Universal Technical Institute Inc (UTI) 2007 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to Universal Technical Institute Inc. fiscal second quarter 2007 conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. (OPERATOR INSTRUCTIONS). As a reminder, today's conference call is being recorded. A replay this call will be available for 90 days at www.UTICORP.com, or alternatively, the call will be available through May 15, 2007 by dialing 1-800-405-2236 or 303-590-3000 and entering pass code 11088947 pound. At this time, I would like to turn the conference over to Ms. Jennifer Haslip, Senior Vice President and Chief Financial Officer of the 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 second quarter ended March 31, 2007 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 web site 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. I will refer you to today's news release for UTI's comments on that topic. The Safe Harbor statement in this release which I will not repeat here in interest of time also applies to all statements made during this conference call. Information on this conference call, including the initial statements by management as well as answers to questions related to -- in any way to the projection of forward-looking statements 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 second quarter fiscal 2007 results. On today's call, I will provide a high level overview of the quarter and discuss some key operational metrics and business initiatives. Jennifer will conclude with a more detailed review of our financial results before opening the call to your questions.

As we reported earlier today, our net revenues for the second quarter were $91.7 million, up 3.3% from the prior year's quarter. The primary drivers were tuition increases partially offset by lower average student enrollment. Net income for the second quarter was $6.1 million, $0.22 per diluted share, a decrease of 26.4% compared with $8.3 million, or $0.29 per diluted share for the same quarter a year ago. Operating and net income margins for the quarter remained under pressure due to lower utilization rates, increased advertising expense, compensation-related costs and depreciation expense.

Our year-over-year contract growth rate was approximately 2% for the first seven months of our fiscal year. Contracts increased by 4% for the second quarter of fiscal 2007 driven primarily by our high school and military recruitment efforts. Although the number of contracts written for the adult market was flat for the quarter year-on-year, this was the first quarter in several that we did not experience a year-over-year decline with this student segment. April proved to be a bit more challenging for our field representatives working the high schools and military bases. Contracts written during the month of April were down 5% year-on-year primarily due to staffing level changes in open territories currently under review as we continue to transition from a sales model of efficiency to effectiveness. We remain focused on improving the overall effectiveness of our sales and marketing strategies, customer service levels and cost controls.

During the second quarter of fiscal 2007, we had 3082 students start school, which is 1.5% lower than last year's second quarter. We did improve sequentially from last quarter's year-over-year decline of 4.6%. While we are pleased that we have seen some improvement sequentially, we remain concerned about start growth through the remainder of the fiscal year given modest growth in student contracts and a show rate that has yet to improve year-on-year.

Our show rate was unfavorable during the June through March start season by approximately 330 basis points as compared to last year. This statistic improved by 60 basis points from the seven-month period reported in our first quarter call. We continue to believe that the primary factors impacting the number of starts and the volatility of our show rate revolve around low unemployment, affordability concerns and internal process challenges.

Average undergraduate enrollment for the second quarter of fiscal 2007 was 16,389, a decrease of 1.5% compared with 16,642 in the same quarter a year ago. Our student capacity at the end of the second quarter was 25,410 seats, up 300 seats or 1.2% from the previous quarter and up about 11% from last year's second quarter. This slight increase reflects the reconfiguration of space at our MMI Phoenix campus to accommodate Honda's request to double the length of its elective. Our second quarter capacity utilization rate was 64.5%, significantly below the 72.6% level for the second quarter of last year. This decline is primarily related to the shortfall in starts over the last year, combined with increased seating capacity of 11%. As we discussed in our conference call in February, we expect utilization rates to be under pressure for the remainder of the year as compared to the prior year due to these factors.

We are constantly evaluating ways to more effectively use our facilities. We have made a number of changes to optimize our existing space while accommodating the needs of our industry customers. This has resulted in a change to our plans to add 900 net new seats during fiscal 2007. We have reevaluated our plans and have been able to reduce planned new seats by 32%, or 290 seats. We have opted to repurpose some space at our Avondale campus to accommodate dealer training for our motorcycle customers. This will lower Avondale's undergraduate student seating capacity by 300 to 3120 during the third quarter of fiscal 2007. As a result, our MMI Arizona location will add 480 seats compared to the 720 seats originally planned to accommodate the Honda elective expansion. 300 of the 480 seats were added during the second quarter. The remaining 180 are planned for late in the fall of 2007. This will take MMI Arizona's capacity to 2580.

We're also reconfiguring our Orlando campus and plan to add 190 seats by year-end. This much-needed expansion addresses the strong student demand at our Orlando site allowing for more flexibility in student scheduling and supports improved retentions. Furthermore, we previously mentioned that we plan to reduce capacity by 120 seats at our Glendale Heights at campus as we transitioned out of a temporary facility. This number has been reduced to 60 due to additional seating capacity created with the consolidation of the Volvo program at our Avondale campus. The total capacity at Glendale Heights will shift to 2340 during the third quarter of fiscal 2007. Our Sacramento facility is planned to be completed during the third quarter, adding 300 seats as anticipated, bringing total capacity of the campus to 2100.

Now I will provide an update to you on our sales and marketing area. For the second quarter, advertising expense was approximately 7.5% of revenue as compared to 5.6% in the same quarter a year ago and 8% last quarter. The cost relief for the second quarter was down approximately 21% from the first quarter due to efficiencies in media buys and seasonal trends. Total leads for the quarter were up 16% compared to the same quarter last year as was the average cost per lead. The increase in cost on a year-over-year basis is partially attributed to higher advertising costs to reach our traditional enthusiastic segment and increased spending in non-enthusiast targeted television programming. During the past 10 years, non-enthusiast advertising has not accounted for a large part of our media spend, but we believe there is potential beyond the traditional enthusiast segment and will continue to broaden our reach to tap into this segment.

It's probably worth noting that until about 10 years ago before national cable programming was rich with enthusiast programming, UTI successfully reached both enthusiasts and non-enthusiasts through local television and other forms of advertising. Thus, we will continue to invest in both local and national market advertising where we are experiencing a good return on investment.

While the cost per lead for local television may be higher than national cable, students living within closer proximity to a campus tend to show and complete at higher rates. For the quarter, the media mix was relatively the same as last year with 30% of our leads responding directly to television and approximately 60% responding via the Internet. Our advertising spend on television was up 26% for the quarter year-over-year and up 89% for Internet advertising. The increased spend in Internet is attributed to raising the lead cost threshold for Internet lead aggregators providing higher quality leads and a larger investment in this medium overall. With new marketing leadership at UTI, we are embarking on a major effort to improve our targeting of potential students by developing real insight into specific student segments. This allows us to strengthen our value proposition in messaging and to increase the appeal of our advertising to each of these segments. Furthermore, it will allow us to better understand the student buying process and to alter our interaction and approach based on various decision stages.

In addition, we're taking steps to reduce the cost per contract by qualifying leads more effectively and redirecting the sales process to aggressively work the high potential leads. Last, we're focused on increasing the yield from contract to start by enhancing the customer relationship experience. In summary, we're refocusing both marketing and sales with an emphasis on quality and conversion of leads with a good ROI versus a historical emphasis of lead volume at the lowest cost.

From a sales perspective, we continue to analyze the effectiveness of both of our field and campus-based sales teams making adjustments to our lead distribution processes, sales force structure and sales methodologies. From a competitive standpoint, we're not going to disclose such changes in depth, but I will share that our use of data-driven analytics and our investment in market and customer research, predictive modeling capabilities and CRM platform are intended to improve the return on investment from our sales and marketing efforts.

We also are continuing to focus on improving our front-end or pre-service to students and have been piloting new systems, touch points and processes at a number of our campuses as well as increasing our funding options. Given the complexity of financial aid and in the growing funding gap, it became very important for us to move from an efficient one-size-fits-all paperwork processing mentality to an effective customized solution model for our students. As you might expect, this requires significant change in leaders who are willing and capable of changing everything if necessary except our commitment to compliance. To accomplish such, we transitioned financial aid operations to our Vice President of Student Services and Financial Aid Operations, [Laurie] Smith. She has been with the Company for 14 years, is as a proven leader with campus experience and a financial background. During this transition, we parted ways with our Vice President of Financial Aid and a Senior Director of Financial Aid. Oversight of compliance and cash flow-related activities remain in the finance area as usual. We're currently searching for new candidates to fill these roles. On an interim basis, we've engaged a consulting firm with experience in higher education to help mitigate any risk during the transition.

As many of you are aware, relationships between lenders, guarantors and schools have been under scrutiny during the last several months. Recently, Arizona's attorney general indicated they would be pursuing investigations within the states. As a result, we received a civil investigation demand yesterday from the office of the Arizona attorney general requesting information related to our student financial aid practices. As such, we are complying with the demand which is due by May 25, 2007. To date we have not received notice from the New York attorney general [Como], however we have compared our policies to the code of conduct and believe our practices generally conform to the state's seven-point college loan code. Arizona has yet to adopt a code of conduct in this area.

Next, I will provide a brief update on new campus statistics. As of April 20, 2007, the student population at our Sacramento campus was about 700 students, up roughly 230%, or 490 students from a year ago. During the second quarter, we had approximately 750 students on average, up around 535 students from a year ago. We're currently teaching automotive, diesel and collision training at our Sacramento campus. During April 2007, we received our temporary certificate of occupancy for the remainder of our permanent facility and expect to begin teaching in our new facility during the third quarter. Over the next few months, we expect to complete the final aspects of construction at this campus.

Our Norwood, Massachusetts campus has a student population of approximately 900 students as of April 20, 2007, up 63% or roughly 350 students from a year ago. We're continuing our diesel construction and expect to begin diesel training during the summer of fiscal 2007. As a reminder, the construction is a retrofit of existing space to accommodate the diesel program and does not increase overall seating capacity at this campus.

By the way, I'm pleased to announce, Mark [Buerle], our education director at our Norwood campus, has been promoted to school director. Mark succeeds Bob [Adler]. Both gentlemen did an excellent job building the Norwood campus this past year. Bob was recently named campus director at our Avondale campus in Arizona. Bob has been with UTI for about a year and Mark has been with us for about 10 months. Both of these gentlemen were formerly with the University of Phoenix.

At our Exton, Pennsylvania campus, we had approximately 1235 students enrolled through April 20 which compares with about 1255 a year ago. In addition, we continued to see strong growth in our student population at our Orlando, Florida campus which has grown to just under 3000 students or up 23% year-on-year. This campus' growth is primarily attributed to our automotive program.

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 we are rebuilding our student enrollment, we're very focused on tightened cost controls to ensure we're operating as lean as possible. Now I would like to turn the call over to Jennifer Haslip, our CFO, for a detailed review of our financial results for the quarter and fiscal year. Jennifer? Thank you, Kim. As noted in our news release, net revenues for the second quarter of fiscal 2007 were $91.7 million, up 3.3% from $88.7 million reported in the same quarter last year. Net revenue growth was primarily driven by higher tuition rates and to a lesser extend was favorably impacted by our change in retake policy as well as an increase in the number of students taking two courses at a time.

Our change in retake policy benefited the rate by approximately 80 basis points and students double-coursing benefited the rate by about 50 basis points in the quarter. These increases were offset by lower average student enrollment of approximately 150 basis points for the quarter and higher scholarships and discounts of approximately 120 basis points.

Our operating income for the second quarter of fiscal 2007 was $9.5 million as compared quarter $12.5 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 second quarter fiscal of 2007 was 10.3% compared with 14.1% for the same period last year. On a percentage basis, the change primarily related to compensation and benefits related cost of 231 basis points, of which 131 basis points was related to medical claims from our self-funded insurance plan as well as advertising of 191 basis points and depreciation of 111 basis points. These were partially offset by lower bad debt expense of 64 basis points. Our improvement in bad debt expense primarily relates to better monitoring of students' account balances and related collections as well as five of our schools no longer being required to wait 30 days for federal fund payment.

The net operating loss for Sacramento, California at the operating level was $600,000 during the second quarter of fiscal 2007 and is the only campus for fiscal 2007 that is being considered a new campus. As expected, Norwood Massachusetts continued to be profitable for the quarter excluding corporate allocations. The combined net operating loss was $1.9 million in the same quarter a year ago for both Sacramento, California and Norwood, Massachusetts.

Net interest income for the second quarter was $595,000 compared with net interest income of $849,000 for the same period last year. Net income for the second quarter of fiscal 2007 was $6.1 million, or $0.22 per diluted share as compared with net income of $8.3 million or $0.29 per diluted share for the same quarter in fiscal 2007. A lower average diluted share count benefited EPS by $0.01 per share in the second quarter of fiscal 2007.

Our tax rate for the second quarter of fiscal 2007 was 39.1% compared with 37.8% for the second quarter of fiscal 2006. The increase in tax rate for the second quarter of fiscal 2007 is primarily due to the release of tax reserves last year. In the future, we would expect our text rate to range from 37% to 39%.

Briefly turning to year-to-date results, net revenues for the first six months of fiscal 2007 were $181.2 million, a 4% increase from $174.2 million last year. Operating income for the first six months of fiscal 2007 was $20 million as compared to $28.8 million a year ago, a decrease of 30.6%. Operating margin for the first six months of fiscal 2007 was 11% compared with 16.5% for the same period last year. Net interest income for the first six months of fiscal 2007 was $1.3 million compared with net interest income of $1.6 million for the same period last year. The net income for the first six months of fiscal 2007 was $13 million, or $0.48 per diluted share as compared with net income of $18.6 million, or $0.65 per diluted share for the same period last year, a decrease of 29.9%. A lower average diluted share count benefited EPS by $0.02 per share in the first six months of fiscal 2007.

Our tax rate for the first six months of 2007 was 38.6% compared quarter 38.8% for the same period last year. The factors that impacted our six-month results were similar to those during our second quarter.

Looking at our balance sheet, we had cash and cash equivalents of $40.4 million at in March 31, 2007 compared with $41.4 million at September 30, 2006. We generated $16.7 million in cash flow from operations for the first months of fiscal 2007 as compared with $19.3 million in the prior year.

Updating you on our sale leaseback transaction for our Sacramento and Norwood properties, we had signed letters of intent with two companies and are working to complete the transaction during the summer. We continue to expect net proceeds ranging from $70 million to $75 million. We do not expect to have a significant gain or loss from the transaction.

Our days sales outstanding improved by seven days, primarily related to better overall efficiencies for collections on student loans driven by our financial aid and collection team. We also have had five of our compasses that are now able to request access to Title IV funds without a [30 delay]. These campuses are not subject to a 30-day delay for three years running, because three years running our default rates were below 10%. Our other campuses also have low cohort default rates, however they have not yet achieved this three-year requirement.

Moving to student funding, through mid-April we had used about half of the $10 million discount program facility that we have previously discussed. We are continuing to spend our needs-based scholarship programs and anticipate awarding approximately 1000 scholarships between February and the end of the fiscal year. We had capital expenditures for the six months ended March 31, 2007 of approximately $20.3 million as compared to $19.2 million for the same period last year. Of the $20.3 million in capital expenditures, $14.3 million related to expansion activities as compared with $13.9 million in the prior year. The majority of the expenditures in both years related to our Sacramento buildout.

We are continuing to address our capital utilization issues while at the same time remaining mindful of meeting our customers' demands and needs. Based on the reduced seating capacity at that Kim discussed previously and the elimination of some ongoing capital expenditures, we have reduced our planned capital expenditures $50 million to $55 million for fiscal 2007, reduced from $55 million to $60 million previously discussed. This does not include the leaseback transaction. The range for capital expenditures includes approximately $33 million to $35 million of expansion capital spending primarily related to our Sacramento facility, Norwood and our two MMI expansion projects. We are continuing to look for potential opportunities to optimize our footprint which could include reallocating a portion of its existing space to OEM retraining programs, new product offerings or subleasing facilities with excess capacity.

Our capital expenditures typically vary with our student population as well as planned program enhancements and expansions. Assets are placed in service slightly ahead of when they are required for training purposes. We continue to anticipate maintenance capital expenditures ranging from 5% to 6% of total revenue. New and expanded facilities add to our maintenance capital expenditures.

Finally, I would like to say a few words regarding seasonality. Operating income typically is the lowest during the third fiscal quarter [ended] June 30 due to a lower population of students. The Company's costs do not significantly vary with changes in student population. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. However, these patterns 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.

Thank you, Jennifer. As you are well aware, our operating environment continues to challenge us. It is during the tough times that we have the greatest opportunity to learn and build strength in new ways, and that is exactly what we're doing. While we work through short-term challenges, we continue to invest in the business for the long-term, strengthening our brands, strategic industry relationship and overall business capabilities. We will continue to work on our key imperatives, which are optimizing our sales and marketing approach, reinventing the student experience and making value and affordability a competitive advantage. Thank you for your continued interest in UTI, we will keep you updated as we make progress. And with that, we would now be happy take questions, operator.

(OPERATOR INSTRUCTIONS). Michael Lasser, Lehman Brothers.

I guess at a high level with some of the weakness in the housing market, one might expect that some of the competitive pressures you have been feeling may have eased recently. Perhaps you can talk about where you're finding [the potential things] are getting employed as an alternative to doing one of your programs. And as a follow-up, maybe you could talk about graduates' starting salaries and end placement rates and recent trends there and how those have been looking recently.

Okay, with respect to the labor market and the changes in construction, we have yet to fully experience that change. I think it's a little too early. I do think the results that we reported relative to our adult based sales efforts to begin to reflect some change in that. As I mentioned during our prepared remarks, this was the first quarter that we did not see year-over-year declines with the adult segment, and we had started to build progress inside of this fiscal year and in Q2 actually had a flat performance compared to last year which doesn't that great, but it is positive given the number of quarters where we saw declines previously. So that may be speaking to some of those changes that we're starting to feel out in the labor market.

We've had some improvement with the high school market throughout this fiscal year year-on-year, but I still believe we are feeling pressures quarter both segments given the overall economy and the low unemployment rates.

As for the graduation rates and placement rates, those remain very strong. There is very strong demand for our graduates across the board and we continue to see escalation of starting salaries primarily with respect to our diesel employers as we have not been able to fully satisfy the demand from these new industry customers.

One quick follow-up. Should we read into anything with the changes in the finance personnel and the civil investigation from the Arizona Attorney General?

You should not read anything into that. They're totally unrelated, and really as I described during our prepared remarks earlier, we needed to step up the leadership requirements and quality on a much broader scale than what these two individuals were prepared to do and they were financially technical exports. And as you know, when you move up in the organization, a broader leadership capability is required and that is primarily what drove the decisions.

Trace Urdan, Signal Hill.

On that same point, could you speak a little bit about what activities you're doing with respect to sort of packaging students and the efforts to improve show rates? Just a little bit of color on the process there would be helpful.

Yes, we've had a number of reorganization efforts at both our central location here in Arizona where we employ our future student services team and some front-end financial aid advisers. We have piloted two very different approaches at a couple of campuses to increase the level of customer service given different customer segments and market requirements and we are initially pleased with the outcomes of such. We have engaged outside consultants to map our processes and to identify any breakdowns in barriers and are in the process of training our teams given this feedback. And I think initially we've been very pleased with the success. It's a lot of work, but I think the team is up for the challenge and we've been making very good progress.

And I may have missed this, but did you give us an ending enrollment number for the quarter?

We did not; we gave average.

I know you mentioned the starts, which I did catch, but I wondered if you had that ending enrollment number.

We do, give me just one second. The ending population for the second quarter was 16,026, and that would compare to 16,206 in the year-ago quarter.

Okay, thank you.

Brandon Dobell, Credit Suisse.

Maybe a little bit of a departure here. You talk about the contracts down in the high school segment in April after what looked like a pretty decent quarter. Anything that has changed there, or is it specific to a certain geography? Just trying to get a better feel for why that inflection happened.

I think with the high school market, it does fluctuate from month to month so I'm not as concerned about one month being off. I think a lot of it is driven by our decision to not replace some territories. As we have been looking at the effectiveness model and the return on investment from certain territories in specific geographic areas, we have not replaced those positions and the deficit is largely attributed to the open territories. That business will be transitioned over to some reps working in surrounding territories as well as our campus-based reps, but we're in the process of transitioning. I don't think there was anything unique occurring in April that accounted for the changes, other than that.

Okay, that's fair. And then at Exton, it sounds like you had a year-over-year decline in enrollment. Is there anything going on there? Is that part of that whole issue, is there something else going on there with the program that might be slowing that?

I think one of the of the primary impacts to that location has been that we opened up our where Norwood, Massachusetts facility and it has drawn some of the students that would be more closely oriented around that campus to it and that has had an impact on our Pennsylvania campus.

And Pennsylvania does remain largely a regional pulling campus to Jennifer's point, so there has been some cannibalization with Norwood. But overall, we're getting positive feedback in the region surrounding it, it's just a matter of choice, location convenience.

Jack Sherck, Suntrust Robinson Humphrey.

Thank you very much. I may have missed it, I know I did, but you said that in the second quarter contracts for adults were flat. What was it a year ago in the adult segment?

How much were they down last year?

Yes.

I would have to look that up for you. I know that they were down for the four or five quarters previously, but I don't have that statistic quarter me but I can call you back with it.

Did you also say that high school contracts were up 4% in the quarter?

We said -- I think that we gave a combined number for the quarter. Actually if you look just at the high school and military, it was up slightly more than that. That was the combined.

So combined was 4%, and then what was it year ago, combined?

Hold on one second here.

I will do that off-line with you. I don't have the statistics in front of me with that data on it specifically.

And what was the ad spending as a percentage of revenue quarter?

The ad spending as a percentage of revenue would have been about 7.5% versus 8% in the first quarter of '07.

Jeff Silber, BMO Capital Markets.

My first question is regarding persistence rate. I'm not sure if I'm calculating this correctly, but in looking from first quarter to second quarter and comparing that to the year-ago time period, so it's 1Q versus 2Q '07 compared to 1Q versus 2Q '06, it looks like your persistence rate did increase. I'm wondering, was there something different that you were doing? And I know I'm not including graduates. Was there any change in terms of the number of graduates between the two-year period as --?

There really wouldn't be any correlation from a graduate standpoint in the persistence number because they're just successful completers in essence, so that doesn't impact our persistence number necessarily. But, we did see improvement and have seen really sequential improvement for more than a year now as the campus teams have been very focused on those things that most impact the students. They've had a number of activities and plans that have gone on there from counseling to involving the instructors at a higher level. We've piloted some new curriculum in some of our more technically-oriented classes, and all of those things have worked and benefited that overall persistence number.

And then moving onto show rates, I think you said it was down, maybe it was a little less worse than what we've seen before hand. Correct me if I'm wrong -- I don't think you have too many high school starts during the most recent quarter. If you do, did you see any difference between the high school starts and the adult segment starts in terms of show rates?

There's always a bit of a difference between the show rates from a high school perspective and that of the campus-based or older adult students. We didn't see a significant difference between quarter one and quarter two for field. We saw slight declines in the show rate for campus from quarter one to quarter two, but it was pretty slight.

of Howard Block, Banc of America Securities.

I wanted to ask also about the Exton campus. It appears that the capacity utilization at that campus may be the lowest for campuses that still one would think are -- in other words, if you exclude the campuses that are in the growth mode, like Sacramento for example, and look at campuses that are maybe maturing or have matured, is Exton's capacity utilization the most inferior in the group?

I think that because you have growth occurring at California as well, I would say the answer to that is not necessarily yes. There are some that are in a similar range to that, and I would say that North Carolina would also be one of those schools that would be a bit more challenged.

Okay, but even if Exton is sort of challenged on the utilization side or even NASCAR, it still is a profitable campus, is it not?

Absolutely, and I would say, even when you compare it against our typical model from a new school perspective, we're off slightly on that maybe 10% to 12% from an average population standpoint. So we're not way off from what we would have expected we would have been there.

And remember, we're still building enrollment in our diesel program at the Exton site, so that has not fully matured so we have excess capacity created by the addition of the diesel program that has not been fully enrolled at this point. We're still building enrollment there.

Mark Marostica, Piper Jaffray.

First question, just a clarification. The 5% year-over-year decline in April for contracts -- was that high school, military-only or combined again?

That was combined high school, military and our adult population.

Got it. And so based on that 5% decline in April, and perhaps it's a little bit too early to know, but what is your read on the June quarter in terms of start growth? Should we see it on a relative basis decline worse than what we saw in the March quarter?

Let me give you some insight on both the third and fourth quarter. With the contracts that we have written through April, we have more scheduled starts on the book for our summer-fall start season than we did last year at this time. With no further deterioration in show rates, we would expect to realize an increase in starts during the fourth quarter. We still have opportunity in the first quarter of 2008 given that we're behind for this quarter, but recognize that we still have five to seven months to write business for that time frame specifically. We continue to focus on the improved customer service levels to ensure financial aid packaging is completed and that any other barriers, such as living and relocation expenses have been saved, housing reservations have been made and part-time employment opportunities exist.

On one hand, we've been challenged with the starts; on the other, we've started to close a number of overbooked late summer and fall start dates at our Orlando campus and a few other start dates at select campuses. So we're starting to see that build, but it doesn't really happen until the fourth quarter.

And so the third quarter, again, it's not a big start for your high school/military I would assume, but should we see that still in decline mode?

I think it's probably closer to flat or slightly under, and that's assuming that we don't see further deterioration in the show rates. As we reported, we started to see some improvement in the show rates, 60 basis points. If that continues or improves, that will change the outcome for the third quarter.

(OPERATOR INSTRUCTIONS). Brandon Dobell.

Excuse me if I don't ask the question the right way here, but with the retakes you're seeing, does that have an impact on how you calculate the persistence, or is that not taken into account?

That would not necessarily take into account persistence because those students would just be active students in our population.

And then I would imagine the same kind of thing from a retakers perspectives -- it's not going to increase or affects enrollments or persistence or anything like that, it's just more of a revenue differential?

You're exactly right.

Thanks a lot.

Mark Hughes, SunTrust.

For the fourth quarter, I think you had suggested starts would be positive. Any way to judge the magnitude of that at this point based on the book of business that you are building? Is that kind of mid-single digits, a little better?

I'm not going to give a statistic. We remain cautiously optimistic given the build that we're seeing, but given that we have only seen really one month of a show rate improvement and it's 60 basis points, I'm just going to say that it looks better. I'm not going to throw a percentage out there at this point in the game; it's still too far out.

Gotcha. Any comment on the competitive dynamics? Have you seen your major competitors or community colleges do anything different, or is it a similar environment?

From what I hear, it's a very similar environment, certainly listening to our competitors as well as our representatives out in these territories. It does seem to be that we are all experiencing pretty much the same thing. The labor force is challenging for us, there are affordability concerns and from the sounds of it, everybody is working on process improvement opportunities on the front end of the enrollment cycle to ensure that we improve the yield from contract to show.

[Ryan Mahoney], ThinkEquity.

Could we just get the stock expense for the quarter and the breakout between line items?

Sure, give me just one second. That stock expense for the quarter -- for quarter two of '07 would have been $1.7 million, and for quarter one of '07, it would have been $1.5 million or almost $1.6 million. For quarter two of '06, it would have been $1.1 million. And then the breakout for the second quarter would have been $1.5 million related to selling, general and administrative costs with a balance of just under $200,000 being in the ed services and facilities line.

Thanks.

(OPERATOR INSTRUCTIONS). Ms. Haslip, there are no further question at this time, please continue.

Thank you again for participating on our call. We will provide an update on our third quarter results tentatively scheduled for August 7 of 2007 and we look forward to updating you then. Thank you for your interest, good night and have a pleasant evening.

Ladies and gentlemen, this concludes the UTI fiscal 2007 second quarter conference call. A replay of this call will be available for 90 days at www.UTICORP.com or the call will be available through May 15, 2007 by dialing 1-800-405-2236 or 303-590-3000 and entering pass code 11088947 pound. [ACT] would like to thank you for your participation, you may now disconnect.