Gulf states our show rates were consistent with the prior year for the December quarter.

Through January 17, 2006, we experienced lower than expected student starts of approximately 300 students as compared to our internal plan. This impacted 6 of our 10 students and related to both lower than expected show rates and the number of applicants that enrolled for the specific start dates in January. This in large part was driven by (1) a lingering impact of hurricanes in southern regions; (2) the continued future student service process refinement across admissions, financial aid, and future student services; and lastly by a significant transition in our marketing department in the last quarter.

The first quarter of 2006 was one of significant transition for our marketing department, which included the departure of our Senior VP of Marketing. We do believe this move will best meet the future needs of our organization -- a national search for the position is underway. Meanwhile I am confident in the team's ability to execute according to plan despite the change.

We also named new advertising agencies and a new call center. During the quarter we transitioned to new ad agencies that primarily serve as media buyers for television ad placement. The new agencies are responsible for buying and placing approximately 75% of our television and radio buys. UTI buys and places the remainder.

Due to the transition to new advertising agencies, 500,000 of planned advertising spending did not occur. This negatively impacted lead generation recruitment activity and starts during the first quarter. Lower spending and advertising occurred during a quarter that is normally challenging due to fall season programming, sweeps month and holiday advertising.

In January, after the transition was completed and normal spending resumed we did see lead flow normalized but enrollment in start activity are expected to lag. In addition we are approximately 80% completed with the transition to our new call center. We have been very pleased with the noticeable improvements in lead capture and conversion. We were also able to implement warm call transfer that enabled the center to transfer calls during business hours to a live representative. This has been a very positive transition.

Due to the significant transitions in marketing, the lower than planned advertising expenditures and the increased focus on local advertising, our average cost per lead trend was unfavorable for the quarter as compared to the prior year. However, we did see this stabilize in January as well. As a reminder we do expect to see slightly higher costs per lead as we spend more on local market television advertising to support our newer campuses. As I've stated previously, these ad buys are more costly than the national regional cable buys that have been the mainstay of UTI's advertising plan.

While the cost per lead for local advertising may be high, the cost per local start and graduate is typically favorable. The focus on the local adult market remains important because it allows us to balance our student population throughout the year.

Today, 75% of our advertising spend is on television. However nearly 60% of our leads are sourced to the Internet. UTI continues to test different Internet lead generating activities. Some have proven very successful, others have not. We continue to invest in the strategies that demonstrate potential and discard those that ultimately are a waste of our resources, time, talent and money.

We believe consumers in general, and most specifically, generation Y consumers have changed how they prefer to receive information about brands. Events, internet and direct marketing have become key mediums for influencing their decisions and buying patterns as TV continues to lose its effectiveness due to increased clutter, fragmented audiences and high cost.

According to research by Jack Morton, Worldwide and DYG event and experiential marketing is the medium most likely to influence purchasing for generation Y consumers. We believe this is especially true with our students given their natural inclination to hands on learning.

To this end, for the past several years, we have been testing innovative lead generating activities classified as event or experiential marketing using a very disciplined approach. We have invested in building relationships with key partners in this space just as we have partnered with OEMs and suppliers in our training programs.

Such partners include publishers, event marketing sponsors, media companies, race teams, industry customer suppliers and employers. Together we are working to create event and experiential marketing opportunities to promote our individual brand, leveraged co-branding opportunities and to provide potential students the chance to experience our brand in a new way, reinforcing the opportunities that await them with a UTI education.

We are gaining traction with our future tech initiative at local dealerships. This is a grassroots local student recruitment effort that provides students the opportunity to experience the working environment of a dealership and promotes future employment opportunities for the dealer. In addition we have sponsored exciting events at powerful marketing venues such as Supercross and Super Street Events, Monster Jam truck events and other racing type venues. As a sponsor of these events we have a large captive audience that is already predisposed to our brand and message.

We consistently reach them through a variety of advertising and promotional efforts during the event. The Q collegiate challenge sponsored by Primedius Hot Rod Magazine is an example of a unique lead generating activity that also drives student involvement at the campuses. This event culminates this weekend with a showdown competition among four UTI campuses at a Houston raceway park. The event as well as the progress in building the cars has been covered by Hot Rod Magazine since November of last year. The actual race competition will be covered by Hot Rod TV in a 30-minute segment, which is scheduled to air in July.

Next, I will provide an update on our recent B-to-B activities and then I will discuss our progress on building key industry relationships. During the first quarter we conducted several future tech events at participating dealers that resulted in a number of signed applicants as well as employment opportunities for our graduates.

Building relationships with dealers and other key employers at both a national and local level is paramount to our strategy. As part of this effort our B-to-B team will be participating in the National Automotive Dealers Association Convention in Orlando this upcoming week. I will also be attending as I've been asked to speak to the nation's dealers on recruiting and retaining a new generation of technicians given that we are the leading supplier of their technicians and have found success in recruiting, training and placing technicians within the industries we serve.

Our B-to-B team continues to work with leading OEMs and other national accounts to offer them access to our trained graduates in addition to pursuing corporate training contracts. We continue to renew long term employer relationships that are not automotive OEM related. Historically with a limited supply of graduates, our primary focus concentrated on the immediate and growing needs of our OEMs and we restricted other employers' access to our students. By renewing our focus on these relationships, we have discovered a strong UTI employee contingent, the need for additional technicians, the willingness to donate valuable equipment and the opportunity to train their existing workforce.

One example of this is Crown Lift Trucks. Crown is the number one brand of electric lift trucks in North American and the sixth largest manufacturer of lift trucks in the world. Crown has more than 800 trained service technicians and employs more than 250 UTI graduates with 34 in management positions. Recently Crown Lift committed approximately $100,000 worth of equipment to UTI campuses for the industrial portion of our diesel program. The career opportunities and wages offered by these types of employers are very attractive and can rival or exceed those offered by OEM dealers.

Our B-to-B efforts are gaining momentum and appear to be benefiting all of our key stakeholders in a variety of ways. We launched the BMW motorcycle training with strong interest from MMI Arizona students. The first classes had more than 40 students in total starts in January of 2006. The BMW branded training environment is consistent with BMW's commitment to excellence as BMW equipped the class, bikes, equipment, books and other items necessary to teach this new elective. Although this program is offered at a competitor on the East Coast, MMI's program offers additional credentials that are not available at any competitor which is a powerful recruitment tool. We also visited with Harley Davidson this past month. They shared their technician expectations through the year 2010 and we believe we are on track to meet their demands. We do foresee an opportunity to enhance their course offerings to address new subject matter requirements. As you may recall, we are doing something similar with American Honda.

Lastly, I'm excited to share that we are very close to formally announcing a new automotive OEM relationship. We have received a verbal commitment and are waiting legal review of a proposed contract. Due to competitive and confidentiality reasons, I cannot disclose the name at this time, but can say we will most likely announce the relationship with a formal press release within the next few months. The new relationship is expected to take the form of an elective and be piloted at three different UTI campuses.

The offering is planned to be a nine-week elective and is planned to be eligible for Title IV funding. We are targeting the pilot to be launched toward the latter part of this year, assuming there are no unforeseen implications or changes to the pending agreement. And now I'd like to turn the call over to Jennifer Haslip, our CFO, for a detailed review of the financial results for the quarter and fiscal year. Jennifer?

Thank you, Kim. As noted in our press release, net revenues for the first quarter of fiscal 2006 were $85.5 million, up 16.6% from $73.3 million reported in the same quarter last year. Revenue growth was driven primarily by higher student enrollment as well as tuition increases. It should be noted that there was one less earning day in the quarter of 2006 as compared to the prior year. This resulted because of the holiday break and how it is distributed between the two quarters. Revenues associated with the loss day during the first quarter was approximately $1.4 million. The second quarter of fiscal 2006 has one additional earning day as compared to the prior year.

Income from operations for the first quarter was $17.3 million or 11.6% higher than the same quarter last year, excluding equity based compensation expense. The year-over-year increase for the quarter is primarily attributable to growth in overall revenue, efficiencies in educational services and facilities cost and selling, general and administrative costs. The increase was partially offset by expansion losses at our new Norwood, Massachusetts and Sacramento, California campuses of $2.3 million, as compared to expansion losses associated with our Exton, Pennsylvania campus and Norwood, Massachusetts campus of $1.1 million.

Several cost categories were favorable for the first quarter as compared to our internal expectations. In the educational services and facilities categories, the favorability related primarily to timing of purchases of training aides, tools and depreciation. In selling, general and administrative cost categories the primarily favorable categories are salaries and related benefits and advertising costs. During the December quarter, approximately $500,000 of planned advertising spending did not occur, due to the transition to the new advertising agencies. We expect to spend the $500,000 of planned advertising during the second quarter to support our recruitment efforts. We also transitioned to a new call center during the quarter and have been pleased with the enhancement and improvements in lead capture and conversion.

Income from operations for the first quarter was $16.3 million or 5% higher than the same quarter last year, including equity based compensation of $1 million. Net interest income for the first quarter was $746,000, compared with net interest income of $217,000 for the same period last year, due primarily to favorable interest income. Our tax rate for the first quarter was 39.6% compared to 37.4% for the same quarter last year and 37.4% for the fiscal year ending September 2005. The higher effective rate for the first quarter of 2006 as compared to the same quarter a year ago is primarily related to higher state taxes, a portion of which relates to a tax cut received during fiscal 2005 for the purchase of our Norwood, Massachusetts campus. We expect our tax rate to range from 38 to 40% for fiscal 2006.

Our net income for the first quarter was $10.9 million or $0.38 per diluted share, excluding equity-based compensation. This represents a 10.8% increase from $9.8 million or $0.35 per diluted share for the same quarter last year. Net income margin was 12.7% for the first quarter as compared to 13.4% in the prior year, excluding equity-based compensation. Expansion-related operating losses at Sacramento, California and Norwood, Massachusetts resulted in the planned margin decline. Our net income for the first quarter was $10.3 million or $0.36 per diluted share including equity-based compensation. This represents a 4.4% increase from $9.8 million or $0.35 per diluted share for the same quarter last year. Net income margin was 12% for the first quarter as compared to 13.4% in the prior year including equity-based compensation.

Turning now to our balance sheet, we increased cash and cash equivalent to $79.8 million at December 31, 2005, compared to $52 million at September 30, 2004. We generated $15.7 million in cash flow from operations for the first quarter of fiscal 2006, as compared to $21.5 million in the prior year. Cash flow provided by operations in the three months ended December 31, 2004, included a non-recurring change of $10.4 million related to the release of restricted cash, because of collateralizing a letter of credit with the Department of Education.

Capital expenditures for the three months ended December 31, 2005 were approximately $4.5 million compared with $3.1 million for the same period last year. Of the $4.5 million in capital expenditures, $3.6 million related to expansion activities as compared to approximately $400,000 in the prior year. Our capital expenditures typically vary with our student population as well as planned program enhancements and expansions. [Classes] 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% of total revenue. New and expanded facilities add to our ongoing or maintenance capital expenditures.

Primary driver for our company's solid performance is growth in average enrollment. Our average undergraduate enrollment for the three months ended December 2005, was 17,427 students, an increase of 12.3% from 15,525 for the same period a year ago. Undergraduate enrollment at December 2005 was 16,533 students compared with 14,809 students at the end of the prior year.

Now, I will update forward-looking guidance for our fiscal year ended September 30, 2006 which is broken down into the following categories -- our fiscal year 2006 expected revenue growth and annual margin target; second quarter 2006 revenue growth target; seasonality in the business; and fiscal year 2007 ranges for revenue and net income margin. Our target for fiscal 2006 year-over-year net revenue growth ranges from 19 to 21%. Our net income target excluding equity-based compensation ranges from 11.5% to 12%. Our net income target including equity-based compensation ranges from 10.5 to 11%. Our targets remain unchanged from our last earnings call during December 2005.

Turning to our second fiscal quarter of 2006, we anticipate year-over-year revenue growth ranging from 16 to 17% as compared to the second quarter of fiscal 2005. The range includes the shortfall in starts that occurred in January 2006 as well as allowing for a longer than planned break from school for a larger percentage of students than expected. As we have discussed in previous calls, operating income typically is the lowest during the third fiscal quarter ending June 30, due to a lower population of students. As our program length continues to expand and our adult population grows, we are seeing better utilization of our facilities during our non-peak periods of the year. The company's costs do not typically vary with changes in student population. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. These patterns may change however, as a result of new school openings, new program introductions and increased enrollments of adult students.

Looking further ahead, we expect net revenue growth in the 20% range for fiscal 2007. We expect that revenue growth will come from three primary sources -- average enrollment growth; program extensions and new elective growth; and tuition increases of approximately 3 to 5% per annum. In years when we add 2,000 seats or less it is expected that net income margins will improve slightly. During periods of more aggressive growth, net income margin improvement may slow or there could be slight margin compression for short time frames. The timing and expansion related expenses in most cases will be incurred prior to generating revenue. Now, I'll turn it back to Kim for a quick summary.

Thanks, Jennifer. Before we take questions, I would just like to comment on some calendar items related to UTI. We've recently filed our annual report and related proxy materials with the Securities Exchange Commission and will be hosting our annual meeting on February 28, 2006, at our Avondale, Arizona campus at 8:00 a.m. Phoenix time. We are scheduling several conferences over the next quarter, as well as a variety of investor field trips in the upcoming months. We look forward to seeing some of you during our travels and we will post any presentations made during the meetings on our investor relations section of our website. And with that we would now be happy to take your questions. Operator?

[OPERATOR INSTRUCTIONS] And our first question will come from Howard Block with Banc of America Securities, please go ahead.

Thank you, operator. Good afternoon everybody.

Hi.

Congratulations on a solid quarter. I wanted to ask about enrollment though. The comment that the population came in at about 100 basis points below your expectation and I think you said something like 60 fewer students -- and commented that I think that the trend should continue. Can you help us understand what "trends to continue" means and whether or not you think it might be prudent to revise the outlook you offered originally of, I think, 14 to 15% enrollment growth?

I'll take that one Howard, this is Jennifer. I think what we think is going to continue in the future periods is most related to the southern states and seeing local job opportunities being strong in those areas. We are being impacted from a recruitment standpoint in those particular states. The shorter term impact that we're seeing is that we have more students out on break right now. And so then they're going to be out for a little bit longer and we do typically see this vary from year to year a little bit. And we're expecting that those students will return over the next couple of week timeframe actually.

Okay, so I guess I just want to -- you still feel comfortable with the 14 to 15% outlook in light of the fact you were negatively surprised because of the impact of the hurricanes as well as the fact it sounds like things are a little slower in Norwood?

I do think that we have good opportunity to make those ranges. They -- we built in some of the hurricane impact as we talked about previously. And a lot of the issues that we're seeing related to advertising and a slight lag of that are being corrected as we speak. So, I think it's a little too early in the year to go away from those ranges.

If I could just add one thing relative to Norwood, Howard. Norwood is actually responding favorably from a recruitment standpoint. The issues we've had in Norwood have been retention dates. And again, I think that's attributed to the absence of a school director there. But our enrollment activity has been very strong in the Norwood area. It's just in the south and I think with the positive trend we saw in January, we're not at a position where we would change our ranges because we feel it can be corrected. And we started to see that in January.

Thank you. Our next question will come from Mark Marostica with Piper Jaffray, please go ahead.

Good afternoon everyone. I just want to clarify Howard's question as well, in terms of the start performance for January. Could you just clarify for me in terms of the miss to your expectation? How many students was it again?

It was about 300 students that we find in the first [start] of January that was lower than what we had expected.

And you said 60 were due to the Gulf Coast situation and were the balance then entirely in your minds due to the break situation?

Actually, when you discussed the 60 it related to the impact that we occurred in the first quarter ended December 31. And so the 300 was a combination of both what you're discussing -- those that are longer -- actually 300 is actually applied to the January start.

Got it. So, those are the two major issues the lingering affect of the Gulf Coast and the break situation that you think will correct itself over the next couple of weeks.

We do think that the break will correct itself in terms of students coming back. This is something that happens every year around this time, it's just -- we take a shot in the dark as to what that percentage is going to be and it varies year-to-year. And the other thing to consider relative to the 300 students that we were short, some of that is the result of the transition during marketing inside of that fourth quarter. That's what's being corrected. So, I think that that's not something that indicates a long-term trend from our perspective.

And on that point relative to the marketing situation and I know you're changing advertising agencies, is there any change in the advertising strategy or the lead generation strategy that you can cover for us that's a result in the change in Ad agency?

No, it's just we needed an agency that had greater capabilities in terms of our own growth goal. The strategy as we've discussed earlier is going to require more focus on the local market. And so that will be something that would be forthcoming. We don't necessarily retain an advertising agency in the truest sense, meaning they're primarily media buyers, they're not creative developer of content of advertising, et cetera. So the strategy is driven internally. And I don't think it's a significant change in terms of our advertising buys, it's just we needed agencies with higher capabilities.

Thank you.

Our next question comes from Michael Lasser with Lehman Brothers. Please go ahead.

Hi, Kim and Jennifer. Thanks for taking my call. To frame the question, I guess in looking at Norwood, Massachusetts compared to the Exton, Pennsylvania campus, and I appreciate that Exton probably performed a little bit better than the model suggested and Norwood is lagging behind a little bit. But, it started about the same time, they're both located in the same geographic area of the country and on the 1Q '05 conference call a year ago, the student population in Exton was about 700 -- so about 200 students more than Norwood. Is it fair to attribute -- call it 100 students to the retention issue? Maybe you could -- could provide just a little bit more commentary around that to connect the disconnect there.

Michael, it's about 60 students that we're off on retention through the December timeframe. And so that's the contributing factor, with relative to retention. And then the other component of it is that we're drawing students from the same areas to both schools. And so there's a focus being placed on the adult market in surrounding -- the Boston area or the local market around the Boston area. And we're cannibalizing a little bit of Pennsylvania even though it is running a little bit ahead of plan -- to fill that other site.

Okay. And is there anything explicit -- is there anyway you can tie the drop-off in retention to describe the connection between the drop-off retention and the lack of campus leadership a little bit more closely?

Well, I can tell you whenever you see any negative trends at a campus, typically it's coming back to leadership and -- or the lack thereof. And this is a campus that has a new team with not a whole lot of people coming from our other campuses. And without leadership, I think it impacts the educational experience and quality. And with that students have an expectation of their educational experience and if we're not delivering on it, they leave. And I believe that that's what's happening, is we've had a disconnect in terms of delivering on our brand promise at that location and it's impacted our students' willingness to stay there, and that's being addressed now with the management team there, as well as significant home office support, but I can't ignore the impact that a vacancy has had at that campus.

Thank you very much for the commentary.

Thank you. Our next question comes from Kristen Edwards with ThinkEquity Partners. Please go ahead.

Hi, guys. It's along the same lines. Can you talk a little bit about your leadership at the Sacramento campus and what gives you confidence that that ramp-up will be smoother than Norwood?

Yes, the leader, the school director is in place and has been working very closely with our regional team out of our home office, whose been very involved, given the issues that we've had in Sacramento. While I can't give you any guarantees in terms of people's employment and their commitment to stay with us, I do believe that this is a quality individual who has been very connected to the ramp-up of the Sacramento campus. He's done a phenomenal job with the campus in a temporary site, and comparing that to Norwood, this was a situation where the school director was - he was given an opportunity that was too hard to refuse.

And so it's not that he wasn't a fit for us, it just didn't work out. Sometimes those things happen and they're hard to predict. We do our best to make certain that the person is capable and competent and going to be a culture fit, and I believe that all of the indications are there that suggest our campus director at Sacramento is a fit from both competency and a character standpoint.

Okay, great. And then you mentioned that the retake rate trend had stabilized. Does that mean you're - are you still considering changing your policy from two to one retakes?

Yes, we are still considering changing that, but this stabilization occurred prior to any implementation of that rule.

Okay. And then just to make sure I understand about the students on holiday break, is they are not included in the end-of-period school count, because they're technically on sabbatical. Is that right?

That's true. They've elected to take a break from school, and because they're not sitting in a classroom, they would not be part of that count.

Well, are they back in classes now?

Some of them have begun to return as we've migrated through January, and we would expect that to continue over the next two start dates.

Okay, great. Thanks a lot.

Thank you. Our next question comes from Jeff Silber with Harris Nesbitt. Please go ahead.

Thanks. I was wondering if we can get a little more color on your guidance. In prior quarters, you've given us net income margin guidance for the current quarter. I'm wondering if you're willing to do the same thing for the current quarter.

Jeff, we kind of broke our rule last time when we went to the net income margin in the first quarter of last year, primarily because there was a larger variance between external guidance in that particular area and what expectations were. That's not the case in this particular timeframe, and so we didn't feel it necessary to go down to that net income line.

Okay, that's fair enough. If I can shift gears to the turnover in your Senior VP of Marketing position, if you can give us a little bit more color in terms of what happened there, I'd appreciate that.

Well, for reasons of confidentiality and respect for a very long-term employee, I'm not going to discuss the details. I will say that we believe the decision was in her best interest and ours, and as I said earlier, I have a high level of confidence in the team's ability to execute on our plan, and I think January's performance was an indication of such.

I'd also just like to remind everyone that our Senior VP of Admissions is a 25-plus year employee and his senior management team is very tenured as well. So I don't believe it's going to create a disruption from a future standpoint, but I do think it was disruptive during the quarter as the transition was occurring.

So it's safe to say that those duties right now are under the admissions realm, and then when you get somebody in charge of marketing you'll be shifting over there?

I'll say that we have high-level directors, and pretty much functioning at a VP level in the marketing department, but our sales and marketing teams are working very closely together. This has been my previous experience, so I am involved as well, and I think we're on the right track.

Okay, appreciate the color.

Thank you. Our next question comes from Trey Cowan with Stanford Group. Please go ahead.

Hi, thank you very much. With respect to looking at the 500,000 or so in marketing and advertising expenses, can you kind of give us a feel for what the lead time is typically from a tracking a student until they actually enroll?

With the adult students, and that is typically where that 500,000 spend would be in the local markets --

That was going to be my next question.

-- it can be anywhere from -- I want to start on Monday if you have a start date to the next couple weeks, all the way out to four months' time. It just depends on the campus and the students interested in it.

So it's safe to assume that the 60% of your population that is the high school student is -- it's out there in the future and it's probably a better - you're not as much concerned about that as getting the adult student that's coming in and sequentially over the year.

Well, from an advertising standpoint, yes, the primary focus is on the adult recruitment. The only concern that we have from a field standpoint is what Jennifer mentioned early in some of the Southern regions that have been impacted by the hurricanes. There are some jobs there that are high paying, and it's just giving the students another reason not to commit to move out of state and get an education. So that is having some impact with our field reps in the Southern regions as well.

Okay. And then just one quick question about Sacramento. What is the capacity there as far as the number of students it can hold in a temporary building?

The temporary building is at 400.

Okay. And you were talking about some expansion to that, about how many students additional expansion is on that 400, or is that included?

That would be included in that 400 number. It's about 12,000 square feet that we're looking to add at that facility, and it's really to accommodate lab areas to accommodate that population.

Right, thank you very much.

Thank you. Our next question comes from Mark Hughes with SunTrust. Please go ahead.

Thank you very much. The January start, you talked about 300 students. Is that included in the quarter-end number or does that relate to fiscal 2Q?

That would relate to fiscal 2Q.

Okay. Is Sacramento eligible for Title IV funding, yet?

Not yet, although we've made it through two of the agencies that we have to work through and we're awaiting approval at the final step.

Got you. Any thoughts on timing on that?

It would be hopeful in the next six months. but that's about the right timeframe for that to get approved.

Right. And then, final question, in the K the tuition range at the low end was up about 11% compared to the prior year. Did that affect many students, sort of that low-end tuition price? And then what's the strategy in terms of pricing going forward, again, at the bottom end of the range? And this is for the auto tech program.

Okay. The mix of the students that we're seeing, the average stay of the student we're actually seeing increase slightly by about a week-and-a-half. It wasn't a dramatic change year on year.

Right. So that would -- if we're talking about the bottom end of the range for tuition, it's a lengthier stay, I guess, that affects that?

The lengthier stay just means that they're in school a little longer, so there's not a mix shift to the shorter programs, I guess, is what I'm saying. It's been pretty constant.

However, there is a discounting that occurs the longer the program, so the shorter programs have higher tuitions on a course by course basis than you'll find at the longer programs. I'm not certain we've addressed your question, though.

I guess I would have to take that probably offline to look at that a little bit more closely. My first instinct, though, is to say that we've added schools in the east that came out with a little bit higher pricing because the cost of occupancy and various other factors inside the business are higher there, and because that's when more of our additions have been added, that may be driving the cost up, but I can certainly follow up with you on that.

Yes, the sense of the question is whether the pricing for the lower end programs, or the shorter or less-expensive programs, whether that was up more meaningfully than other programs, and it's just a simple reading of the K, so you probably don't have the information in front of you, but just wanted to ask that.

Okay.

Thank you. Our next question comes from Greg Cappelli with Credit Suisse First Boston. Please go ahead.

Hi, guys, how are you?

Fine, how are you?

Good, thanks. Just a couple of follow-ups. Kim, just in general, the U.S. auto companies [that] have been in disarray and you're obviously dealing with a lot more than the U.S. folks, but just in terms of their layoffs, could that be impacting your enrollment at all? And - well, maybe you can just talk about that at first?

In listening to our representatives, we don't hear that as an issue or a barrier in the recruitment out in the field or at the campuses. I do believe that it weighs on consumers' minds, but we have not seen it become a barrier to our recruitment. I think what helps overcome that with the adult population is the fact that it's not a technology or information job that can be offshored. That really does help with the sales proposition for the adult student.

When you look at the high school population, they're enthusiasts and passionate about it and believe that they can still go down this path. That doesn't seem to be influencing them at all. And as we work out within the markets with the students at the high schools, the high school instructors, as well as just the adults, whether they'd be parents or spouses of potential students, we share with them that the most meaningful indicator in terms of the needs for technicians are actually cars in service, and the last two years have been the highest in our history as far as the number of cars in service and sales. So that's a positive indicator that really helps us in that area.

Okay, that makes sense. And then just when you think about the environment and the employment statistics in general, the tightening of the labor markets, is that having an impact at this point [inaudible - cross talk]?

It is not having an impact for the recruitment for the majority of our students. Where it's having the most impact, again, is in the South, and that's because there's a lot of high-paying jobs in rebuilding some of these areas damaged by the storms. So we are seeing it there, but it's very concentrated in that area.

Okay. Other than BMW, can you just talk about the strategic partner renewals that might be coming up this year for you guys? Sorry if I missed that.

Let's see. I know that we have Volkswagen and Audi, but it's actually at the end of the calendar year. Most of the major renewals we took care of inside of last year, and if I recall, that is it. We had Jaguar that was scheduled for May, and we've already talked about that program and the discontinuation of it, and I think that leaves us with Audi and Volkswagen and that's a December 31 expiration.

Great. One final one, actually. The stock comp, how is that split between ed services and SG&A?

The biggest proportion of it is going into SG&A. I think there's about 100,000 in this particular quarter that will end up in ed services.

Okay, great. Thanks a lot, guys.

Thank you. [OPERATOR INSTRUCTIONS] And our next question will be a follow-up question from Howard Block. Please go ahead.

Wanted to see if there's a possibility that the global warming phenomenon in this country could have any impact on recruiting or in the schools at all.

Oh, Howard, I don't know.

I didn't mean that facetiously, actually. I just meant in terms of better weather. Is it ever an impact -- a negative impact in the Northeast in terms of recruiting efforts or anything else?

No, I don't think it's an impact in the Northeast because those people are typically used to that weather and they actually prefer a closer location. So we've not seen that, if I'm addressing your question.

Yes, I think you are. And then, just in terms of the program with Mercedes that you talked a little bit about in the last call more than this in terms of the service adviser sales program, any sense of the success of it and whether or not there might be an opportunity to announce those with other OEMs?

We are having conversations about those with other OEMs, and I do believe that there is interest there. We're in developmental conversations with a number of them. We've had good success with the Mercedes program, and we're out there now building upon our success out there with the dealers. And so they're continuing to grow the programs and we remain optimistic about their growth and the opportunity to leverage that type of program across other OEMs using the nonspecific material that's related to Mercedes Benz.

Okay. And then in terms of fiscal '07 and beyond, I mean, should we still keep thinking about this 2,000 seat number and any sense as to when you may share more insight into the specific numbers, higher or lower than 2,000?

I think that that will come in the third quarter, Howard. We're making great progress on our national footprint expansion project, and we'll have a lot more visibility and clarity to what that looks like, and we'll be happy to share it at that time. But I think the earliest will be third quarter.

Okay. And then does - as we sit here with all of the discussion on this call about the 300, the 60, the impact of the hurricanes and so forth, you're holding to the 14 to 15% enrollment guidance, but would it be fair to say that today you have less visibility into that, or even a little less confidence into that than you did three months ago? Or would you say that maybe you were guiding conservatively three months ago and that's why you're still feeling comfortable about that or -- ?

I think that it's two things that are contributing to it. One is that we're pretty early in the year yet and we have the ability to make changes as we progress through the fiscal year. We've seen very favorable results on our retake rate, where we're now doing slightly better than we were in historical periods -- not much, but back to comparable. And rate per student has been coming in a bit more favorable because of that.

If you were to have included the missed day of revenue in the first quarter, that would have driven that rate up even higher than what it currently stands, just because there would have been an extra day during that timeframe. And I guess all of those factors just kind of lead us to believe that top line revenue growth of [219 to 21] is an achievable number. We've not gone down and talked specifically to the average undergraduate enrollment growth as an individual indicator here, but that's something that we can certainly comment on on our next call as to whether we think that range needs to change. But top line revenue, because of rate improvement, I think is still a solid number for us.

Great. Thank you.

Thank you. Our next question comes from Michael Lasser. Please go ahead, and it's a follow-up.

Looking back over your last year as enrollment growth has decelerated a bit, could you attribute any of that to increasing competition, and might you say that could be a factor moving forward?

I do believe that the competitive landscape has changed, and if you look at all of the competitors, we all seem to be doing pretty well in this space, so my guess is that it is playing into it. Typically, we don't hear that cited as a reason that we're not getting students. I mean, we're constantly asking whether the barriers out there, and I won't say that that comes up in the top three. But in some markets it's stronger than others, and I think healthy competition is good. It makes us stay on our toes and improves the quality of our brand and our educational experience.

And to follow up, you've been able to generate nice cash flow and have a healthy cash balance. Do you have a share repurchase program in place and is that something you might consider?

Certainly, that's something that I think we'll be looking at as we move into the future that, along with a number of other items. The cash is built in the first quarter for a couple of larger reasons. One is that we had a significant amount, a little over $16 million, that we released because we had a letter of credit that was backed with the Department of Education, and so that released into our cash availability. And as we progress through this fiscal year, we're going to continue to be spending a significant amount of capital expenditures. The goal for this year, or the plan for this year, was close to $75 million, and so we will use some of that up, but it's actually building in the first part of this year.

Sounds good. Keep up the good work, guys.

Thank you.

Thanks.

Thank you. Our next question is a follow-up question from Mark Marostica. Please go ahead.

Yes, I just wanted to ask whether or not you had any more data around placement rates that you could share with us.

Our placement rates remain very strong, and I just actually met with all of our employment directors last week, and they believe that the market continues to be very strong for our graduates. I can also tell you that the efforts of our B-to-B team working out there with industry continues to open up a significant amount of new jobs for our graduates that have typically not been posted on our open job boards. So, from an employment standpoint, the trend is very positive and continues to be very strong.

Would you expect placement rates to pick up this year compared to last year? I think they were 87 to 89% last year?

Yes, they were in that range, and I would expect it to hover around 90%. That's where it's been for the last decade, and it's just there are going to be students who chose not to go to work or who go on to pursue additional education or go into the military, and we just don't count them in our placement numbers. Another percentage, given the nature of our training, basically want the training as a hobby, and so their full-time employment may not be in the field for which we've trained, and we will not count those, as well. So there's always going to be a percentage that are not getting employment, but I can tell you, it's not because the jobs don't exist. There are plenty of jobs.

Fair enough. Thanks for the color.

Thank you, sir. Management, at this time, we have no additional questions in the queue and we thank you, and I would like to turn the conference back to you for any closing remarks.

I'd just like to say thank you for your interest in UTI and we look forward to seeing some of you on the road at the conferences, as well as the individual investor tours. If we see you then, great. Otherwise, we look forward to updating you on our achievements next quarter. Again, thank you for your interest in Universal Technical Institute.

Thank you, management. Ladies and gentlemen, at this time, we will conclude today's teleconference presentation. We thank you for participating on the conference call. You may now disconnect, and please have a pleasant day.