Universal Technical Institute Inc (UTI) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Universal Technical Institute, Inc. fiscal fourth quarter 2006 conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded. A replay of this call can be available for 90 days at www.uticorp.com, or alternatively, the call will be available through December 13 of 2006 by dialing 1-800-405-2236, or 303-590-3000, and entering passcode 11077327#.

At this time I would like to turn the conference over to your Chief Financial Officer of Universal Technical Institute, Ms. Jennifer Haslip.

Hello and thank you for joining us today for Universal Technical Institute's conference call. During the call we will discuss the results of our fiscal fourth quarter and year ended September 30, 2006, 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 affect the Company's actual results include changes to federal and state educational funding, inability to fill existing capacity, construction delays for new or expanded campuses, possible failure or inability to obtain regulatory consent and certifications for new campuses, potential increased competition, changes in demand for the programs offered by the Company, increased investment in management and capital resources, 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 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 #123R 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 of SFAS #123R, the Company accounted for stock-based awards to employees in accordance with Accounting Principles Board Opinion #125. As a result of the Company's adoption of this standard, the Company's conference call includes 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 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.

Thank you, Jennifer. Good afternoon, and thank you for joining us. On today's call I will provide a high-level overview of the quarter and year-end results, which will include a discussion on key operational metrics. Then I will provide an update on our five-point plan, followed by some specifics related to our campus operations and industry relationships. Jennifer will conclude with a more detailed review of our financial results before opening up the call to your questions.

Our net revenues for the fourth quarter were 88.7 million, up 5.8% from the prior year. Net income for the fourth quarter was 5.3 million excluding equity-based compensation expense, as compared to 9.2 million for the same quarter a year ago.

As previously disclosed, our fourth-quarter costs include 1.1 million related to a reduction in force. Approximately 70% of the risk costs were recorded in the sales, general and administrative category, with the balance in the educational services and facilities category.

Operating margins for the quarter were under pressure due to lower utilization rates and increased compensation, advertising and depreciation expense. Net operating losses for Sacramento, California and Norwood, Massachusetts campuses were 2.4 million during the fourth quarter of fiscal 2006, and compared to net operating losses of 1.9 million for Sacramento, California, and Norwood, Massachusetts campuses, as well as Exton, Pennsylvania reported in the same quarter a year ago.

Our net revenue for the full year is 347.1 million, up 11.7% from 2005. Net income for 2006 was 30.4 million, excluding equity-based compensation expense, compared to 35.8 million for fiscal 2005.

Operating margins for the year were impacted by the same factors as in our fourth quarter. However, net operating losses were 9 million for Sacramento, California and Norwood, Massachusetts for fiscal 2006, which compares to 5.8 million for Sacramento, Norwood and Exton for fiscal 2005.

Average undergraduate enrollment for the fourth quarter of 2006 was 16,278 compared to the same quarter a year ago of 16,169. In anticipation of higher average undergraduate enrollment for 2006, we began to expand capacity last year, and ultimately grew our capacity by 14% to 25,110 seats at our fiscal year end. This decreased our capacity utilization rate to 65%, compared to 73% for the same quarter a year ago. However, on a sequential basis, our fourth-quarter utilization rate improved from 61% in the third quarter despite adding 425 seats.

As we complete our expansions at Sacramento, California and our Arizona Motorcycle campus, we plan to add 900 seats during fiscal 2007. These additional seats are to accommodate the diesel and collision repair programs in Sacramento and the expanded Honda elective at MMI Arizona.

As planned, we will not renew a short-term lease at an off-site location near our Glendale Heights, Illinois campus. This will lower capacity at the location by approximately 120 seats. The building accommodated temporary demand until we were able to open our facilities in Exton and Norwood.

We had approximately 16,000 students start school during fiscal 2006, 3.1% lower than in fiscal 2005. Student starts declined in the fourth quarter by 3.1% as well, as compared to the prior year. However, we saw a sequential improvement in the rate of decline from the third quarter, which was 13.3% year-over-year.

As many companies within the educational sector have reported, we are also experiencing some declines in our show rates. Our show rate was unfavorable during the summer/fall start season by approximately 360 basis points as compared to a year ago. The timeframe reported is the five months from June through October of 2006 as compared to the prior year. Our show rate declines are attributed to a combination of the inability to adequately finance certain students' tuition expense, a tight labor market and internal process deficiencies.

On a positive note, persistence rates for our total student population improved for the fiscal year by approximately 100 basis points. While our initiatives around student persistence have shown favorable results, we believe the full benefits of our initiatives are yet to be realized.

We successfully graduated approximately 10,800 undergraduate students during the fiscal year, up 14.2% as compared to fiscal 2005. Approximately 70% of those graduates were automotive and diesel students. We are proud of our completion rate, which has remained in the 70% range for the last five years.

Our average program length for fiscal 2006 was approximately 16 months, an increase of 1/2 a month during the year. Program mix and elective programs growth were the main contributors to the extended stay of our students. Notably, our 2005 placement rate continues to be excellent at 91%, an improvement from 89% in the prior year. We continued to experience strong demand for our students from prospective employers.

Next I'd 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 41% compared to the same quarter a year ago. The average cost per lead increased 38% for the quarter on a year-over-year comparison, due to the significant shift from Internet to television year-over-year. While we have spent more on television, our television cost per lead declined by 19% for the quarter on a year-over-year basis. For the quarter our leads mix is approximately 44% television and 50% Internet, compared to a year ago with 24% television and 66% Internet. Of our total quarterly advertising expense, television was approximately 85% compared to 80% last year. Our Internet spend was 10% compared to 15% a year ago. This past year we intentionally shifted our media mix to heavier television to maximize lead generation through proven national media channels and to broaden our reach on new stations in regional and local markets surrounding our campuses. We recognize that our broadened advertising efforts would not be as successful as our previous television efforts on strictly niche national programming, but we needed to identify what other sources would prove valuable. We continue to gather data and make changes in our overall media strategy, and would expect our mix to become more balanced between television and Internet as we optimize our Internet strategies to generate quality leads.

Through Q4 we continued to see strong year-over-year growth in lead volumes, demonstrating solid interest in our programs well beyond our traditional enthusiast audience. We are pleased with that progress and the fact that we have started to experience year-on-year contract growth. However, we believe there is more to be gained from our increased investment in marketing. As we broadened our advertising reach beyond our traditional enthusiast students, we have discovered different needs and motivations in this population. This has made conversion of student interest into contracts and starts more challenging than we expected. But we are addressing these issues and believe this new pool of potential students is key to our future growth.

The second point in our five-point plan is to streamline the distribution of leads. As a reminder, UTI has two sales forces -- one that is dedicated to high school recruitment, which has historically been responsible for generating their own leads; and a campus-based sales force, which is dependent on media-generated leads targeted at the adult market.

Recently sales management modified the structure and scope of responsibilities for each sales force to improve our lead distribution process and customer service interface. In addition, we have continued to invest in the IT infrastructure to improve processes in lead capture and tracking, lead scoring and distribution, and the method and timeliness of response to each lead. We have seen significant improvement across most of the lead distribution categories, but again believe there is opportunity to further improve.

In addition, we recognize that the true measure of our efforts is how these leads convert to contracts signed, then to starts, and ultimately to graduates.

The third point in our five-point plan is about offering shorter programs with lower tuition as a way to appeal to students who cannot afford to finance a longer program. We recently received licensure of our shorter programs and expect to pilot the shorter programs at both UTI's Avondale and Houston campus during the second quarter of this fiscal year. This program will be promoted to those students who are unable to secure funding for the more preferred longer program. As students progress through school, we plan to introduce them to employers who may support their training or agree to pay their tuition through our [trip] program.

In addition, we continue to focus on alternative funding sources, industry support and scholarship programs to help students pay for their education. To this end, we recently engaged [Veronica Muri] as Executive Director of the UTI Foundation. The mission of the UTI Foundation is to provide eligible students with scholarships and grants for a technical education leading to a rewarding career. This year Veronica will focus on building the Foundation and recruiting board members to govern the entity. She has 23 years of experience in the nonprofit sector and most recently served 11 years as the Executive Director of the Society of Automotive Engineers, where she was responsible for securing $1 million grants from key organizations in the industry. Veronica has worked with the highest level of management in the automotive, diesel and aerospace industries, and we're excited about the potential to help these students through the Foundation who are challenged economically to come to school.

The fourth point is focused on enhancing the future student experience from the time of application to the time the student starts classes. This initiative is all about simplifying the financial aid process for students and removing obstacles so that the students are better prepared to come to school on their original start date. This effort has been largely centralized over the last few years. While we believe there is still opportunity for improvement to come primarily from further automation, as well as more meaningful human contact, we recognize the key barrier is still the unfunded portion of the tuition. To address such, we have renegotiated our alternative funding contract with Sallie Mae, creating more funding opportunities for our students, as well as better terms for their loan arrangements. We have revised and enhanced our recourse funding program to help students with more challenging credit histories to finance their education. We are continuing to investigate other types of funding opportunities for our students through a variety of programs and providers that offer alternatives to prospective students and balance risk for UTI.

The fifth point relates to improving student persistence. As I mentioned previously, our initiatives in this area have been producing positive results. In fact, in 2006 we achieved our highest student persistence rate in three years. We will continue to focus on student persistence, which has led to our average completion rate of roughly 70%.

Before I move into the campus update, I would like to give you an update on filling critical positions. I'm pleased to share that we have recently filled our two open school director positions at our California campuses. Our new Rancho Cucamonga school director came to us from the University of Phoenix, where he filled a similar role for several years. Our Sacramento director comes with 20 years of managerial experience in education.

In addition we've hired [Mike Conley] as our VP of Investor Relations. He has more than 15 years' experience in the field, and most recently was employed with a $2.6 billion global manufacturing company. We are happy to welcome our new team members to the UTI family. As for the senior VP of marketing, we are in the final rounds of interviewing and hope to announce our selection relatively soon.

Next I will provide a brief update on new campus openings and campus expansions. As of November 22, 2006, the student population at our Sacramento campus was approximately 680 students, as compared to 290 students reported in July. We are continuing to complete construction at our permanent location. The first phase, comprised of 118,000 square feet, was completed and occupied in June. Construction on the remainder of this facility is specifically to accommodate diesel and collision repair.

During this phase of construction we will continue to utilize the temporary facility to accommodate students enrolling in these programs through the third quarter of fiscal 2007. The collision repair program begins training in October of 2006, and diesel is scheduled to begin in the third quarter.

Utilizing both facilities, we have a current capacity of 1800 students. At maturity, the permanent campus will accommodate three programs and 2100 students.

Our Norwood, Massachusetts campus has reached a student population of approximately 1000 students since opening in late June 2005. This compares to 710 students reported in our third-quarter earnings call. Through the end of the 2006 fiscal year we had approximately 600 students on average for the year, which compares to our new campus model of 820 students planned for the same timeframe. The primary reason for the difference in (indiscernible) is unfavorable persistent rates that impacted the location during the first part of fiscal 2006. This trend has completely reversed during our new start cycle with the efforts of a new school director and focus from the management team. Today the school has the second-best persistence rate for our newest cohort group.

The campus broke even from an operations perspective during September 2006 after 14 months of operation. We have begun the construction related to our diesel program in the recently vacated space from a previous tenant. We expect to begin diesel training during the third quarter of fiscal 2006.

The additional program offering here will not increase overall seating capacity at this campus. However, this campus has additional expansion opportunity for the future.

At our Exton, Pennsylvania campus, we have approximately 1530 students currently enrolled through November 22, 2006, which compares to approximately 1400 -- I'm sorry -- 1420 students a year ago. This campus has been open for approximately 29 months and had on average 1295 students in school for fiscal 2006. This compares favorably to our new campus model, which would have projected 1170 students on average for the same timeframe. The campus can accommodate up to 2420 students with the expansion of our diesel program, which added 500 seats at the beginning of fiscal 2006. We expect over the next several years that approximately 25 to 40% of our automotive students will add diesel to their program.

We have completed the expansion of our automotive program in Orlando, Florida, adding approximately 770 seats throughout fiscal 2006, taking total capacity to 1395 for the program. Today we offer three sessions for student selection -- morning, afternoon and evening. Demand in the area has been strong, and we have seen this location rebound from the hurricane impacts and the dissipation of the construction boom discussed a year ago. As of November 22 we have 960 students in the program, or approximately 70% utilization after only a few months of availability.

At November 22, many of our mature schools had fewer students in attendance than a year ago. The year-over-year decline is between 140 to 450 students per campus. Our Avondale campus has been most impacted with the opening of our Sacramento campus and the inability to backfill the campus at historical rates.

On the lower end of the spectrum is Houston, down 140 students. On a consolidated basis, we are slightly below last year for all campuses by approximately 60 students.

Our focus for the near-term is increasing student enrollment and improving capacity utilization at our existing locations. We are committed to future expansion once we return to historical utilization rates across our campuses. We believe our industry relationships, brand image and quality training will allow us to successfully compete in a challenging economy; however, we do believe it will take some time to overcome current market conditions.

From an industry perspective, we have launched our Nissan elective at all three locations. Student interest continues to be strong for this specialized training. Today we have 50 students enrolled in the nine-week elective. We are focused on finding more ways to create value for our industry partners and believe this focus will result in further expansion of existing relationships to new campus locations, as well as consolidation of some manufacturer training sites to decrease training costs for our partners and improve profitability for UTI.

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.

Thank you, Kim. As noted in our press release, net revenues for the fourth quarter of fiscal 2006 were 88.7 million, up 5.8% from 83.9 million reported in the same quarter last year. Revenue growth was driven primarily by higher tuition rates.

Our operating income for the fourth quarter of fiscal 2006 was 7.8 million, excluding equity-based compensation, as compared to 14.4 million, which did not include equity-based compensation a year ago. The year-over-year decrease relates primarily to higher operating costs and lower capacity utilization during the fiscal year.

Income from operations for the fourth quarter of fiscal 2006 was 6.3 million, including equity-based compensation, compared to 14.4 million for the fourth quarter of fiscal 2005. The fiscal 2006 fourth quarter includes equity-based compensation expense of 1.5 million.

Operating margins for the fourth quarter of fiscal 2006, excluding equity-based compensation expense, was 8.8%, compared to 17.2% for the same period last year. Lower-than-planned students, as well as higher operating costs, including compensation-related costs of 260 basis points, advertising of 370 basis points, rent and utilities of 73 basis points, and depreciation of 128 basis points, lowered margins as compared to the fourth quarter of fiscal 2005.

Operating costs for the quarter also included 1.1 million related to our reduction in force. Net operating losses for Sacramento, California and Norwood, Massachusetts were 2.4 million during the fourth quarter of fiscal 2006, and compared to 1.9 million in the same quarter a year ago for Sacramento, California, Norwood, Massachusetts, and Exton, Pennsylvania.

Operating margin for the fourth quarter of fiscal 2006, including equity-based compensation expense, was 7.1%, as compared to 17.2% for the same period last year. The fourth quarter of fiscal 2006 includes equity-based compensation expense of approximately $1.5 million.

Net income for the fourth quarter of fiscal 2006 was 5.3 million, excluding equity-based compensation expense, or $0.19 per diluted share, as compared to net income of 9.2 million, or $0.32 per diluted share for the same quarter in fiscal 2005. Net income for the fourth quarter of fiscal 2006, including equity-based compensation expense, was $4.3 million, or $0.16 per diluted share, as compared to net income of $9.2 million, or $0.32 per diluted share for the same quarter in fiscal 2005.

Our net revenues for the year ended September 30, 2006 were 347.1 million, an 11.7% increase from 310.8 million for the same period in the previous year. Average undergraduate student growth and tuition rate increases were the primary contributors to the growth.

Income from operations for the year ended September 30, 2006, was 45.5 million, excluding equity-based compensation, as compared to 55.8 million in the same period during the previous year, which did not include equity-based compensation expense. In addition, net operating losses associated with the expansion of Norwood, Massachusetts and Sacramento, California were 9 million during the year ended September 2006. Net operating losses associated with the expansion of Norwood, Massachusetts, Exton, Pennsylvania and Sacramento, California were 5.8 million during the year ended September 30, 2005. The annual period also included $1.1 million of costs associated with our reduction in force that occurred during the fourth quarter of fiscal 2006.

Income from operations for the year ended September 30, 2006 was 40.7 million, including equity-based compensation, as compared to 55.8 million for the year ended September 30, 2005. The year ended September 30, 2006 includes equity-based compensation expense of $4.8 million.

Operating margin for the year ended September 30, 2006 was 13.1%, down from 18%, excluding equity-based compensation for the year ended September 30, 2005, which did not include equity-based compensation expense. Lower-than-planned students, as well as higher compensation-related costs of 206 basis points, advertising costs of 134 basis points, and depreciation expense of 89 basis points lowered margins as compared to the fiscal 2005 period.

Operating margin for the year ended September 30, 2006 was 11.7%, down from 18%, including equity-based compensation expense for the year ended September 30, 2005. They year ended September 30, 2006 includes equity-based compensation expense of 4.8 million.

Net income for the year ended September 30, 2006 was 30.4 million, or $1.07 per diluted share, excluding equity-based compensation, as compared to net income of 35.8 million, or $1.26 per diluted share, for the year ended September 30, 2005, which did not include equity-based compensation expense.

Net income margin for the year ended September 30, 2006 was 8.8%, excluding equity-based compensation, and was 11.5% for the year ended September 30, 2005, which did not include equity-based compensation. Net income for the year ended September 30, 2006 was 27.4 million, or $0.97 per diluted share, including equity-based compensation, a decrease from net income of 35.8 million, or $1.26 per diluted share for the year ended September 30, 2005. Net income margin for the year ended September 30, 2006 was 7.9%, including equity-based compensation, as compared to 11.5% for the year ended September 30, 2005.

Net interest income for the fourth quarter was 566,000, compared with net interest income of 526,000 for the same period last year. Our tax rate for the fourth quarter of fiscal 2006 was 36.9%, compared to 31% for the previous quarter and 38.2% for the fourth quarter of fiscal 2005. The lower rate for the third quarter was primarily related to a release of tax reserves. In the future we would expect our tax rate to range from 37 to 39%.

Turning now to our balance sheet, we had cash and cash equivalents of 41.4 million at September 30, 2006, compared with 52 million at September 30, 2005. At September 30, 2006, we had retained earnings of approximately 8.1 million, as compared to an accumulated deficit of 19.3 million at September 30, 2005.

We have repurchased 1.4 million shares to date under our stock repurchase program, and have recorded $30 million in treasury stock. Although this completes our Board authorized fiscal 2006 repurchase program, we are evaluating a larger share repurchase program for fiscal 2007.

To fund a repurchase program, we will consider cash generated from operations, as well as a potential sale leaseback or mortgage on the two properties we own. These properties are expected to have a book cost of approximately 75 million at their completion, which is scheduled to occur during the third quarter of fiscal 2007. We have ordered a third-party appraisal to help us make our determination of the best economic proposal. Consideration will also be given to other regulatory and compliance requirements, as well as current operating conditions. It is our intention to complete our evaluation of our planned transaction during the second quarter of fiscal 2007.

Our days sales outstanding improved by 4.3 days, primarily related to better overall efficiencies for collections on student loans, driven by our financial aid and collection team. We also had five of our campuses that are now able to request access to Title IV funds without a 30-day delay. These campuses are not subject to the 30-day delay because for three years running our default rates were below 10%. Our other campuses also have low cohort default rates; however, they have not yet achieved the three-year requirement. In addition, we have completed our financial aid audits with clean opinions and have no material findings to report.

Capital expenditures for the year ended September 30, 2006 were approximately 46.1 million, compared with approximately 45.8 million for the same period last year. We did not complete as much of the construction as we had originally planned for Sacramento, California or Norwood, Massachusetts, and the spending will shift to fiscal 2007.

We are planning to spend approximately 55 to $60 million for capital expenditures during fiscal 2007. The range includes 35 to 40 million of expansion capital spending primarily related to the Sacramento, California facility, Norwood, Massachusetts, and our two MMI expansion projects. Our capital expenditures do 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 our current equipment and expand our existing facilities. We anticipate maintenance capital expenditures to continue to range from 5 to 6% of total revenue. New and expanded facilities will add to our maintenance capital expenditures.

Now I will provide an update to our student statistics for the quarter. Our average undergraduate enrollment for the three months ended September 30, 2006 was 16,278, as compared to 16,169 for the three months ended September 30, 2005. Our average undergraduate enrollment for the year ended September 30, 2006 was 16,291 students, an increase of 5.9% from 15,390 students for the same period a year ago. Undergraduate enrollment at September 30, 2006 was 17,523 students, compared with 17,368 students at the end of our prior year.

Given the number of recent inquiries regarding seating capacity and program offerings by campus, I thought it might be valuable to provide an update as we begin our new fiscal year.

Avondale, Arizona has a current capacity of 3420 students, including our blended online program of 570 seats. We have evaluated our FlexTech pilot program and have determined that student outcomes and the quality of the program are strong. Building the student population, however, has been challenging at our Avondale location, primarily because there is a small commuter population that attends this campus, and because students prefer to learn in lab or a hands-on environment. As a result, we will no longer offer the program to new students beginning December 2006; however, we will teach the existing population of students in the program through the first quarter of fiscal 2008. Once the program has completed, we will remove the seating capacity from our calculation.

Now that the regulations have been changed and online programs can be offered to non-degree programs, we are evaluating offering the blended program at our Rancho Cucamonga campus, where we have a strong commuter population. As part of the evaluation, we will look for additional flexibility for students to make the program attractive for students who are working adults.

Houston, Texas currently has capacity for 3160 students, of which 1020 are related to collision repair, and the remainder are auto and diesel capacity.

Glendale Heights has capacity for approximately 2400 auto and diesel students. The campus will reduce its capacity during the third quarter by approximately 120 students when we exit our short-term lease at that facility.

Rancho Cucamonga has capacity for approximately 2640 auto students. NASCAR has capacity for approximately 1920 auto students. Exton, Pennsylvania has capacity for approximately 2420 auto and diesel students.

Sacramento, California has capacity for 1800 auto, diesel and collision students, and by the third quarter it's planned to have 2100 seats available, 500 of which will relate to our collision program.

Norwood has approximately 1920-student capacity in automotive, and is expected to add diesel training during the third quarter of fiscal 2007. The addition of the program will not change overall capacity at that location.

MMI Arizona has capacity for 2100 motorcycle students, and MMI Florida has capacity for 3330 students; 1275 in motorcycle, 1395 in automotive, and 660 in marine. For the full fiscal year, approximately 71% of our students on average were attending the auto and diesel program.

As we've discussed in previous calls, operating income typically is the lowest during the third fiscal quarter, ended June 30, due to the lower population of students. As a result of lower capacity utilization and higher spending on advertising, margins during the fourth quarter were also pressured. The Company's costs do not vary significantly with changes in student population. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns, and these patterns, however, may change as a 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.

Thanks, Jennifer. Although our operating environment remains challenging, I believe our focus is where it should be, on solving the affordability equation, improving our overall student recruitment efforts and increasing capacity utilization. We have built the infrastructure to support solid growth over the next few years. As we fill in capacity we should drive margin improvement. We will keep you updated as we make progress.

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

(OPERATOR INSTRUCTIONS). Mike Lasser, Lehman Brothers.

I just want to confirm what you said, that right now the student population across all campuses is down about [50] enrollments year-over-year. So, we should expect average enrollment to be down this quarter?

That could potentially happen during the quarter. We gave the statistic as of, I believe, it was 11 -- the middle of November, the third week of November.

Okay. So, that's a reasonable expectation?

Exactly.

That leads into my follow-up. Given the wide dispersion of analyst estimates for the Company for the upcoming year, have you thought about -- rethought your decision to stop offering guidance, and what is preventing you from doing so? It seems like, given your concentrated [base campus], operations are stabilizing, you would have a reasonable sense of what the earnings power of the business might look like over the next 12 months.

We have not really considered going back to giving full guidance, as we had in historical periods. What we have tried to do, though, is to offer the statistics that are the biggest driver of the business as part of our call. So, as you probably noticed, we've given a little bit more data or color on specific student populations, starts and graduations. And we are expecting that should help people be able to build their models.

I guess the one area that's a little murky is the SG&A spending. It's unclear how much additional spending from a marketing perspective the Company will look for over the next 12 months in order to re-ignite growth.

What we've talked about up to this point is that we expect it to increase. And it probably is going to be anywhere between 8 to 10% of revenue for the next year. And you can compare that to roughly 6.5% in Q4 fiscal year '06. And then in prior years it was more like in the 5% range. So, we are continuing to invest in marketing and advertising, and against a depressed revenue stream is what's driving that up.

Howard Block, Banc of America Securities.

First question is did you say that you had 10,800 graduates in fiscal '06? Yes?

That's correct.

That is correct.

That's up 14%?

That's correct.

First of all, I just want to congratulate you on being the first management team to disclose graduates. And I hope that other managers are listening and will continue to do so. Obviously, it's a critical statistic, so thank you. The question -- the first question really is, with regards to the contract growth, which is sort of a new metric, is there a chance that you could help us reconcile that with maybe the timing of those signed contracts as to when those students would be expected to start? Their contracts probably have start dates on them.

That's challenging, because we see the campus rep enrollments or contracts start a little sooner than the high school. So, I would have to break that out. You know, if you think about the high school-based representatives accounting for 65% of our business, the leadtime on their enrollments, especially this time of year, is going to be nine to 12 months. And then our campus-based reps could be anywhere from I'd say two months to five months. So, at least you have those percentages to break it out. But it's tough for me to give you exactly.

How can we sort of reconcile maybe the growth in contracts, which obviously is positive, though, with the more positive comments you've offered recently in terms of lead flow and improving conversion rates. Obviously, I think, on the last call we talked about lead flow being up 30% and conversion rates improving. So, it would only be fair to sort of extrapolate from those significant growth to maybe even more growth in contracts or starts. So, I don't want to try to extrapolate improperly from the lead flow and conversion rate improvement to what seems to be far more modest growth in contracts.

I don't think that we were specific about conversion rates. We were -- it's kind of early on for us to tell whether or not the lead flow is producing the contracts at the rate we had expected, and believe that we should wait until the fall for enrollments, until January for starts, to be able to really assess the value of that increased lead volume. And at this point, what we know about the leads that we're generating is we are generating the traditional type of students that continues to close at a pretty good rate, regardless of media source. And that's the pure enthusiast, passion-driven student. As we've broadened our advertising reach, and we are reaching a lot more people, we've seen deterioration in close rates, which you would expect given that this population is not all of the enthusiast audience. And what we've discovered with that audience is that they have different concerns. As they work through the sales process, it's more logical; it's more analytical. Affordability is a big issue for these students, and it requires a different approach. Those are the things that we're tweaking to improve our overall close rate in addressing this audience.

So, when you look at 3.3% contract growth relative to 30 to 40% lead growth, we would have hoped that it would have been a little higher, to be honest, at this point in the game. But we do believe we've gained a lot of understanding about the types of students and are investing in the areas where we need to to attract those that will convert at a higher rate, and to address those that, we believe, will convert with a different level of service and a sales approach.

Mark Marostica, Piper Jaffray.

My question relates to some of the scholarship activity, Kim, you talked about. Perhaps if you could first just let us know what your experience has been with granting more generous scholarships to students in your pilots.

We have had a number of pilots, although they've been small relative to our entire student population. The results have been very favorable, and this is with a population that has already signed a contract and is committed to coming to school. And we evaluate whether or not they are a candidate for a scholarship, and scholarships can range anywhere from 500 to a full scholarship, depending on if they're in a competition or if they're competing in one of our needs-based scholarship programs. But overall I would say that the success with these programs has been very strong, and we'll look at rolling it out to a larger population over time.

Would it be correct to say, then, that the scholarships were in no way related to the contract growth that you saw? Or is there an overlap there?

No; that is a correct statement. The scholarships have nothing to do with contract growth. The scholarships would be awarded to students once they have already signed a contract. And we don't want to be using scholarships as an inducement to enroll students. So, it has no bearing on the 3.3% contract growth.

What we're measuring, though, is the impact on show rate of the students that receive these scholarships. And we're seeing some benefit coming from that, just because their commitment level is different to coming to school. And their funding opportunities are helped as well.

Kirsten Edwards, ThinkEquity.

Can you guys give us a little more color on who this new student is, the broader population, the less-enthusiast, what the typical profile is, and where they're -- how they're hearing about UTI as compared to the enthusiast?

We're, obviously, targeting what we believe to be our core demographic. So, it's the male population with the age groups. And we have a number of factors that we use as preliminary targeting criteria. But what has changed is that we're not just on Speed Channel and ESPN over national cable. We're running on daytime slots, weekend slots on local programming stations and in regional markets. And so, it reaches a much broader audience in different programming.

For example, if you're sitting there watching a Speedvision program, typically those who are watching a hot rodder show are pure enthusiasts. And we get a certain type of close rate out of that population versus one that might be coming from a daytime spot running in a local market. And the big difference for us is that what we've discovered with these students is that if they're pure enthusiasts and really passionate about this, you can overcome a lot of the objections that might be more of a concern to students who, for the first time, are considering this as a career opportunity for them. And so it's taking -- we're having to deal with them in just a little different way.

Are there for some reason less enthusiasts out there, or why shift away from what was historically such a great student cohort?

We're not shifting away. In fact, we are continuing to maximize and optimize that. But if you recall from previous conversations, we believe that there is opportunity with a broader audience, and are trying to drive traffic to our newer sites, as well as backfill the mature sites. And in doing so, at some point you have to branch out beyond just the pure enthusiast. And I guess the good news is that people who are not enthusiasts are responding to this opportunity. And now it's our challenge to make certain that we convert those leads and interested inquiries into contracts.

Mark Hughes, SunTrust.

You started -- you talked about getting approval for the shorter-term programs. Have you started marketing those yet?

No, we have not, Mark, and won't probably until the second quarter. So, it's going to be after the first part of the calendar year.

And then the advertising expense, I think, you said was 6.5% in the fourth quarter, 8 to 10% for next year. What was it for the full year '06?

Full year '06, I believe it was more like -- Jennifer is looking it up before I sound off here. But historically it's run around 5%. I don't know exactly what it is. We're looking.

From a full-year period, it was right around 7%

Jeff Silber, (technical difficulty).

First of all, again, we all appreciate the extra statistics that you do give us compared to most other companies. I just wanted to clarify a couple of numbers. You said that starts were down about 3.1% in the fourth quarter. Can you just give us the data? What were the exact members?

In the fourth quarter for fiscal 2006, we would have overall started about 3700 students, and that would compare to the prior year at roughly 3450.

Great. And for the full year '06?

From a full-year perspective, we would have had about 16,000 students that we would have started. And that would compare to about 16,525 students in the prior year.

Now that we are about two months into the current quarter, can you give us any color how starts are doing year-over-year?

We're trending -- I would say we have some preliminary information through November. We're pretty consistent with that fourth-quarter activity. So, we are trending down slightly to the prior year.

Greg Capelli, Credit Suisse.

This is actually Chris on for Greg today. On the lower show rates, I know that you mentioned that those have been due to a variety of things, including inadequate financing for some students in the labor market. Can you speak a little bit more to the process inefficiencies piece which you mentioned?

I think that we made significant progress there, and it's just in terms of the interaction, the type of interaction, and the number of interactions we have with the student from the time they actually sign a contract to the time they show to school. And we have made great progress there, but believe there is a lot of simplification that could still occur with further automation and improved training for customer service on the front end; just trying to help people through what is a very difficult and challenging process, trying to work through financial aid. So, we've made good progress there, but believe there is opportunity still.

On the renegotiation with Sallie Mae, can you provide any more color there?

Yes. We did renegotiate our contract with them, and we did favorably improve both interest rates for our students, as well as overall funding opportunity to our students. As we've talked about previously, we have a pool of funds that we are able to really reach into those students that have a little bit more credit challenges, and does have a discount to UTI. And yet, with capacity utilization where it's at today, it makes a lot of sense to do that to bolster our overall student population. And we are effectively reaching a good group of students through that program.

Can I clarify one thing from the last question, or two questions ago, I guess? I was asked for the fourth-quarter starts, and I inadvertently read the first-quarter starts as part of that. The year information was accurate. But if I could just read the -- for fourth quarter 2006 we had roughly 6660 starts, compared to fiscal 2005 of 6873. So, I just wanted to clarify that.

Trey Cowan, Stanford Group.

Just looking at the Nissan program and how that's ramping up, can you give us a little bit of information about how that compares to either Toyota or Ford, as far as the ramp-up process goes?

I think it's very similar. We are seeing very strong interest from the student population; however, it does take time to build because it's an add-on at the end of their program. And what we find is that students that are already at the end of their program typically do not want to add on. So, it takes us time to build the pipeline. But overall, we would say it's trending very similarly to what we've seen with Ford and Toyota.

(OPERATOR INSTRUCTIONS). Kirsten Edwards, ThinkEquity.

One follow-up on the Sallie Mae renegotiation. I think you'd mentioned previously that students under the current loan structure have to pay back their loans before graduation, so it makes monthly costs high. Is that something that you were able to change with the renegotiation?

Actually, the majority of the students that are eligible for our funding program do not have to pay as they go through school. It's an option. They can always opt to pay cash payments. Where the difficulty, I think, comes in, though, is if a student isn't eligible for any of our programs, and they have a piece that just is simply unfunded, that's, I think, what we were talking about in our previous quarter; where some students, because we didn't have all of the available options, were required to make payments at a higher level then they really could afford to do.

I see. Has that -- do those students now have more options?

They do have more options. I can't say that we have programs that reach every single student, because even our discount pool that we have does have credit requirements associated with it. But we are able to go into levels where the student would have had some difficulty in their credit background. But certainly things like bankruptcies or defaults on prior student loans would not be eligible.

Great. Was this quarter's revenue per student growth driven in any way by increased student retakes on a year-over-year basis?

The retake rate really didn't have much of an impact on this particular piece. But I would say that the two -- one of the biggest drivers was really double-coursing, which is a component of our overall student population where we did see a higher uptick, in essence, of overall participation in taking two courses at a single time. There was some impact from an enhanced retake rate, but it was a bit smaller than the double-coursing.

What was causing the increased amount of students double-coursing year-over-year?

We believe that because of the depressed student populations that we have across the system, there's more availability from a seating perspective for students to take these courses, where in the past we wouldn't displace a student to allow someone to take two courses at the same time.

That makes sense. Thank you.

Ben Andrews, Wanger Asset Management.

Was G&A up year-over-year in the fourth quarter?

Yes. We would have had G&A be up in the fourth quarter on a percentage basis.

Okay. How do you look at G&A coming over this next year?

We think that the sales and marketing perspective are that those components should rise by a couple hundred basis points on the year.

No; I'm talking about just the G&A piece.

Just general and administrative? Okay. From an '07 perspective, I would expect it to have slight increases, because -- pay increases across the board. However, a portion of that should be offset by our reduction in force and the savings that we saw, because that was the primary component that that was -- that that impacted.

This may have been discussed; I apologize. I'm juggling between a couple of calls. As your decision has come to increase the selling expense as a percentage of revenue, what road marks are you looking at to make you feel comfortable that that's the correct decision to make?

We are analyzing on a daily and weekly basis as to our media buys. It does take time for us to work the leads through the system, to score them, distribute them, and to get feedback from our reps. But as we put all of the pieces together, including analytical data, as well as feedback from our representatives, we can start to make changes with the mix. And at this point in time, we are continuing to invest in those areas that we believe we are getting a good return on our investment. And we're also cutting some advertising expense in the areas where it's not producing positive results. And we try to make those decisions as quickly as we can through the whole cycle.

I mentioned in the call that we'll continue to balance our media mix between Internet and television. And as we do that, overall advertising expense will decrease. But I expect it to take several months, perhaps quarters, to fully realize any reduction there. I guess the bottom line is we're not interested in spending to generate leads that don't convert into contracts, shows and graduates. But we are willing to invest where we're showing a good return on investment, and our research shows that there's plenty of opportunity to do that.

Mark Hughes, SunTrust.

Could you give me a sense of the enrollment staff at the year-end versus the year ago, and then what plans you may have for fiscal '07?

We were up about 5% in headcount for Q4 at the end of that, and are continuing to build, but believe it's going to be anywhere from the 5 to 10%, depending on what we require to convert these leads. And so we are growing our sales staff in proportion to the leads that we're generating. So, at this point in time, at the end of November we had about 95 campus reps, with six open positions, and we had 180 field reps with eight open positions.

And that was at the end of the quarter?

The actual number was at the end of November.

And then, bad debt in the quarter -- can you (indiscernible) that?

Bad debt in the quarter? Sure. Give me just one second. It was right around 1% from fourth quarter fiscal '06.

Was that up 1%, or --?

No, it was right at about 1%

Just 1%. Thank you.

Mike Lasser, Lehman Brothers.

Can you remind us when starts first -- what quarter starts first going -- went negative on a year-over-year basis?

It was the second quarter.

And because of the double-coursing, do you anticipate that the average length of student stay will decrease?

I think that it makes logical sense that there would be some of that happening. Although when you look at what happened in fiscal 2006, we actually increased the overall stay of a student to 16 months from 15.5. It's not a really large population of students that double-course, so I don't think it will swing the overall population very much. But it does contribute to revenue, and it certainly would shorten that cycle that the student was attending.

Finally, how are you thinking about pricing during the upcoming year, given a lot of the affordability issues and some competitive pressures? Will that have any bearing on your moves?

We increased our tuition prices in October by 2.5%, with the exception of our NASCAR campus. And traditionally we do that after the first of the year, and have plans to do that as well, with the exception of our NASCAR campus.

From a pricing standpoint, instead of holding prices or cutting prices, we're looking to be more strategic about how we look at our overall pricing strategy, and have talked about various scholarship programs, pricing differently by region, and have even looked at some session strategies. And a lot of these things are still under regulatory review as to how we approach them. And we want to make certain that we remain compliant. But at this point we don't see value in just across the board reducing tuition when we have thousands of students who are continuing to pay at these current rates.

I think the focus really needs to be on solving the funding equation. Most of the students enrolled in our schools look at the affordability in terms of the monthly payment. And if we can get that into a range that they can accept and are comfortable with, we have some pricing power.

Last question. I recently saw the 30-minute infomercial. How has the response been to that?

Our infomercial response has been terrific. The new marketing campaign that the team here has put together, not only the infomercial that's 30 minutes long, but the 30 and 60-second spots in both the -- I would say the niche programming, where you're targeting the enthusiast, as well as in some of the regional and broad -- regional and local markets reaching a broader audience have really -- they've really been successful. And I'm very pleased with the results that we're getting in our proven channels and stations, as well as the new ones that we're trying.

Mark Marostica, Piper Jaffray.

I was hoping that you may have this information with you since you've been so generous with giving us some of the data. I'm coming up with 6200 starts in the December '05 quarter. Is that right?

Jennifer is grabbing her paper here; hold on one second.

I'm sorry; can you tell me again which period you were looking for?

December '05. December quarter a year ago.

So, first quarter of '05. We had approximately 3450 students that would have started during that timeframe.

I was way off. You wouldn't happen to have the second quarter, would you?

I would. From a fiscal 2005 standpoint, we had roughly 3300 students, for the second quarter of '05.

And first quarter of '06 and second quarter of '06 -- do you have that?

First quarter of '06 was roughly 3700 students from a start perspective. Second quarter of '06 would be roughly 3130 students.

Howard Block, Banc of America Securities.

The question was -- a couple things. Did you offer the breakout on the stock-based comp in terms of how to allocate it between the two expense lines?

From an annual perspective, it was (multiple speakers)

I saw the annual; I was wondering -- I guess we could go back and --

I've got it. From a quarter standpoint, the stock compensation expense was about 1.9 million in the G&A section, with the remainder being in ed services.

And then, you'd said that in '07, the only capacity additions will be 900 seats, some in Arizona, some in Sacramento. Did I hear that right?

You did. We have a reduction of 120 seats at our Glendale Heights facility, and then you've got an increase of roughly 300 seats at the Sacramento facility as we complete our expansion there. And then the other expansion component would be the MMI Arizona location for fiscal 2007.

And that's it. You're saying for sure that's it? There are not going to be any other additions or --?

That's it.

And then, the comments about the declines ranging from 140 in Houston to as much as 440 in Avondale. Could you offer any more color on those as well? Were the other -- how many decliners were there, I guess? How meaningful is it to look at sort of that range? How do they fall on the spectrum, I guess?

We really had the majority of our -- all but one, actually, of our schools go backwards slightly in population (multiple speakers) the three newer schools that we had. And that's what balanced out the student population.

So, if Avondale is the biggest decliner, and Houston was one of the smaller decliners -- is that right?

That's correct.

It doesn't sound as though that Katrina necessarily was the most challenging headwind, if you'll excuse the word, in the business last year for '06.

What we believe it to be is that we've seen recovery. And I think that's further evidenced by Orlando today being one of our strongest-performing, and is the only campus that's up year-on-year. And if you remember the hurricanes hit Orlando; we started to feel it their first; then it traveled to Houston. And the fact that we're only 140 down from the year prior, we are hopeful that the recovery we've seen in the Orlando area and what we're experiencing in Houston will now kind of sweep across the rest of the United States. So, we are very pleased with the efforts of the teams in the southern regions who have responded to it, because we definitely felt the impact of the hurricanes. And they've done a remarkable job in terms of retaining students and getting those students to school.

Management, at this time we have no additional questions in the queue. We'll turn the conference over to you for any closing remarks.

I'd just like to thank everybody for their interest in UTI, and we hope to see you soon.

Thank you, management. Ladies and gentlemen, we thank you for your participation on today's conference call. At this time we will conclude the presentation. You may now disconnect. Please have a pleasant day.