Universal Technical Institute Inc (UTI) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Universal Technical Institute, Inc. fiscal first quarter 2007 conference call. At this time, all participants are in a listen-only mode. On today's presentation, instructions will be given for the question and answer session. If anyone needs operator assistance at any time, (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 the call will be available through February 14, 2007, by dialing 1-800-405-2236 or 303-590-3000 and entering the pass code of 11082914 pound.

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 first quarter ended December 31, 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 provisions of the Private Securities Litigation Reform Act of 1995. I will refer you to today's news release for UTI's comment on that topic.

The Safe Harbor statement in this release, which I will not repeat here in the interest of time, also applies to all statements made during this conference call. Information in this conference call including the initial statements by management as well as answers to questions related to any projection or forward-looking statement are subject to the Safe Harbor statement.

At this time, I would like to turn the call over to Kim McWaters, Chief Executive Officer. Kim?

Thank you, Jennifer. Good afternoon, ladies and gentlemen. Thank you for joining us to review our first quarter fiscal 2007 results. On today's call, I will provide a high-level overview of the quarter and discuss some key operational metrics. Then I will provide an update on our five point plan followed by some comments on efficiency improvement and cost reductions. Jennifer will conclude with a more detailed review of our financial results before opening the call up for your questions.

As we reported earlier today, our net revenues for the first quarter were $89.5 million, up 4.7% from the prior year's quarter. The primary driver was tuition increases partially offset by lower average student enrollment. Net income for the first quarter was $6.9 million or $0.26 per diluted share, a decrease of 32.7% compared with $10.3 million or $0.36 per diluted share for the same quarter a year ago.

Operating in net margins for the quarter were under pressure due to lower utilization rates, increased compensation, advertising, and depreciation expense. Average undergraduate enrollment for the first quarter of fiscal 2007 was 17,265, essentially flat compared with 17,427 in the same quarter a year ago. Student starts for the quarter declined by 4.6%, which was relatively consistent with the fourth quarter of fiscal 2006.

Our student capacity at the end of the first quarter was 25,110 seats, unchanged from year-end fiscal 2006 and up about 10% from last year's first quarter. Our first quarter capacity utilization rate was 69%. This is significantly below the 76% levels for the first quarter of last year.

On a sequential basis, our capacity utilization rate has improved in each of the last two quarters, improving from 61% in the third quarter to 65% in the fourth quarter to 69% in the first quarter of the current fiscal year. However, we do expect utilization rates to be under pressure for the remainder of the year as compared to the prior year given slight growth in contracts and a continued show rate decline. As planned, we expect to add about 900 net seats in fiscal 2007 as we complete the expansion of our Sacramento California campus and Arizona Motorcycle campus and lower capacity at our Glendale Heights, Illinois location.

Moving to contracts written, for the quarter, we were up 1.6% year-over-year. You may recall that we reported a 3.3% improvement for the first couple of months in fiscal 2007, so we lost some ground in December. January's results strengthen our year-to-date performance with a 4.2% improvement for the month year-over-year and a four-month improvement of 2.3%.

During the first quarter of fiscal 2007, we had 3,530 students start school, which was 4.6% lower than last year's first quarter. This result is slightly better than our internal plan projected for the first quarter. However, we remain concerned about future start growth given the modest growth in student contracts in the declining show rates.

As you may recall, the year-over-year decline in starts during the fourth quarter of fiscal 2006 was 3.1% and the third quarter year-over-year decline was 13.3%. Contributing to our decline in starts for the year is an unfavorable show rate. Our show rate was unfavorable during the June through December start season by approximately 390 basis points compared to a year ago. We continue to believe that the primary factors impacting the number and volatility of our starts and show rates revolve around the general strength of the overall economy, tight employment markets, affordability challenges, and our own internal process challenges.

Next, I would like to briefly update you on our five point plan. As a reminder, the five point plan includes 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. We continue to address our internal lead distribution and lead qualification process as it greatly impacts the success of our business plan. For the first quarter, advertising expense was approximately 8% of revenue as compared to 5% in the same quarter a year ago.

Total leads for the quarter were up 20% compared to the same quarter a year ago. The average cost per lead increased 38% for the quarter on a year-over-year comparison. This was largely driven by continued investment in television advertising. Total investment in television advertising was up 64% year-over-year as we continued to test new markets, new channels, and new programming. This drove our television cost per lead up 18% for the quarter on a year-over-year basis.

We also invested 75% more in Internet advertising than we did a year ago, which equated to a 47% increase in a cost per Internet lead. Our quarterly advertising expense for television was approximately 81% of our advertising spend and produced 30% of our lead volume for the quarter. This compares with 83% and 26% respectively last year. Our Internet spend was 13% of our total spending, producing 61% of our lead volume in the first quarter of both 2006 and 2007.

In an effort to increase the quantity and quality of leads, we have continued to invest heavily in advertising for the past year. Initially, we were pleased with the quantity of leads generated, but have been disappointed with our ability to convert the leads into contracts and starts. Now that we've had sufficient time to measure the quality of leads generated from our advertising efforts, we are making adjustments to our media buys and mix. We will continue to invest where we see a good return on our investment and continue to cut spending in the areas that have produced disappointing conversions.

The second point in the five point plan is to streamline the distribution of leads. 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.

We have been experimenting with technology that tracks the effectiveness of a representative with certain types of media leads and have effectively launched a new lead distribution process that disseminates leads based upon the representative's ability to convert the lead to a start. This means that in some territories, we may assign media leads to representatives that have historically worked only high school leads and in other territories, we may limit field representatives to the leads they simply generate on their own.

Furthermore, we continue to use technology to score a lead before assigning it to a representative to improve efficiency and ultimately effectiveness. We continue to focus on ways to improve our sales force effectiveness.

In fact, to further optimize both sales teams, Dave Miller, our Senior Vice President of Admissions, will devote 100% of his time to the campus admissions model and the marketing interface. Dave has 25 years experience in campus-based admissions. His ability to focus in this area will allow our new senior VP of Marketing to leverage Dave's expertise and experience.

During this period, Joe Cutler, a Regional VP of Field Admissions, will oversee the field organization and continue to improve its sales force effectiveness. Joe has 23 years of field experience. He was a top representative for a number of years and has served in a leadership capacity for more than 10 years with UTI.

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 our longer programs. As I discussed in our last conference call, we have received licensure of our shorter programs and intended to pilot the shorter programs at both our Avondale and Houston campuses during the second quarter of this fiscal year. However, we have tabled the launch of these shorter programs for several reasons.

Over the past two quarters, we have implemented a variety of new funding programs and tuition discounts or scholarships that have helped to offset some of our students' affordability challenges. Because many of these programs were offered in smaller pilots, we have not fully realized the benefits. Those efforts that were successful have been implemented now on a wider basis and we would expect to have a larger impact over time.

In addition, we continue to seek additional funding sources for our students and expect new offerings to be introduced within the next six to nine months. We are focused on improving our front-end customer service and simplifying our funding process, which has shown favorable results in a variety of these pilot projects.

In addition, we are encouraged by the proposed increases to federal funding that may occur during the summer. These changes will reduce the GAAP and title for funding by more than $2,500 for students who are eligible and that does not consider the impact if Pell grants are also increased. The change in subsidized funding is effective for students on July 1, 2007.

In addition, there are proposals to lower subsidized interest rates over time, which would further help the affordability challenge. A shorter program format would reduce the students' total tuition by more than $5,000, but reduce the GAAP by only $1,500. So, due to the favorable impact of some of the other initiatives and the unnecessary risk of having students opt for a shorter program, potentially unfavorably impacting revenue and capacity utilization, we are holding off on piloting these programs. In the future, should we choose to offer the shorter program, we can do so quickly, given we have already received state licensure.

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 aimed at 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 largely has been centralized over the last few years.

While we believe there is still opportunity for improvement to come, primarily from further automation as well as customization and improving front-end service levels, the key barrier remains the unfunded portion of the tuition. To address this, we have renegotiated our alternative funding contract with Sallie Mae, creating more funding opportunities for students, as well as better terms for their loan arrangement. We have revised and enhanced our recourse funding program to help students with more challenging credit histories to finance their education, reaching approximately 400 students during the quarter.

We are continuing to investigate other types of funding opportunities for our students through a variety of programs and providers that offer alternatives to perspective students and balance risk for UTI.

The fifth point relates to improving student persistence. On a positive note, our initiatives related to this [technical difficulty] persistence rates for our total student population have been consistently working. Our campus management teams have implemented a variety of strategies, from online tutoring to developing innovative training techniques to overcome highly technical curriculum content. As a result of their efforts, persistence for the quarter improved by 70 basis points compared with last year's first quarter.

Next I will provide a brief update on new campus statistics. As of January 26, 2007, the student population in our Sacramento campus was approximately 680 students. This is up more than 500 students from a year ago. During the first quarter, we had approximately 620 students on average. We are continuing to complete construction of the second phase of our permanent location and expect to take occupancy in the next few months.

Our Norwood, Massachusetts campus has reached a student population of approximately 915 students, up more than 400 students from a year ago. During the first quarter of fiscal 2007, we had approximately 990 students on average. We are continuing our diesel construction and expect to begin diesel training during the third quarter of fiscal 2007. The additional program offering will not increase overall seating capacity at this campus. However, this campus does have additional expansion opportunity.

At our Exton, Pennsylvania campus, we have approximately 1,330 students currently enrolled through January 26, 2007, which is relatively the same as a year ago. During the first quarter of fiscal 2007, we had approximately 1,525 students on average.

When we reported our fourth quarter results in December, we provided enrollment data as of November 22 before the Thanksgiving break and December holidays. Traditionally, students take a leave of absence over the holidays in December and return some time in January during one of our starts.

The data we provided today shows a decline in enrollment at Norwood and Exton from November 22 through January 26 for this reason. January data only reflects starts and those returning from a leave of absence for the first start in January and would only include those that returned from a leave of absence on January 8, 2007.

Before I turn the call over to Jennifer, I want to reemphasize that our focus for the near-term is on increasing student enrollment and improving capacity utilization at our existing locations. While expansion is part of our long-term business plan, we do not expect to add new locations until we return to historical utilization rates across our campuses.

In the meantime, we are focused on creating a leaner cost structure across our Company. We are focusing on maximizing the benefit obtained from our marketing efforts, spending more heavily in the areas that are yielding strong conversion, and eliminating those that have not been as productive as we'd hoped.

Now I'd like to turn the call over to Jennifer Haslip, our CFO, for a detailed review of our financial results for the quarter. Jennifer?

Thank you, Kim. As noted in our press release, net revenues for the first quarter of fiscal 2007 were $89.5 million, up 4.7% from $85.5 million reported in the same quarter last year. Revenue growth was primarily driven by higher tuition rates and, to a lesser extent, by an increase in the number of students taking two courses at a time, which impacted our rate by approximately 120 basis points in the quarter.

In addition, revenue was favorably impacted by our change in policy to allow students to retake one course free instead of two, which impacted our rate by approximately 70 basis points. These increases were partially offset by lower average student enrollment of roughly 100 basis points for the quarter.

Our operating income for the first quarter of fiscal 2007 was $10.5 million as compared to $16.3 million a year ago. The year-over-year decrease primarily relates to higher operating costs and lower capacity utilization during the fiscal year. Operating margin for the first quarter of fiscal 2007 was 11.8% compared with 19% for the same period last year. A lower than planned level of students led the margin compression.

On a percentage basis, the relative change came primarily from compensation-related costs of 153 basis points, advertising of 310 basis points, rent and utilities of 59 basis points, depreciation of 74 basis points, and professional services of 39 basis points. This 720 basis point decline was partially offset by lower debt expense of 61 basis points.

The net operating loss for Sacramento at the site level was $1.5 million during the first quarter of fiscal 2007, and is the only site for fiscal 2007 that is being considered a new campus. As expected, Norwood, Massachusetts was profitable for the quarter excluding corporate allocations. The combined net operating loss was $2.3 million in the same quarter a year ago for both Sacramento, California and Norwood, Massachusetts.

Net income for the first quarter of fiscal 2007 was $6.9 million or $0.26 per diluted share as compared with net income of $10.3 million or $0.36 per diluted share for the same quarter in fiscal 2006. A lower average diluted share count benefited EPS by approximately $0.013 per share.

Net interest income for the first quarter was $661,000 compared with net interest income of $746,000 for the same period last year. Our tax rate for the first quarter of fiscal 2007 was 38.2% compared with 36.9% for the fourth quarter of fiscal 2006, and 39.6% for the first quarter of fiscal 2006. In the future, we would expect our tax rate to range from 37% to 39%.

Looking at our balance sheet, we have cash and cash equivalents of $46.8 million at December 31, 2006 compared with $41.4 million at September 30, 2006. We generated $10.7 million in cash flow from operations for the first quarter of fiscal 2007 as compared with $18 million in the prior year.

During the quarter, we identified that our bonus program for our field representatives was not calculating in accordance with the plan. Because the adjustment was immaterial to historical periods, we're recording approximately $1.3 million net of tax to retain earnings to appropriately reflect our obligations. This adjustment reflects changes ranging from 2002 to present.

Next, I would like to provide an update on our sale leaseback or mortgage transaction. We are continuing to evaluate a potential sale leaseback on the two properties we currently own, Sacramento and Norwood, and are narrowing the list of proposals. 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.

It is our intention to complete our transaction during the second or third quarter of fiscal 2007. Management and the Board of Directors will continue to evaluate various options for redeploying a portion of the proceeds from this transaction, taking into account how our business results develop, our composite score and other potential uses for our cash.

Our day sales outstanding improved by 6.2 days primarily related to better overall efficiencies per 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 a 30 day delay because for three years running, our default rates were below 10%. Our other campuses also have low cohort default rate. However, they have not yet achieved the three year requirement.

Capital expenditures for the three months ended December 31, 2006, were approximately $6.6 million compared with approximately $8.5 million for the same period last year. Of the $6.6 million in CapEx, $5 million related to expansion activities as compared with approximately $6.9 million in the prior year.

We were planning to spend approximately $55 to $60 million for CapEx during fiscal 2007. However, this will reduce if we successfully complete our sale leaseback transaction. The range includes approximately $35 to $40 million of expansion capital spending, primarily related to our Sacramento facility, Norwood, and our two MMI expansion projects.

Our capital expenditures typically vary with our student population as well as planned program enhancements and expansion. Assets are placed in service slightly ahead of when they are required for training purposes. We expect capital expenditures to increase over the coming quarters as we upgrade current equipment and expand existing facilities.

We anticipate maintenance capital expenditures to range from 5% to 6% of total revenue. New and expanded facilities add to our maintenance capital expenditures. As we have discussed in previous calls, operating income typically is the lowest during the third fiscal quarter ending June 30, due to a lower population of students.

As a result of lower capacity utilization and higher operating costs, margins during the first quarter were also under pressure as compared to a year ago. The Company's costs do not typically vary with changes in student population. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. These patterns may change, however, as a result of new school openings, new program introductions, and increased enrollment of adult students.

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

Thanks, Jennifer. Our operating environment continues to be challenging in large part reflecting various macro factors, and in that regard, our plan is to work on the internal areas that we can control until the macroenvironment becomes more favorable. Some of our internal opportunities include improving the front-end service provided to our students, improving overall processes, addressing the affordability issue, and getting our costs in line.

As we fill in capacity, we should continue to drive margin improvements. We will keep you updated as we make progress.

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

(OPERATOR INSTRUCTIONS). Mark Marostica, Piper Jaffray.

My first question relates to your comment, Kim, about declining show rates in the quarter. I didn't catch it, but did you quantify the show rate decline in the quarter for us?

We talked about it for the show cycle which started in June, so June through January -- I'm sorry, June through December was 390 basis points decline.

You also mentioned that you were less enthused about the outlook for capacity utilization over the next few quarters. Can you give us a sense where you think where capacity utilization will trend over Q2 and Q3?

Well, that's difficult to project because those quarters are typically our toughest quarters, specifically the third and we are looking to see improvement on the contracts written above what we're seeing today and to see a turn in the show rate. We haven't seen that at the level we would like to, to be able to speak with the confidence that I think anyone would like to hear with respect to the capacity utilization for those quarters.

We're also, in the third and fourth quarters, adding on capacity which makes it more challenging from a utilization range.

Just following up on your point, Kim, about contracts written. What happened in the month of January that caused the improvement that you didn't see in December?

We saw significant outperformance from our field representatives which is focused on the high school market and we have seen that team continue to build momentum over the last couple of months, and January was a particularly strong month for them. So, that's what really contributed to the outperformance in January.

Howard Block, Banc of America Securities.

Jennifer, the significant positive variance in revenue is because we don't have a lot of visibility into this double coursing and retaking and I appreciate your quantifying the impact of those two. Can you give us a sense, though, for how those two variables may play out over the course of '07?

I guess on the double coursing side, we have an unusual anomaly that's occurring in this particular quarter, the first quarter of our fiscal year, in that we've been lower in capacity utilization at some of our mature locations. So on a year-on-year basis, there was very little room for students to go ahead and double course just because there wasn't availability of the seats in many of those locations. As we progress into the year, in particular the latter part of the second and third quarter, there's always been room during that timeframe. And so I don't necessarily think it's going to be sustained through the remainder of the year, but I do think that we will see a little bit of it trickle into the first part of the calendar year, if that makes sense.

From a retake perspective, on that policy change, we made that policy change a little over a year ago and again, as we move through the fiscal year, I think it will become less impactful because we will have a comparable period, but in the first cycle we did not.

Okay, so it will still -- both should still manifest, but maybe not to the degree that we just witnessed?

I would say that's true. And I would still say with the discount programs that we're offering, from a tuition standpoint which would offset these favorable outcomes, that we would likely be at the very low end of our range from a tuition rate increase, in essence, closer to the 3%.

How should we think about coupling the growth in contracts which is decelerating with the decline in the show rate in terms of what it may imply for new student growth, which is coming up, obviously, on some easier comps, but nonetheless, those two variables, the show rate and the contract growth sort of bode poorly for any kind of recovery (indiscernible) the rest of the year.

I can tell you that we have -- we're able to measure the first start that occurred in our January timeframe and it's a smaller start for us. It would have been through basically January 15 that we would have data that would be available, and we saw slight growth, a little bit better than 1% on that particular start; but it's not translating into the levels that we were hopeful for because of the declining or difficult show rate that we've been seeing. I can't really speak to the other dates until we get a little bit more solidified on the actual.

Preliminary data for the end of January does look as though it's similar to the first start date in that we would see some year-on-year growth.

Michael Lasser, Lehman Brothers.

With the increase in the number of students who are taking two courses, might we see a bigger graduation such that there will be like a compounding effect where the bigger graduation would lead to a bigger year-on-year decline in average enrollment?

That is correct. And the student goes through in double courses, they would graduate if they did it once three weeks earlier than they would have otherwise. We are continuing to see some extension of some of our elective programs which is helping to offset that component, but again, you are correct in as we see those higher double courses, you will see higher graduates.

You talk a lot about the difficult external environment. Is there any way to break that down between the strong job market, some of the other factors you mentioned and then competition? How often are students -- are you losing out students to other providers?

The comments that we have made historically tend to ring true today, and that is focused on the job market as well as the affordability concern, and we do believe that those are the two primary barriers right now that we're faced with. From a competitive standpoint, I know that we've been criticized for not recognizing that the competitive landscape is changing and we do. However, our representatives consistently say that that is not one of their top three concerns or barriers to getting students enrolled.

When you look at Sacramento and certainly that's one of our most competitive markets, and I look at the contracts written for the first four months of this year, we're better than 50% ahead of where we were last year for the same time period, and our enrollments at that campus are certainly growing, so that continues to be a good indicator as to how we are performing in the competitive environment.

Greg Cappelli, Credit Suisse.

This is actually Chris on for Greg today. Just a couple of questions here for you. First of all, on the scholarships that you guys are offering, could you just provide a little more detail maybe on how that's going to be rolled out on a larger basis and I guess as a follow-up, what sort of impact you might expect that to have on the revenue per pupil going forward?

Well, I don't want to give too much information from a competitive standpoint, but I'll give you what I can. These are need-based scholarships and so we're targeting students that have the least ability to pay. They are students that would have already signed an application to come to school and yet what we found is by offering a scholarship, that we have a favorable impact on their commitment level or ultimately their show rate when they come to school.

When we started this pilot program, we were intending to offer this program to approximately 400 students, and we're nearing that number. We're not quite there yet, but we're getting closer to that number. From what we've learned to date, the success of the program, we do believe rolling it out in the areas where we are able to and it would be all areas except for Exton, Pennsylvania, that we would have a significantly greater number of students that could be impacted.

And then, I guess, another question I had, if you don't mind, could you give us the stock-based comp breakout for the quarter by expense?

Sure. I can do that. Give me just one second.

Sure. And I guess while you're looking for that, just one final question regarding the recruiting for next year's high school class. I don't know if you -- would you be willing to expand beyond the contract value or the contract growth of 2.3% in the first four months of the quarter and let us know how high school recruiting in particular might be doing or anything on that front?

Sure. As I mentioned earlier, January was a very strong month for our field recruitment in the high schools and in fact, out of the four months, we continued to see outperformance from that field sales force on a year-over-year basis. So we are very pleased with the results that we're getting out of our high school recruitment efforts. And this is just a front end indicator when you have the applications. Now what we will look toward is how those convert into starts as we near the summer and fall months, but we've been pretty pleased so far with the progress our field team has made.

From a stock-based compensation standpoint, it looks like it was right around $1.6 million for the quarter; 1.4 of that wound up in the general administrative and sales categories.

Mark Hughes, SunTrust.

You've broken out the increase in advertising expense. I think up 310 basis points. You had suggested up 370 last quarter. Any way to characterize if you look at your other enrollment activities, which are included in the SG&A, would you say that the intensity is -- or the increase in spending on those other activities is comparable to last quarter or less than last quarter?

I would say that it's fairly comparable to the quarter when you look at that particular statistic because we had hired the majority of the people that we were looking to add on during the October -- or during the August timeframe on the field sales side, so it might be a little heavier in that first quarter just because they came on nearing the end of the quarter, but it's not significant.

So would you say that the G&A, kind of the overhead expense was a little bit less year-over-year this quarter?

I would say that the G&A expense from that standpoint is a little bit less when you look at it, partially because of our reduction in force that we had executed right at the beginning of the fiscal year that is primarily impacted that particular category.

Trace Urdan, Signal Hill.

Are you guys able to quantify in the quarter what the savings was from the reduction in force?

I did not pull that out specifically. I would say it's tracking pretty consistently with what we've said previously, which would have been $4.5 million over the whole year and I don't see that that would have been much different quarter by quarter.

And then I'm wondering on the -- I know you've been asked about this a couple of different ways, but can you maybe give some qualitative color on the difference in show rates between the field reps dealing with high school students and maybe what you are seeing in the other areas of recruitment? Is there any difference there that you are seeing?

Yes, we are seeing a decline for both the high school population and the adult population. However, historically, and today is not any different, the adult market or those enrolled by our campus-based representatives tend to show at a slightly higher rate. So they are typically running a couple points ahead of the field representatives, which we attribute to the length in time from the time the student makes application or a contract is written, to the time that they actually start.

With an adult student, they're making application and starting within several months, whereas from a high school standpoint, it could be anywhere from six to nine months to a year before they start. And so we always see some discrepancy in those show rates.

Do you have a good feeling for what those high school students are going to do when they don't come to school?

Most of the time they do nothing which is very disappointing. We try to get as much data as we can from them at the point in time they decide not to come to school, but it is typically not wanting to leave home, being -- most recently a number one reason is that they are working and do not want to leave the income that they are making at this point in time, but it's typically things that come up in an 18-year-old's life that are hard to predict.

And then I'm also wondering if there's been any kind of feedback from the other end of the equation, from the hiring end now that you have fewer students sort of coming through the programs, are you able to still supply the market with what it needs? I'm guessing that there are more slots now for the manufacture programs, but maybe the competition is a little bit easier there and maybe, are they seeing any difference in sort of the quality of the applicants that are coming out of those programs? Is there any feedback on the back end, if you will?

I think the feedback from our manufacturers relative to the quality of the students has been very positive. And yes, there's fewer students to compete for those, but certainly there's a significantly larger number in our core programs that go into the graduate level programs, so our manufacturers are not experiencing any type of decline in quality. In fact, they continue to raise the bar, making it more difficult for our students to get into those programs, which has been good for them and a good incentive for our students to perform at the highest level in our core programs.

I will tell you that our business to business team last year spent a significant amount of time cultivating relationships and employment opportunities in the diesel and transportation industry and we have slowed that down a bit while we build the diesel program enrollments, so that we can continue to satisfy our existing customers without creating unrealistic expectations from this new industry segment. So we're trying to show them how we are building the pipeline and what will be coming, but trying to keep their expectations realistic given our student loads at this point.

Jeff Silber, BMO Capital Markets.

Kim, on the call you had mentioned that the Company would be looking at adjusting its media mix in buying. I'm wondering if you can give us a little bit more color on that. Roughly, what do you think advertising as a percentage of revenues will be for the remainder of the year?

Well, we've spoken to being anywhere between 8% to 10%. However, as we get smarter with our decision-making and we learn more, I think that as we move through the year, that will come down. You saw it at being at the 8% inside of this first quarter and so I would expect it to be relatively close to that inside of the second quarter, and as we move through the year, hopefully we will gain efficiencies based on the changes that we're making. The way we're managing our media buys in real-time and adjusting those weekly based on the success that we're having in different geographies with different forms of advertising, whether it be short form or long form, different channels, whether it be local broadcast or national cable, and we're making those adjustments and different things are working better or poorer in different markets. So we're really managing on a location by location basis to really benefit the operating location or the campus versus the Company as a whole across the country.

My follow-up is actually a two-parter. I just want to double check that scholarships, you guys record revenues net of scholarships, correct?

That is correct. And the scholarships would follow the students as their training progresses.

And a little more color on the recourse funding you had mentioned as well would be helpful.

From a recourse standpoint, we did enter into an arrangement with our primary lender to reach a little deeper into the sub-prime market for students that have made some credit mistakes in the past. We have been able to fund about 400 students of that program to the first quarter and it's a portion of their funding obviously that would come through this type of program because the majority of the students are eligible for a significant amount of Title IV as well.

The discount that we get on that program is at 20% today. And so whatever amounts are funded through that program, they would be discounted in a similar way that a scholarship would over the term of the students program.

[Jeff Curry], Skystone Capital.

Quick question. Could you talk about how much incremental cost in dollars will start running through cogs as you bring the remaining 900 seats onboard?

Well, because of the staged entry of that, I will tell you that it's difficult for me to tell you exactly what the costs on that are. We expect to take possession of the Sacramento parcel sometime late in the second quarter or early in the third, and I believe the remainder of the seats that are coming onboard will be in the fourth quarter, and so it's not necessarily something that's an item that's easy to pull out, if that makes sense. Depends a bit on when we take on the occupancy for them.

If I could just add to that. In Sacramento, as we are adding the diesel program, collision program and the same in Norwood, many of those costs that our student acquisition costs have already been incurred for those students who take the auto program and then simply add on diesel, so we've already started to incur some of those costs which makes it difficult, as Jennifer said, to align it with when we take occupancy of that additional space.

(OPERATOR INSTRUCTIONS). Mark Hughes, SunTrust.

What kind of dollar exposure do you have for that recourse funding program so far? What sort of reserves are you taking? Just a little more detail would be interesting.

Well, we have a pool of funding for $10 million today, and so that's the cap, and so it would be basically $2 million that would be at risk, and because we're booking that as we award those funds, there's no additional exposure to the Company on that.

So the $2 million is the 20% of the $10 million that's available, how much do you have out so far?

I believe we've rewarded close to $4.5 million on that. And so we're about 40% of the way through and we believe that will last us through the remainder of the contract here which I believe is up in June.

Is that revenue that would have already been recognized, the $4.5 million?

No, that would have been what was awarded, and so as the student is provided that piece of funding, it would follow their matriculation cycle over the next roughly 16 months.

How much was recognized through that program in the December quarter?

It would have been a smaller dollar amount and I would have to check on what that is. I don't have that handy in front of me, but it would be a lesser amount because we did not began operating that program until partway through the quarter. So it's a pretty insignificant amount. I would guess -- yes, I just don't have that handy for you. So I can give that after the call. It's not a material amount.

Ryan Mahoney, ThinkEquity Partners.

I believe last quarter you made comments on targeting a more general, broader target market of less enthusiast student base. Is there any update you can give us on those initiatives?

Yes, we continue to create new markets with our advertising, utilizing a predictive model that basically takes the students who have been most successful at UTI schools in the past and we look for those same types of student demographics, psychographics, et cetera, and target our advertising towards that. And some of that moves beyond the enthusiast market.

In certain local markets, we've had very good success in doing that. On some national cable programming, we haven't had as much success. It simply depends on how targeted we are and how able we're able to get at that specific target who has or possesses those similar characteristics. So, we're testing a lot of different things and in some markets we're pleased with the success and in others, we're simply saying we're not going to invest any more in this area.

So as a percentage of your total student base, are the amount of these enthusiasts increasing or decreasing?

Well, the number of enthusiasts historically has continued to increase and we would expect that to continue as NASCAR and motorsports and the industry continues to attract this enthusiast population base, but as part of our growth strategy, we believe that there are people who have not considered this type of career and the earning potential and are attracted to it and that we haven't been able to tap into that audience as easily as we have the enthusiasts. So, we are optimistic about being able to tap into this market. We have done so in the past. It just hasn't been as great a focus because we haven't needed to, and now we're leveraging what we've learned and trying to tap into a broader audience that we think has the opportunity to benefit from our types of training, and not all of those are automotive or motorcycle enthusiasts.

[Danny Arnik], Blackrock Capital.

Can you give us an update on your share buyback?

We had completed that program at the last call. It was a $30 million program, and we did exercise it fully as we completed our last fiscal year as of 9-30-2006.

Management, at this time, there are no further questions. I would like to turn the conference back to you for any additional remarks.

We'd just like to thank everyone for participating on our call today. We will be providing an update for our second quarter results tentatively scheduled for May 8, 2007. We look forward to providing an update at that time. Again, thank you for your interest in Universal Technical Institute. Good night, and have a pleasant evening.

Thank you. Ladies and gentlemen, this concludes the Universal Technical Institute fiscal first quarter 2007 conference call. If you would like to listen to a replay of today's call, please dial 1-800-405-2236 or 303-590-3000 by entering a pass code of 110-829-14 pound. We thank you for participating. You may now disconnect.