Universal Technical Institute Inc (UTI) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Universal Technical Institute Inc.'s fiscal third-quarter 2006 conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded. A replay of this call will be available for 90 days at www.UTICorp.com, or alternatively the call will be available through August 15, 2006 by dialing 1-800-405-2236 or 303-590-3000 and entering passcode 11066349 followed by the #.

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.

Hello and thank you for joining us today for Universal Technical Institute's quarterly conference call. During the call we will discuss the results of our fiscal third quarter ended June 30, 2006 and then open the call up to your questions. The Company's earnings release was issued after 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 provisions 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 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 consensus certification for new campuses; potential increased competition; changes in demand for the programs offered by the Company; increased investment in management and capital resources; the effectiveness of the Company's recruiting, advertising and promotional efforts; changes to interest rates and low unemployment. Further information on these and other potential risk 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 standard number 123R effective October 1, 2005. SFAS number 123R requires the Company to recognize equity-based compensation expense for all stock option and other equity-based awards. Prior to its adoption, SFAS number 123R the Company accounted for stock-based awards to employees in accordance with accounting principles (indiscernible) opinion number 25.

As a result of the Company's adoption of SFAS 123R, the Company's conference call include certain financial measures that may be deemed non-GAAP financial measures under 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, and thank you for joining us to review our third-quarter fiscal 2006 results. On today's call I will provide a high-level overview of the quarter, followed by an update on our five-point plan addressing progress on key operational initiatives. I will also provide an update on campus operations and the continued development of our strategic relationships with industries. Jennifer will follow with a more detailed review of our financial results before opening the call up to your questions.

Our net revenues for the third quarter were 84.1 million, up 10.6% from the prior year. Net income for the third quarter was 5.3 million, excluding equity-based compensation expense as compared to 7.6 million for the same quarter a year ago. This is primarily due to increased compensation and related costs, higher sales and marketing costs and depreciation. Margins for the quarter were under pressure due to lower utilization rates, increased advertising costs and higher staffing levels. Expansion losses for Sacramento and Massachusetts during the quarter were slightly higher than the prior year quarter also impacting our margins. Average undergraduate enrollment for the third quarter of 2006 was 15,166 compared to the same quarter a year ago of 14,572, an increase of approximately 4.1%. We ended the third quarter at approximately 61% capacity utilization compared to 71% for the same period a year ago.

Contributing to the lower utilization rate was the new capacity created with the opening of our permanent campus in Sacramento, California, the launch of an evening program for our automotive training at Orlando and the expansion of our diesel program in Exton, Pennsylvania. During the third quarter, we had approximately 400 fewer starts in the same quarter a year ago. Approximately two-thirds of the variance was caused by a lower number of applicants during the period. Typically the third-quarter starts are filled primarily by adult students who respond to advertising in the previous two quarters. This shortfall is not surprising given the challenges we face with lead generation during the first half of the year.

The other third of the shortfall related to a lower show rate. The show rate for the quarter was 255 basis points lower than the prior year. We experienced a declining show rate in insufficient applicants through our first start of the fourth quarter. On a positive note, persistence rates remained stable for our traditional cohort period of June through May and showed a slight improvement of 30 basis points for June, the first month of the new cohort year. Persistence for the quarter, which is a measurement of the persistence of our student body during the quarter, also improved by 70 basis points as compared to the same quarter a year ago. We believe that this is an indication that our efforts are gaining momentum.

Next I would like to update you on our five-point plan. As a reminder, the five-point plan included increasing the quantity and quality of leads, streamlining the distribution of leads to admissions representatives, offering shorter programs with lower tuition as an entry point, improving the future student experience from the time of application to start, and increasing student retention.

Point number one, increasing the quantity and quality of leads. Total leads for the quarter were up 12% compared to the same quarter a year ago. The average cost per lead increased 23% for the quarter on a year-over-year comparison due to the significant shift from Internet to television. Our media mix today is approximately 40% television and 52% Internet compared to a year ago with 24% television and 64% Internet. We have intentionally shifted our media mix to heavier television to improve lead quality, quantity and to enhance local and regional advertising efforts. A television lead can run as much as eight to 15 times the cost for an Internet lead. While television is more expensive, our television cost per lead actually decreased by 25%, which is impressive given the increase spend in 19 additional local and regional markets.

The increase in total television leads and the decrease in television cost per lead are driven by a couple of factors.

First, better url tracking which identifies television as the originating lead source. Stronger media buys driving cost per lead improvement. And three, new television created for both short and long form advertising driving an increase in response rates.

From an Internet perspective, cost increased 61% off a very low basis, which is attributed to a multiple of factors. Completion of url tracking, which identifies television, magazine and radio as the originating lead source. Expansion of our online marketing efforts beyond aggregators, search marketing and directory-based websites, which includes testing online ad units, sponsorships and email marketing. And the refinement and elimination of some high quantity low-cost lead vendors that were discontinued due to low conversion rates. And lastly, the integration of higher quality geographically targeted leads.

According to external sources, we have a very low Internet cost per lead and considerably lower applicant costs than most other educational companies. While this is great from an efficiency standpoint, we do believe that controlling costs at this level with this advertising medium has prevented UTI from taking full advantage of its lead generation opportunities over the Internet. We believe as do other external resources that raising our cost threshold will increase our Internet lead flow significantly. We will continue to focus on quality lead generation versus quantity through the Internet and will continue to maximize our Internet strategies of search engine marketing and optimization in addition to other online advertising opportunities.

To complement our existing marketing team, we have begun interviewing both external and internal candidates for the Senior VP of Marketing. We are pleased with the quality of the candidates and hope to have this position filled within the next few months. Meanwhile our marketing team is performing exceptionally well.

The second point in our five-point plan is to streamline the distribution of leads. As a reminder, UTI has two salesforces -- one that is dedicated to high school recruitment, which has been responsible for generating the majority of their own leads, and a campus-based salesforce focused on the adult market 19 years and older, which is dependent upon leads generated by the Company. Approximately 75% of our campus-based representatives business is conducted over the phone without any face-to-face interaction with the student applicants. Recent analysis has shown an improved close rate with a face-to-face interaction with certain student segments. As a result, we have redirected media leads from 19-year-olds to our field or our high school representative. This change occurred in July of 2006. We will continue to monitor the effectiveness of this decision and will direct leads to most effective representatives regardless of lead source.

In addition, we also regionalized our campus sales teams so they are assigned to a campus and responsible for driving student traffic to the specific campus. This complements our change in advertising strategies as well, moving from primarily national buys to a blend of national, regional and local. Historically it was difficult to control lead flow and student traffic as both as advertising and sales teams were primarily national, meaning they were able to enroll for all campuses. Their activities were driven by where the leads originated. Cost per lead drove the media buys or lead origination. As a result, advertising spend may have benefited a certain region of the country or campus and deprived another.

While it was a very efficient and effective approach historically, with the expansion of our national footprint and varying levels of capacity, it became less effective over time. Now lead and sales goals are campus-specific as are our advertising buys, and the admission teams have been regionalized to better support this approach.

The third point is offering shorter programs with lower tuition as a way to appeal to students who cannot afford or fund a longer program. UTI has applied to license a variety of shorter programs at UTI campuses. Representatives have been trained to enroll students in the longer program given the employment opportunities additional training creates for our students. While the shorter program variations provide a solid foundation for success as an entry-level technician, it will be sold only to those students who desire it based on affordability. We have long believed that our students and families look at the cost of education from an affordability standpoint, focusing on monthly payments versus the total cost of the program. While we're getting some resistance to the total cost of the program, we still believe the greatest barrier to a student showing the school and staying in school is their monthly payment requirements. Thus, we continue to focus on alternative funding sources to improve overall affordability.

The fourth point is focused on enhancing the future student experience from the time of application to the time the student starts classes. This plan includes removing obstacles so that students are prepared to come to school, that they have their start money saved, their tuition financed and an apartment leased. This effort has been largely centralized over the last few years and has been a major focus. In January we moved a proven leader into this division, and she has made significant changes including staffing, increased training and process improvement. While we believe there is still opportunity for continued improvement to come from other automation, as well as more meaningful human contact, the key barrier is the unfunded portion of the student's tuition. Adding alternative funding sources, shorter program lengths will help this team advise our future student who are concerned about affordability.

The fifth point relates to improving student retention. The key to this initiative is alignment across all functional areas on the importance of student retention and how their individual roles contribute to the success of our students. Staffing critical leadership positions at the campuses and continued training in all areas has helped. In addition, providing the students with access to our FlexTech curriculum in a tutorial format for key electronic courses will be rolled out to all UTI campuses by the first quarter of fiscal 2007 with the majority of locations up and running in August of 2006. We have had good success with this new technology at both our Avondale and Norwood campuses and are really excited about the future opportunity. Meanwhile, we are pleased that our focus on improving retention over the past year is working as evidenced by our most recent retention rates.

To strengthen our leadership team and better support our campuses, we have divided the current responsibilities of our Senior VP of Operations into two roles. Roger Speer, our Senior VP of Operations and 18-year veteran, will move into the Senior VP of Custom Training Group and Support Services role. Sherrell Smith, a 20-year veteran, will assume the role of Senior VP of Operations and will be responsible for Campus Operations and Education Services. Sherrell most recently held the position of Regional Vice President and had previously served as a school director for our Avondale campus. We believe the changes in organizational structure, as well as individual roles and responsibilities will improve campus operation, education support services, as well as support future business opportunities with our industry customers through our Custom Training Group.

Next, I will provide a brief update on our new campus openings and campus expansions. As of July 21, the student population in our Sacramento campus was approximately 290 students. We moved into the 115,000 square foot facility during late June with a smooth transition for our training and student services area. Construction on the facility will continue to support the addition of Diesel and the Collision Repair program. During the second phase of construction, we will continue to utilize the temporary facility to accommodate students enrolling in these programs.

The Diesel and Collision programs are scheduled to begin in the fall of 2006. Utilizing both facilities, we have a current capacity of 1800 students. At maturity, the permanent campus will accommodate 2100 students.

At our Norwood, Massachusetts campus, we have reached a student population of approximately 710 students since opening in late June 2005. This compares to 550 students reported in our second-quarter earnings call. Persistence rates have begun to stabilize and student satisfaction has improved significantly. Our new school director has made a positive difference at this location as evidenced by key operating trends and employee morale.

In addition, we have determined that there is strong demand for both a Diesel and Collision program in the Norwood area. As such, we have begun the construction needed for these programs. The Diesel program is expected to begin training in the first quarter of fiscal 2007, and the Collision program is planned to begin in the first quarter of 2008. This program expansion will add 500 seats of collision training and will not impact the current automotive capacity of approximately 1900 students. We anticipate capital expenditures for this expansion to be approximately 14 to 16 million for the fiscal 2007 year.

At our Exton, Pennsylvania campus, we have approximately 1120 students currently enrolled through July 21, which compares to approximately 900 students a year ago. The campus can accommodate up to 2420 students with the expansion of our Diesel program which added 500 seats. We expect over the next several years that approximately 25 to 40% of automotive students will add Diesel to their programs.

While our focus for the next 18 months will be on increasing capacity utilization at our current campuses, we are committed to future expansion once we achieve our historical utilization rates. Our national footprint study is identifying a number of future UTI campus locations and the optimal program dispersion across these campuses. While we are anxious to share the results of this study, for competitive reasons we're not going to identify future locations until necessary. However, the idea of smaller sites, serving both the needs of students and industry customers as is sound strategy that can be accommodated in many key markets. In some instances, there are underserved markets where UTI can easily expand without competitive pressures. In other markets, UTI will need to capture market share from other for profit educators or public community college.

There is an opportunity for UTI in all key markets to gain market share by building a local presence or acquiring a competitor. We believe our unique industry-driven strategy and demand pool business model is superior and will continue to create measurable value to both our industry and student customers.

From an industry customer perspective, our relationship is progressing as planned with Nissan. The nine-week Nissan elective is scheduled to begin within the next few months at our UTI Houston and Orlando campuses, as well as at NASCAR Tech in Morrisville. Student interest in the elective is very strong as expected.

As previously announced, our graduate level training program with Jaguar is expected to end in September with a full class. The decision to discontinue this program was driven by lower-than-expected unit sales and cost pressures. We are also working with Audi and Volkswagen of America on their contract renewal. The current contract expires at the end of the calendar year.

During our negotiations, we strive to create a business model that improves operating efficiencies, mutual cost reduction and increased profitability for UTI. As a result, we will consolidate the Volkswagen program into two locations, one on the East Coast at our Exton campus and one on the West Coast at our Rancho Cucamonga campus. This will result in the closure of the Glendale Heights facility during the first quarter of fiscal 2007. If Volkswagen desires, we can accommodate more students at the two locations than we have previously trained under contracts at the existing three.

Moving to Diesel, the demand for Diesel graduates is very strong. We recently announced the addition of a new relationship with Cummins Rocky Mountain. They are the exclusive Cummins distributor in the Rocky Mountains and Southwest areas. The three-year agreement is to provide a diesel graduate level program specific to their needs that will support technician demand at their distributors and dealer networks. The training is planned to commence in the second quarter of fiscal 2007 and will be delivered in a self-paced learning environment at our Avondale campus. Instructors will support students as they demonstrate mastery of specific skills. Both UTI students, as well as Cummins sponsored students, are expected to be trained in this program.

In addition, we are working with a number of employers desirous of hiring new UTI graduates and a number of companies interested in outsourcing training to UTI. International Truck is anxious for launch of their 15-week elective at the Glendale Heights campus in August. We graduate approximately 15 students from their graduate level program every eight weeks against a steady demand for 150. We believe that the need for Diesel graduates and the level of interest and involvement from a number of employers will continue to drive student interest in the Diesel program.

And now I would like to turn the call over to Jennifer Haslip, our CFO, for a detailed review of our financial results for the quarter and fiscal year. Jennifer?

As noted in our press release, net revenues for the third quarter of fiscal 2006 were 84.1 million, up 10.6% from 76.1 million reported in the same quarter last year. Revenue growth was driven primarily by higher student enrollment, as well as tuition increases. Our operating income for the third quarter of fiscal 2006 was 6.8 million, excluding equity-based compensation as compared to 11.5 million, which did not include equity-based compensation a year ago. The year-over-year decrease relates to higher operating costs and lower capacity utilization during the fiscal year, as well as higher expansion costs during the quarter at the Company's Norwood, Massachusetts campus and Sacramento, California campus.

Income from operations for the third quarter of fiscal 2006 was 5.7 million, including equity-based compensation, compared to 11.5 million for the third quarter of fiscal 2005. The fiscal 2006 third quarter includes equity-based compensation expense of $1.1 million. Operating margin for the third quarter of fiscal 2006, excluding equity-based compensation expense, was 8.1% compared to 15.1% for the same period last year. Lower than planned students, as well as higher operating costs, including compensation-related costs, advertising and depreciation, lowered margins as compared to the third quarter of fiscal 2005.

In addition, operating losses associated with the expansion of Norwood, Massachusetts and Sacramento, California were 2.5 million during the third quarter of fiscal 2006. Operating losses associated with the expansion of our Norwood, Massachusetts and Sacramento, California were 2.1 million during the third quarter of fiscal 2005.

Operating margin for the third quarter of fiscal 2006, including equity-based compensation expense, was 6.8% as compared to 15.1% for the same period last year. The third quarter of fiscal 2006 includes equity-based compensation expense of approximately $1.1 million. Net income for the third quarter of fiscal 2006 was 5.3 million, excluding equity-based compensation expense or $0.19 per diluted share from net income of 7.6 million or $0.27 per diluted share for the same quarter in fiscal 2005. Net income for the third quarter of fiscal 2006 including equity-based compensation expense was 4.5 million or $0.16 per diluted share as compared to net income of 7.6 million or $0.27 per diluted share for the same quarter in fiscal 2005.

Our net revenues for the first nine months of fiscal 2006 were $258.3 million, a 13.9% increase from 226.9 million for the same period in the previous year. Income from operations for the nine months ended June 30, 2006 was 37.7 million, excluding equity-based compensation as compared to 41.4 million in the same period in the previous year, which did not include equity-based compensation expense. In addition, operating losses associated with the expansion of Norwood, Massachusetts and Sacramento, California were 6.6 million during the nine month ended June 30, 2006. Operating losses associated with the expansion of Norwood, Massachusetts and Sacramento, California were 3.4 million during the nine months ended June 30, 2005.

Income from operations for the nine months ended June 30, 2006 were 34.5 million, including equity-based compensation as compared to 41.4 million for the nine months ended June 30, 2005. The first nine months of fiscal 2006 includes equity-based compensation expense of $3.2 million. Operating margins for the first nine months of fiscal 2006 was 14.6%, down from 18.2% excluding equity-based compensation for the first nine months of fiscal 2005, which did not include equity-based compensation expense. Lower than planned students, as well as higher compensation-related costs, operating expenses, advertising costs and depreciation lowered margins as compared to the first nine months of fiscal 2005.

Operating margins for the nine months ended June 30, 2006 was 13.4%, down from 18.2% including equity-based compensation expense for the nine months ended June 30, 2005. The first nine months of fiscal 2006 includes equity-based compensation expense of $3.2 million.

Net income for the nine months ended June 30, 2006 was $25.1 million or $0.88 per diluted share, excluding equity-based compensation, as compared to net income of 26.6 million or $0.93 per diluted share for the same period in fiscal 2005, which did not include equity- based compensation expense. Net income margin for the first nine months of fiscal 2006 was 9.7%, excluding equity-based compensation compensation, and was 11.7% for fiscal 2005, which did not include equity-based compensation expense.

Net income for the nine months ended June 30, 2006 was 23.1 million or $0.81 per diluted share, including equity-based compensation, a decrease from net income of 26.6 million or $0.93 per diluted share for the same period in fiscal 2005. Net income margins for the first nine months of fiscal 2006 was 8.9%, including equity-based compensation as compared to 11.7% in the first nine months of fiscal 2005.

Net interest income for the third quarter was 809,000 compared with net interest income of 403,000 for the same period last year due to favorable interest rates and higher interest income related to the investment of our excess cash. Our tax rate for the third quarter of fiscal 2006 was 31% compared to 37.8% for the previous quarter and 35.8% for the third quarter of fiscal 2005. The lower rate for the third quarter was primarily attributable to tax reserves that were released during the quarter. The favorable tax rate is not expected to benefit future periods.

Turning now to our balance sheet, we have cash and cash equivalents of 54.9 million at June 30, 2006 compared with 52 million at September 30, 2005. We have reproduced 611, 650 shares to date under our stock repurchase program and have recorded $15 million in treasury stocks. We plan to continue to utilize our share repurchase program. At June 30, 2006 we had retained earnings of approximately 3.8 million as compared to an accumulated deficit of 19.3 million at September 30, 2005.

Capital expenditures for the nine month ended June 30, 2006 were approximately 35.1 million compared with approximately 34.2 million for the same period last year. We are planning to spend approximately 55 to 65 million for capital expenditures during fiscal 2006. The range includes approximately 40 to 45 million of expansion capital spending primarily related too our Sacramento, California facility, as well as our two MMI expansion projects. A portion of our construction projects initially planned for fiscal 2006 will shift to fiscal 2007 due to the timing of completion for specific projects. Our capital expenditures typically vary with our student population, as well as planned program enhancements and expansions.

Assets are placed in service slightly ahead of when they are required for training purposes. We expect capital expenditures to increase over the coming quarters as we upgrade training equipment, expand existing facilities and complete our new expansion locations. We anticipate ongoing capital expenditures to range from 5 to 6% of total revenue. New and expanded facilities add to our ongoing and maintenance capital expenditures.

Now we will provide an update to our student statistics for the quarter. Our average undergraduate enrollment for the three months ended June 30, 2006 was 15,166 as compared to 14,572 for the three months ended June 30, 2005. Our average undergraduate enrollment for the nine months ended June 30, 2006 was 16,324 students, an increase of 7.7% from 15,155 students for the same period a year ago. Undergraduate enrollment at June 30, 2006 was 14,073 students compared with 13,867 students at the end of the prior year.

As we have discussed in previous calls, operating income typically is the lowest during the third fiscal quarter ended June 30 due to a lower population of students. As a result of lower capacity utilization during the quarter, margins were further pressured. The Company's costs do not vary significantly with changes in student population. We do expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. These patterns may change, however, as the result of new school openings, new program introductions and increased enrollments of adult students.

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

Thank you, Jennifer. Although our Company is faced with a number of external and internal challenges, we are starting to see very good progress from a lead generation standpoint, and I'm confident that our people are focused on creating solutions that will ultimately benefit our students, the industries we serve and our shareholders. And we will continue to keep you updated as we make progress.

With that, we would be happy to take questions. Operator?

(OPERATOR INSTRUCTIONS). Mark Marostica, Piper Jaffray.

The first question is on the capacity utilization topic. I think you mentioned you had realized 51% in the quarter versus 71% year-over-year. I'm curious if you stripped out the newer campuses like Sacramento, Exton and Norwood, what would your capacity utilization be more on a same-store basis this quarter versus the year ago?

We had reported that the capacity utilization was 61.4, and I think you might have mentioned it was 51.

I apologize.

That's okay. I will need to go ahead and calculate that, so why do you go ahead and ask the next question, and I can come back with that answer.

Okay. As my follow-up, with the emphasis of the Web as a lead source this quarter versus year ago period, I'm wondering if your plans are to continue to deemphasize the leads -- number of leads sourced from the Web from the current levels?

Yes, you know we think that it is a blend with the television and Internet, as well as print and radio, and we will continue to optimize and manage our efforts. And what is most productive and beneficial we will continue to invest in. As we talked earlier, we believe that investing more in television now helps us with our regional and local efforts, but we do believe that there is opportunity with the Internet as we increase our cost per lead threshold to allow more of the lead generators to generate leads for UTI and ultimately go through the aggregators such as the CUnet and Quinstreet. We believe that the caps we have had in place have actually limited the number of lead generators that would pay attention to UTI because we have been so focused on efficiency and that actually a slight increase in that will allow us to drive a higher quantity of quality leads through the Internet.

And I think Jennifer has the question to your first question.

Mark, if I were to exclude both Massachusetts and Sacramento from the population, we would see a 68% utilization rate.

And how does that compare versus a year ago?

Well, it would compare very closely to -- gosh, if I went back, I would have to take out the Massachusetts piece. I would doubt that it would be very similar, but I would have to get back to you on the specific number.

Greg Cappelli, Credit Suisse.

Just on the marketing front -- I am sorry if I missed it, did you guys mention how much the marketing and advertising spend was actually up year-over-year in total?

Last year was typically about 6% of revenue, and this quarter was going to be about 8 to 9. So Jennifer might want to clarify that.

The June quarter was actually up about 115 basis points from that. It would have been closer to 7%.

Great. That is helpful. And then just on the programs, do you guys envision cutting price in any of your core programs just in order to reinvigorate normal growth in certain areas of the country?

We have not considered cutting price on any of our core programs. We are looking at the variation of program lengths that we have mentioned earlier as a fallback position, and we continue to believe if we can find the funding and the students can afford it on a monthly basis that the overall tuition is not the biggest problem. So we're not looking at discounting tuition rates for the core programs at this point.

As far as the average revenue per student, do you still expect to see some increase there year-over-year?

I do think that we will see increases year-over-year, although I would not expect it to be at what you saw this quarter. We were benefited by a higher number of retaking students. So I would expect it to be more in that 2.5 to 3.5% range.

Were you guys pushing particularly hard this quarter on that retake rate or what was driving that?

It is really just seasonality, and students are opting to take more of those -- more classes -- two at a time. So it was not directed effort by our (multiple speakers) or double coursing. Yes.

Got you. Two more quick ones. Just on the recruiter, you guys talked about high school versus working adult just on the reps. Can you give us an idea percentagewise or a number of recruiters you have in each area that are focused on the high school versus non-school?

Yes, for the high school, we have about 168 employed today and plan to add 15 more over the next couple of months, and that would be the high school recruiters. From a campus perspective, we have about 90 and plan to hire a minimum of five or more in the next few months. So that gives you the breakdown there.

Definitely. Great. Just a final one. On the tax rate, what is your expectation going forward? It was lower than we thought this quarter.

It was and it was because we released some reserves in this particular quarter. We would expect that to return to a more normal threshold. So I would say somewhere between 37 to 39% range again.

Michael Lasser, Lehman Brothers.

So just doing the math, if leads were up about 13% or 12% and cost per lead was up 23%, that would imply advertising spend was up around 35%, and then backing into the 7% versus 5% as a percent of revenue, so it seems like advertising was up somewhere between 35 and 50% with the absolute spend year-over-year. How do you envision over the long-term you have to -- the increases will have to be to generate the enrollment growth that you think the Company is capable of?

Well, I cannot comment specifically on whether it is 35 or 50% over. As Jennifer said, it was about 7% of revenue for this quarter compared to a year ago at 6%. I will tell you we will continue to spend provided we get the results that we are achieving now, and they have been very positive results with the -- although we have increased our cost per lead, when you have given -- when you consider the amount of leads shifting from Internet to television, it is actually very good results, and we believe that the focus on television allows us to target more of the local and regional areas to specifically address our utilization rates at varying campuses.

My guess is that is going -- it could fluctuate between 7%, 8%. It could even be 9% inside of a month or a quarter if there are good lead generating opportunities, and we will continue to evaluate those based on the opportunities as they present themselves on a month over month basis.

Okay. And then when do you anticipate that you would be able to start the shorter length program?

The shorter length programs at a couple of campuses will actually be available this fall, and we will probably pilot the approach at one. And then in our next quarterly call, we will give you some statistics on the success of that, and based on the success of that pilot and the launch of it, we will determine how quickly we roll that out to the other sites. But we will have a number of sites licensed within the next couple of months.

So, to the extent that that program does pretty well, it could impact the revenue per enrollment moving forward?

It could. I can tell you just coming from our national sales meeting, our representatives are not looking at this as the ultimate or core program to promote. They want to use it as a fallback position, if you will, for students who simply cannot get funding to do it. So we don't see it as being a significant movement. We just believe it is going to help a segment of the population that we cannot serve today.

Okay and two more questions. You won't be taking down prices, but do you believe that the 4 to 5% prices increases that you have historically achieved are appropriate for this year and moving forward?

We do believe that it is probably 3 to 5%. It is going to be lower on the motorcycle side, and at NASCAR Tech we expect that to remain relatively flat. That will be largely driven by our negotiations with NASCAR as we look to renew those contracts.

Today to add to Kim's content, NASCAR Technical Institute is one of our -- it is really the highest program in the system. And what is occurring now that we have added some schools in the East and also expanded our Orlando automotive program is it is cannibalizing that particular site. So it is helpful for us to keep those rates more constant with the rest of the tuition rates across our system to continue to draw favorably to that site.

Okay. And just kind of putting it altogether, if I look back at 2004, the Company achieved a peak operating margin that year on an annual basis of 19.6%. Given that advertising, the increases in advertising are going to be likely higher moving forward than occurred back then, and it seems like capacity utilization as far as my notes was in the mid to high 80s at that point. Is there anything to believe aside from advertising and maybe a slightly different outlook for revenue per student given some of the factors there, is there anything to believe that the cost structure for the Company has changed in any way that should you resume back to the mid, high 80% utilization rate that it is reasonable that you could regain that peak margin of high teens, or could you even go higher than that?

I do think it is tied to capacity utilization as you just said. And when we get that back into the threshold of the 85 to 95% range, that is where you would see that or better margins from an overall Company perspective.

And that is why it makes sense right now to pay a little more for leads, especially the quality of leads that we're getting because every student -- it is a volume game -- and every student we can put in a seat helps us move closer to those operating margins that we had a few years ago.

Howard Block, Banc of America Securities.

This is Aramie Dimm in for Howard. I just wanted to follow-up. I know you mentioned a few specific campuses, but I wanted to go through a few others. I'm kind of curious if NASCAR enrollment has stabilized? I now we had had that impression based on conversations with some of the campuses, but I was wondering if you could confirm that?

I can tell you that we are starting to see improvement on the front end of the cycle, which is the lead generating activities as we have been far more aggressive in promoting the brand. It does take time for that to transition into actual applicants and then enrollments, and I think Jennifer is looking at the population right now.

We actually are showing a little bit of a downturn as compared to the prior year. It would have been about 15. students lower this year than it was in the prior year.

And again, if you think about this last quarter, that is largely driven by the adult students, which would have been dependent upon advertising leads generated in the prior quarter. So I guess my point is the things on the front end of the cycle such as the leads being generated specifically for NASCAR Tech have improved significantly, and we would expect to see those trends follow.

Great. And then at Houston and Glendale, are they still suffering from Hurricane Katrina?

Well, Houston was one that was impacted by Hurricane Katrina, and Glendale Heights was not so much. But Houston we continue to take a step forward and then a couple of steps back. I don't think it is fully attributed to the hurricane.

In the South we continue to see the same issues. I would say that from a show rate standpoint with the first start date in July, it was pretty widespread. We saw some deterioration at most campuses with the exception of the Rancho Cucamonga where we saw improvement, and I believe one in Arizona was relatively flat.

Trey Cowan, Stanford Group.

Looking at the changes you made to your marketing as far as going from a more national type of spend to a more localized focus, can you talk a little bit more about that and when you actually started that process or when it is going to start?

Yes, we started doing that the minute we engaged our new advertising agency. So we started to make that migration in January. I would say that we started to fully realize the benefits of their buying strategies and our brand power once our new creative was launched. So we started launching new creative over the last couple months. And just to give you an idea of what the improvement was, I talked about the last quarter or third quarter leads being up 12% year-over-year. And while that was good growth, it was really good given that on a comparative basis we had a lot of, I would say, low quality leads and a high-volume of them in the prior year period that needed to be replaced. Plus we needed to grow on top of it.

When you look at that quarter, April in itself was very challenging from a lead generation standpoint, but was more than overcome when we moved into May and June. When you look at the three-month trend of May, June and July, we actually saw 30% year-on-ear growth for that same period of time with each month continuing to improve upon the previous month.

So we just continue to see these trends strengthening, and we have a much better blend at the short form, the 30 second, the 60 second, the 30 minute. We are in 19 new markets as we talked about, and to be able to see our television cost per lead down by roughly 25% is very impressive because those local and regional buy are far more expensive than national buyers. So I am very impressed with the efforts of our marketing team, and working with our new ad agency is is starting to pay off.

So it sounds like things have not only stabilized, they are starting to improve a little bit again? Is that a fair assessment of your situation with your marketing effort?

I'm thrilled with our marketing team. As we have talked about, they have been operating without the Senior VP of Marketing. They fully transitioned the new call center and ad agency. We have new television creative as I mentioned earlier, and our Internet team continues to perform exceptionally well. In fact, I had a meeting with Tom Ferrara, the CEO of CUnet, and I asked him to give me specific feedback on our Internet team, and he said, your team gets it. They have been a leading force in the online educational marketing since the beginning, and I think the fact that we entered the interactive market early on and were able to leverage the strength of our brand provided us with the niche in the educational market and ultimately very low-cost leads in enrollment.

In addition, we just had our national sales meeting in July, and our sales teams came off of a very difficult and challenging year. Yet we left that sales meeting with a team that was really on a high and energized about what was ahead. They were really excited about the new advertisements, as well as the entire new print collateral with an interactive CD that tracks our students' usage or visits on our website. They were also very excited about the launch of UTI's power trip, and this is a mobile event marketing truck and trailer that has eye-catching graphics that carries a NASCAR simulator, a hotrod T-bucket and one of Michael Jordan's race bikes. This is something that we were able to do in combination or with our relationships with Ford and NASCAR at a fraction of the cost with new scope marketing.

Now the UTI power trip will participate in 40 key events, including like NASCAR and other motorsports events across the United States specifically in venues that are targeted or populated by our targeted audiences. They have already been to a number of race events, just recently left the Xgame, and the reports from the field are very strong.

So not only do you want to see improvement in volume, improvement in quality, which I heard that firsthand from our reps as well, you need your morale and momentum from the sales teams to be high, and it was at an all-time high when we left our sales meeting in July. So I'm very optimistic that the front indicators, the front piece of our business cycle is starting to show good improvement.

[Carrie Nelson], [SkyStone].

It is [Jeff Quarry]. I wanted to ask you about starts. You mentioned on the call that the starts were down 400 (technical difficulty)-- versus last quarter or this quarter last year. And if I recall, it was down 160 in the previous quarter. What are the total number of starts in each of this quarter and last quarter, i.e. what was the year-over-year start growth?

Well, the year-over-year start growth would have been a decline because we fell short by the 400.

But specifically is that 400 on a base of 3000 or 400 on what base?

Well, it is basically -- in 2005, in this particular quarter, it was close to 2900.

2900, so that is to say 400 on 33 gross. So your starts were down 12% or so year-over-year, and then what was the equivalent in the previous quarter?

The previous quarter I honestly would have to go back and look up the absolute number. I don't have that in front of me.

Got it. Let's say it was roughly the same start. That would be 160 on, call it, 3000, so call it negative 5%. So 6000 starts roughly, half comp down negative 5, half comp down negative 13. What is your outlook for the next quarter?

We are currently not providing an outlook as we go forward.

Jeff Silber, BMO Capital Markets.

Two questions. You had mentioned the alternative financing sources briefly in your remarks. Can we get a little bit more color on this? Is this something you might take on on a recourse basis?

I don't know that we are going to look at recourse, although we are looking at a number of opportunities today. It is more likely that we will look for a solution that will help our students be able to matriculate through school but not have such high monthly payments as they go through school. We are working with a provider today to work through that program and think we should have something in the not too distant future that would be available to our students.

Okay. Great. My second question is on stock-based compensation. At the beginning of the fiscal year, I can see we are guiding for higher stock-based compensation in the second half of the year or the quarter that just ended in the current quarter, yet you came in roughly stable. What kind of stock-based comps should we be expecting going forward?

I would think that the stock-based compensation would be fairly similar to this quarter, maybe a little bit higher because we did do a stock grant partway through this last quarter.

Mark Hughes, SunTrust.

Anything on the marketing costs front for the shorter programs, any anticipation of reducing cost to get those students in the door?

We're not looking at reducing costs to the core program. But obviously if they have fewer courses in the program, it will be at a lesser cost. In terms of our actual advertising and marketing materials, we are not promoting that. We just promote in general what our program offers, and we will leave that up to our representatives to determine whether that was the best option for the student. So we don't see marketing costs or any of those things changing to affect that market.

And then any update on the typical sales cycle with kind of the shift from the TV or to TV from the Web, just the normal time it takes from the first contact with a student until they come into the door. Any differences there and how long is it?

I would say year-over-year we have seen a longer process where typically we would say inside the three to four months, and we have seen it stretching out as far as six months. I do think that it is somewhat dependent upon the originating lead source, but I also think it is an indication of the times, meaning that many of them have to relocate so they are having to work longer to save their money to show to school, and so we don't get the commitment as early as we did before. So I think it is two factors playing into that.

Kirsten Edwards, ThinkEquity Partners.

This is actually [Ryan] in for Kirsten. I appreciate the fact that you are not providing guidance, but is there any comments you can make about general enrollment trends going forward and if you expect them to deteriorate from further levels?

Well, I think we've talked a little bit on our call about show rates, and that is one of I think the risk areas that we have got as we see that trend continuing even into the July -- the first chart that we saw in July. We have a number of efforts that are going towards correcting that particular issue for us. But it is very difficult for me to tell you exactly when that is going to occur. I'm also positive as Ken talked about in seeing the very front end of this process in lead generation being so positive for the last several months. We now need to see that turn into contracts, and in the next call I think that we will be able to update the group on progress in that particular area.

(OPERATOR INSTRUCTIONS). Howard Block, Banc of America Securities.

This is Aramie Dimm for Howard again. Just a few quick follow-up questions. Your reported enrollment of I guess 15,156. How was that relative to your internal plan?

Compared to our internal plan, it would have fallen short. Bear with me for a second. It would have been between 10 and 15% lower than our original plan.

Okay. And then again recognizing that you're not providing guidance, but would you mind giving us some color on how we can expect startup and preopening expenses to be versus prior year?

Well, from a startup standpoint, we have just moved into our Sacramento facility, and so you're continuing to see pressure on margins for that as we move into the fiscal fourth quarter. We want see breakeven at that school I would not expect for several more quarters. I don't have specifics -- I don't have specifics for each of the costs for the next few periods on the locations, but it is something that I think we could provide you in our next call a little bit more color on what some of those startup expenses would look like.

We are in the process of completing a couple of expansion projects as we have talked about, one being or two actually have been in the (indiscernible) location. Those are existing sites that are expanding, and so the pressure that gets put on margins is far less and for far shorter periods of time because we are able to utilize the existing workforce there and then just build the instructor teams and support services teams to help support that growing student population.

Mark Marostica, Piper Jaffray.

Just a follow-up on the point that you mentioned regarding your front-end showing acceleration in lead flow growth, yet the conversion rates or show rates are somewhat challenging. I wonder if you can give us a sense for what you feel are the top one or two reasons why you feel your show rate is down at this point, just so we can, as we look through the next, look ahead to the next few months and quarters how we can see that potentially turn?

Okay. We do believe that there are a number of contributing factors. Some are external and some are internal. From an external standpoint, the macrotrends, which are the low unemployment, and I would say general affordability are the biggest negative impacters to the show rate. As you know, unemployment rates are the lowest since 2001. And kind of working against this or in tandem with is our own internal policies where we have encouraged our future high school students to work before showing the school so that they could establish a work history and to save enough money for their first month's living expenses, which often equates to a couple of thousand dollars. Well, the unintended consequence of this policy has been a reluctance for them to quit their jobs given their pay levels, and then for others it is almost the reverse. It is taking them much longer to save the money than it has historically given the cost of fuel, etc., and that has actually pushed their start date out longer. The longer they push their start date out, it starts to lessen the likelihood of them actually showing to school.

So we have implemented plans to help depend students fund their relocation and startup expenses, and that is something that has just started to take place in the last couple of months. From an affordability standpoint, this remains a key issue for students as annual tuition continues to increase, as well as interest rates. You think about it, the U.S. Department of Education recommends something between the 8 to 12% range of gross monthly income as acceptable level for educational loans. For dependent students with acceptable parental income levels and the willingness to support their son or daughter, this is not an issue for them. However, there are dependent students whose parents who may have good credit are simply not willing to take out a parental loan or some have credit scores that prevent them from doing so, and this creates a funding challenge for the dependent student.

For independent students the challenge is even greater because they have less access to federal funds. So their monthly payment requirements today are being pushed beyond that 8 to 12% threshold while they are in school and upon graduation. That is why we're very focused on these alternative funding sources, working with the flexibility and program length to help them bridge the gap, and we do believe as some of these things start to gain momentum, it will positively impact the show rates. But some of what we're dealing with right now and going into the fourth quarter, it is simply difficult to undo what has already been created, and that is a perception that they cannot make the payment or that they cannot save enough money to start as they originally planned. We are working very closely to close the gap on that and hope to see progress, but until we do, we cannot speak with confidence that we see a change in trends.

Thank you very much for the color.

[Carrie Nelson], [SkyStone].

This is just a follow-up to the prior question as we were trying to work through the numbers. What do you expect from the negative comp in the last couple of quarters in terms of the enrollments? How long will it take for that to work its way through the system?

It really will take you completing the whole cycle, which is roughly 15 months on average for the student.

Okay. And then the current -- the timelag that you mentioned in the release, how long will it take for the current marketing initiatives do you think to lead to positive year-over-year start growth?

Well, the marketing efforts typically are feeding about 40% of our business. So even if you start to see conversion within four to six months, you also have the 60% that that is driven by our field representatives, and you are not going to see their start until next summer. So you will start to see improvement within the next four to six months, but it is not going to be across the board. It will only be for the adult students, and we will break out that success. But you're not going to see it from the field reps until a whole annual cycle passes, which is Jennifer's point.

Mark Hughes, SunTrust.

Actually I think my questions have been answered. I'm sorry, one question. Cash from operations in the quarter, could you share that?

Sure.

And then also bad debt. I'm sorry.

Cash from operations was actually 28.8 million for the nine months, and it was 52.3 for the previous nine-month period so for fiscal 2005. Bad debt expense for the nine-month period was 3.8 million versus roughly 2.9 million in the prior nine-month period, so bad debt is fairly flat.

How about for the quarter?

Again, I would have to go back and figure that out specific to the quarter. I have the nine months in front of me.

Trey Cowan, Stanford Group.

Okay, I hope I can make it two. One was on your CapEx. Looking forward is it fair to assume that it is going to be in a range of about 35 to 45 million for next year?

I would say that you are in the ballpark with that particular range when we look at the expansion that we talked about at the Massachusetts location, and we also have a little bit of cross-over CapEx that is occurring as we complete our Sacramento facility. You might be at the high-end of that range.

Okay. And just real quickly, how has bad debt been trending?

We have seen bad debt creep up slightly from a year ago period. If you wanted to look at 2005 a year ago, it was basically at 1.4% for the whole year. On a year-to-date basis, we are actually at 1.5, so it is really only 10 basis points different than the annual period a year ago.

But still relatively low. So great.

Yes.

Thank you. At this time I would like to turn the call back to Ms. McWaters for additional remarks.

We thank you for joining us on our call today, and we will be presenting at a number of upcoming conferences in September, and we hope to see you there. Otherwise, we look forward to updating you on our progress next quarter. Again, thank you for your interest in Universal Technical Institute.

Thank you. Ladies and gentlemen, this concludes the Universal Technical Institute Inc. fiscal third-quarter 2006 conference call. If you would like to listen to a replay of today's conference call, please dial 1-800-405-2236 or 303-590-3000 with access number 11066349 followed by the #.

Thank you again for your participation and have a pleasant day. You may now disconnect.