Universal Technical Institute Inc (UTI) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Universal Technical Institute, Inc.'s fiscal third 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 of the call will be available for 90 days at www.UTICORP.com, or alternatively, the call will be available through August 14, 2007 by dialing 1-800-405-2236 or 303-590-3000, entering the pass code 11093285 followed by the # key.

At this time, I would like to turn the conference over to Ms. Jennifer Haslip, Senior Vice President and Chief Financial Officer of Universal Technical Institute. Please go ahead, ma'am.

Hello and thank you for joining us for Universal Technical Institute's quarterly conference call. During the call, we will discuss the results of our fiscal third quarter ended June 30, 2007 and then open up the call for 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'll 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 in this conference call, including the initial statements by management, as well as answers to questions related in any way to projection or 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, and thank you for joining us to review our third quarter results. On today's call, I will provide a high level overview of the quarter, discuss operating trends and provide an update on the continued development of our strategic relationships with industry. Jennifer will follow with a more detailed review of our financial results before opening the call up to your questions.

Our net revenues for the third quarter were $85.2 million, up 1.2% from the prior year. Net income for the third quarter was $3.9 million as compared to $4.5 million for the same quarter a year ago. The primary drivers were tuition increases and our previously disclosed change to the retake policy, which were partially offset by lower average student enrollment.

Our operating performance suffered in the quarter in comparison with the same quarter last year due to under-utilized capacity and higher depreciation expense. This lead to lower earnings per share for the third quarter of $0.14 as compared to $0.16 a year ago. It should also be noted, as disclosed in our press release, that we recorded an out-of-period depreciation expense in the quarter that impacted earnings per share by approximately $0.02.

Student contract growth was slightly down year-over-year for the first ten months of our fiscal year. Contracts for the third quarter of fiscal 2007 were down 10% due primarily to ongoing challenges with recruiting adults, as well as consolidating 24 and realigning 35 high school territories. In August, we will begin hiring new field representatives to replace open high school territories and will have reassigned high schools from the 24 territories that have been recently consolidated.

Average undergraduate enrollment for the third quarter of 2007 was 14,630 compared to 15,166 a year ago, a decrease of approximately 3.5%. During the quarter, we had roughly 300 fewer starts which was the primary reason for the decline. We ended the third quarter at approximately 57.4% capacity utilization compared to 61.4% for the same period a year ago. The decline of 400 basis points was due to both a decline in enrollment as well as an additional 815 seats, which increased capacity by 3.3%. The additional seats were added to support industry demand, primarily at our Orlando Campus and to complete the expansion of our Sacramento Campus.

During the third quarter of fiscal 2007, we had 2,214 students start school, a year-on-year decline of 12%. Approximately 62% of the decline was attributed to a decrease in our show rate with a balance due to a decline in applicants of approximately 38%.

Our show rate during the 2007 start season of June through May declined by 350 basis points year-on-year. Our show rates for the two months ended July 2007 improved slightly from last year's trend and was 230 basis points unfavorable to last year.

We remain cautiously optimistic that our show rates will improve in the remaining large summer and fall start dates given our continued focus in this area. We believe that the primary factors impacting both the number of starts and the volatility of our show rate are unemployment rates, affordability concern and internal process challenges. As a result, we remain focused on process improvement in order to become more efficient and to further insulate our business from volatility in economic cycles.

Student persistence deteriorated by 114 basis points for the third quarter as compared to a year ago. Nevertheless, persistence remains favorable by 55 basis points on a year-to-date basis.

Now, I will provide an update to our sales and marketing area. For the third quarter, advertising expense was approximately 6% of revenue as compared to 7% in the same quarter a year ago and 7.5% last quarter. As expected, total leads declined 8.8% compared to the third quarter of fiscal 2006, an average cost per lead decreased by 3.6%, which was similar sequentially at 3.5% decline. The year-over-year decrease in cost per lead is primarily attributable to decreasing our television spend and shifting more of our buys to the Internet. In addition, we continue to decrease spending for media buys that did not produce a good return on investment.

In the future, we expect our advertising spend to be more locally-driven, both on the Internet and on TV, and we will augment our local spend with both regional and national buys. We continue to focus on the development and implementation of targeted segment-specific advertising to better enable us to capture both enthusiast and non-enthusiast targets.

For the quarter, the media mix was less heavily rated to television with 27% of the mix for the current quarter and 39% during the quarter last year. Third quarter 2007 advertising spend on television decreased by 26% year-over-year and increased by 58% for Internet.

In summary, our marketing and sales effort continue to make the notable shift away from lead volume at the lowest cost to a greater emphasis on quality and conversion.

Next, I'd like to provide a brief update on new campus statistics. As of July 27, 2007, the student population in our Sacramento Campus was up 141% to approximately 690 students from 290 students a year ago. During the third quarter, we had approximately 705 students on average, up 208% from 230 students a year ago.

Our Norwood, Massachusetts Campus had a student population of approximately 810 students as of July 27, up 15% from 705 students a year ago. For the third quarter, Norwood averaged 830 students, a 42% increase from 585 students last year.

At our Exton, Pennsylvania Campus, we had approximately 1,050 students enrolled July 27, which compares with about 1,115 a year ago. For the third quarter, Exton averaged 1,144 students compared to 1,182 last year. Both higher graduates and fewer starts impacted the student population at this campus.

In summary, I'd like to provide a brief update on our industry relationships. After successfully meeting Toyota's goals for Service Technician graduates and placement at our Glendale Heights Campus, we are excited to announce that we have expanded our relationship with Toyota Motor Sales USA to begin offering the Toyota Professional Automotive Technician, or TPAT elective at our Exton Campus early in calendar year 2008. This new agreement has a five-year term and covers both the Glendale Heights and Exton TPAT programs.

Currently, UTI offers the Toyota Automotive elective at our Glendale Heights Campus and a Collision Repair elective in Houston. Toyota Motor Sales is a sales marketing distribution and customer service arm of Toyota, Lexus, and Scion brands in the United States. According to JD Power & Associates, Toyota ended 2006 with more than 13% of unit sales for cars and light trucks and was the fourth largest provider in the U.S. We are proud to be a provider of quality technicians to Toyota, a respected and growing brand worldwide. However, we do believe it is our students who benefit most by this specialty training, and upon graduation become eligible for positions in the highly-desirable dealer networks of Toyota, Lexus and Scion brands.

As we discussed over the last year, our strategy has been to further strengthen the relationships with the diesel industry, just as we have with automotive and motorcycle manufacturers. Thus, we are very excited to add another diesel industry relationship; the second relationship to be added in the last 12 months. Recently, we entered into an agreement with Freightliner, LLC to begin offering a 12-week elective at our UTI Avondale Campus beginning in the second quarter of 2008. The new program will be called Finish First and allow students to successfully complete their training to receive credits within the Freightliner Technician Certification system.

Freightliner is a Daimler-Chrysler company and is the largest heavy-duty truck manufacturer in North America. They are the leading producer of medium-duty trucks and specialized commercial vehicles. The Freightliner relationship is further evidence of the growing demand for diesel technicians, along with additional confirmation that UTI is industry's preference for trained technicians.

During this upcoming year, we will launch new marketing campaigns directed to create greater awareness and interest among both young and adult students in this very rewarding career.

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

Thank you, Kim. As Kim mentioned, net revenues for the third quarter of fiscal 2007 were $85.2 million, up 1.2% from $84.1 million reported in the same quarter last year. The growth was primarily driven by higher tuition rates of 3% to 5% and to a lesser extent was favorably impacted by our change in retake policy, up roughly 1%.

These increases were offset by lower average student enrollment of approximately 350 basis points for the quarter and higher scholarships and tuition discounts of approximately 130 basis points.

Our operating income for the third quarter of fiscal 2007 was $5.7 million, flat to the same quarter a year ago. It should be noted, however, that the current period includes higher than expected costs in two categories and I will discuss these now.

Third quarter depreciation expense included approximately $986,000 of out-of-period expense related to exiting two facilities. These facilities had leasehold improvements that had not been fully depreciated by the time we exited the related building. In addition, based on our internal comprehensive review, we recorded additional bad debt expense during the quarter of approximately $310,000 to reflect the anticipated return of certain federal funds. These two expenses decreased earnings per share during the quarter by approximately $0.03.

Operating margin for the third quarter of fiscal 2007 was 6.7% compared with 6.8% for the same period last year. On a percentage basis, the change primarily relates to increased depreciation of 241 basis points, which was partially offset by lower advertising expense of 92 basis points, bad debt expense of 67 basis points, as well as a variety less significant categories.

The operating loss for Sacramento was $1.3 million during the third quarter of fiscal 2007 and is the only campus for fiscal 2007 that is being considered a new campus. As expected, Norwood, Massachusetts was profitable for the quarter. The combined net operating loss was $2.5 million in the same quarter a year ago for both Sacramento and Norwood, Massachusetts.

Net interest income for the third quarter was $500,000 compared with net interest income of $809,000 for the same period last year. Net income for the third quarter of fiscal 2007 was $3.9 million, or $0.14 per diluted share as compared with net income of $4.5 million or $0.16 per diluted share for the same quarter in fiscal 2006.

Our tax rate for the third quarter of fiscal 2007 was 37.8% compared with 31% for the third quarter of fiscal 2006. Our third quarter 2006 tax rate included a release of certain cash reserves for specified tax years. In the future, we would expect our tax rate to range from 37% to 39% as an unusual item.

Looking at our balance sheet, we have cash and cash equivalent of $29.9 million at June 30, 2007, compared with $41.4 million at September 30, 2006. We generated $26 million in cash flow from operations for the first nine months of fiscal 2007, as compared with $28.8 million in the prior year.

Updating you on our sale leaseback transactions, last month we announced the completion of the sale leaseback for our Sacramento property. The transaction closed on July 18 and the price was roughly $40 million. We recorded a small gain on the transaction. Regarding this, similar transaction for our Norwood Campus, we are currently completing the due diligence related to this transaction. We expect proceeds from the transaction to generate an amount in the range of $32 to $33 million. We do not expect to have a significant gain or loss on our Norwood transaction. It should be noted that upon closing the Norwood transaction we expect to lose tax credits associated with the original purchase and improvement of the property of approximately $900,000.

Moving to student funding, through the end of July we had used approximately $6.3 of our $11 million discount program. This program was extended through August while we negotiate with additional lenders and assess expected changes to our current lender contract.

In anticipation of changing federal regulations, we have issued a request for information to select a larger lender list for our upcoming fiscal year. We expect that available funding for lower credit score students will diminish under our current Sallie Mae contract. In response to such, we have executed a contract with an alternative lender which is expected to support students that otherwise would not have alternatives for financing.

As we begin to use this funding source, we would expect an increase in our bad debt expense. In addition, in support of affordability challenges, we are continuing to expand our Needs Based Scholarship program and anticipate awarding approximately 2,000 scholarships through this fiscal year. This scholarship program has helped improve show rates and also provides improved visibility to whether students will start in advance of their attendance.

Moving to capital expenditures, we recorded approximately $31.8 million for the nine months of fiscal 2007, compared with $38.4 million in the prior year. Of the $31.8 million, approximately $23.2 million was related to expansion activities. The majority of the expansion in both years related to our Sacramento, California build-out.

Our planned capital expenditures are expected to be roughly $45 to $50 million for fiscal 2007. This does not include either of the sale leaseback transactions. We are continuing to look for potential opportunities to optimize our footprint which could include reallocating a portion of the existing space to OEM retraining programs, new product offerings or subleasing facilities with excess capacity.

And with that, Kim and I are happy to take your questions.

Thank you, ma'am. (OPERATOR INSTRUCTIONS) Our first comes from the line of Bob Craig with Stifel Nicolaus. Please go ahead.

Good afternoon, everybody.

Hello.

I know you've been instituting a number of changes on the sales and marketing side, and obviously this quarter there were some dislocations created by some of those changes. I was wondering if you could just summarize for us where you stand in that regard and just how much of a well-oiled machine we should see during the really, really critical start period that's coming up here.

Okay, I'll take that question in two parts; one, to respond to the reorganization on the admissions' structure. For some time we have been evaluating the effectiveness of both of our sales' channels. Those have been focused on the adult market driven primarily through media generated leads, and then those that are in the high school markets. We've evaluated the effectiveness based on the age of the students, the lead source proximity to campus, etc., and then looked at it from a return on investment that has been driving a number of our territory realignment and consolidation efforts with the high school sales force.

That we expect to be fully completed as we go into this new school year, which will be in the September timeframe. We will be hiring representatives for our open territories and we'll be doing the same on the campus side of those focused on the adult recruitment efforts. I do expect that there will continue to be reorganization within the admissions' structure as we continue to focus on a return on investment versus quantity and volume. And so that, I think, we'll continue to speak to throughout the year, but would expect that we'd start to see some positive changes in the fall as we move into our new recruitment year.

As it relates to the starts for this timeframe, June and July equates to 20% to 25% of our starts through the critical start period, and typically, that's going to be June through Nevertheless timeframe. So, that is our primary focus right now with both our admissions' teams, our future Student Services and Financial Aid Departments, to ensure that we optimize all of the students that are on the books currently and those being written for these critical dates. And our hope, as I said before, is that the efforts begin to pay off, although they've not done it at the level we would have expected at this point, but that we start to see that at a higher level as we roll through these starts in the later summer months and early fall.

Kim, that's helpful. As my follow up, any read on starts during the month of July?

July has come in at approximately 8% lower than what we had seen last year. And again as I said, June/July combined is about 20% to 25% of our current start rate. So, we did see an improvement in the year-over-year trends. So less deterioration on the start or show rate, but we were still down 8% when it came to total starts for that month.

Thank you. Our next call comes from Edward Yruma with JPMorgan.

Hi. Thanks for taking my questions. Can you talk a little bit about your potential change in lender as you try to target you said some of those lower credit quality students and kind of what the impact would be for their financing costs? Thank you.

Sure. We are going through two processes right now. One process is to expand our current list of lenders. We had a primary concentration with this low provider being Sallie Mae, and with some of the legislation that's comes through we expect there to be a requirement in the future to have at least three lenders. And so, we're working through that in the middle part of the summer timeframe.

We are looking to expand our risk base lenders as well, and had had a discount pool that I had talked about earlier which we've used about $6.3 million of an $11 million pool in our last year. That we expect will decrease under our new contract with Sallie Mae, but we do still believe we will be expecting that pool.

The new lender is really to reach a little bit more deeply into the sub-prime market, reaching students that otherwise wouldn't be qualified under our existing programs. And also allow us the opportunity if a student simply is unable to get qualified under a program that we could have a servicing arrangement in place for students that could cover their gap balance.

Got you, so just to clarify, and this is an incremental student rather than servicing existing students?

It would be a combination of both. Today, as we have looked at our current student population, and we've talked about this in previous calls, they gap between what tuition costs in total for students and what they are able to fund through traditional methods is rising. And our goal is to make sure that while students are in school that they're not having to make payments at such a high level that they are being displaced, if that makes sense.

If I could just add there? When you look at the causes or reasons for the students who are not showing to school, the vast majority tend to focus on affordability concerns and not being able to effectively close that gap, which has been our focus for some time in providing alternative lending sources and other funding solutions for them. So, we do believe that this is critical moving forward and that we have to have a number of options for our students to consider in how they fund their education.

Thank you. Our next call comes from the line of Mark Marostica with Piper Jaffray. Please go ahead.

Good afternoon, Kim and Jennifer. My first question relates to the decline in contracts and I'm curious whether or not you think the decline in applicants is a function perhaps of the change in mix of advertising to favor more Web and less TV? If there's any relationship there? And then just as an attachment to that, perhaps any color you can give us as to why you think we're seeing that decline?

I think, if you look through let's say the April/May timeframe, our high school recruitment efforts continue to be up year-on-year until we decided to start consolidating some of these territories and not replacing open territories. So some of that we anticipated to have a short-term hit or impact while we reorganized that, and it's really going to be a 90-day issue for us. So as we start to refill those, I think that will address the high school markets.

When you look at the adult side, I think that we have done a lot of work to improve conversions coming off of the Internet. We continue to focus on the Internet as a good lead source for us and have strengthened the relationships with providers, improved our own internal capabilities, and have further plans underway to make the Internet even more effective for us.

When you look at television, we've been experimenting with a number of different approaches. And as we've talked in calls prior, we have spent the majority of our television buys in long-form national cable. And as we've been closely monitoring the results from this advertising, we have continued to make a shift to some of the shorter forms in the local and regional markets, and that takes time to build awareness in those local markets and to build up frequency.

So, some of this is expected, but honestly we would expected to have seen a turn by now at a faster rate. We do see promise with some of the initiatives, but we're impatient at this point. So we continue to invest in those things that make a lot of sense and we're getting rid of and jettising the ones that are not giving us a good return on investment. But I don't think that we have lower applicants because we've shifted from television to Internet at all.

On the point of lower lead growth this quarter, what proportion of that lower lead growth do you think is a function of jettising your lower ROI lead sources?

I think the majority of it is that. You can get with not having as targeted messaging and as targeted buys, whether it be on Internet or television, you can tend to pick up inquiries or students that may appear as leads or student prospects. But as you dig deeper in trying to understand whether or not they're qualified leads or truly interested, you start to see some of those fall out. And as we've worked the lead distribution and lead qualification processes, that has allowed us to make better decisions on where we spend our advertising dollars. So when you think about moving from quantity or volume to quality we've been able to remove some of those that might have driven our lead counts up in the beginning, but that were never going to materialize and it becomes a waste of resources as you work the lead funnel up to the point of enrollment and show.

Thank you. Our next question comes from the line of Michael Lasser with Lehman Brothers. Please go ahead.

Hi, guys. Some of the other folks in the industry have talked about an improvement in July. What do you attribute the continued weakness that you've seen throughout that month? And then as a follow up, if you jettison some of the lower return on investment advertising, was it possible to invest more heavily in some of the higher return stuff, or did you reach a point of saturation?

We have not reached a point of saturation and we are experimenting with a number of new channels and opportunities to advertise and reach our students. In, I think, the previous call, we talked about the segmentation work that we were doing and how to reach beyond the enthusiast market that is likely to come to school regardless of the circumstances, and to make certain that we're speaking the language that the non-enthusiast wants and needs to hear to see value in the UTI education. So we've started to change a number of, you know our buying strategies, our messaging strategies and how we connect with those students.

So, when you're starting out trying new things, it's not that you go full board. You have to test them and some of that has been testing things before we invest in them on the large scale. And so we're in transition between an old strategy that works to a certain level and a new strategy that requires time to build the momentum.

Thank you. Our next question comes from the line of Ryan Mahoney with ThinkEquity. Please go ahead.

Hi, thanks. I was hoping you could comment on capacity utilization and how you expect that to trend on a year-over-year basis into Q4 and throughout 2008?

That's a difficult question for us to answer, because it's very dependent upon how well we do in the remaining piece of the year. And as Kim talked about, we would have seen in June and July about 25% of our starts coming in June, the higher period that we would see, and the remainder would be coming around August to November. And so, I think we're going to have to wait to answer that question to see how the fall materializes.

Okay, and then lastly, maybe we could get stock comps in the quarter and the breakout between line items?

Sure. From a stock comp perspective, we had in fiscal '06 about 130,000 that rolled through Educational Services, and in '07 for that same category we had about 213,000. For the Sales, General and Administrative category, which is the bigger chunk, for fiscal '06 we had roughly 990,000, and for fiscal '07 we had 1,770,000. So your totals for fiscal '06 would be 1.1 million for fiscal '06, and fiscal '07 would be just under 2,000,000.

Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please go ahead.

Thanks so much. Can you remind us what kind of tuition increases you've implemented in '07, and if you have any color on your plans for '08 that would be helpful as well. Then, I have a follow up.

Typically, we've had between 3% to 5% with 5% more weighted on the automotive programs. We did hold pricing at a couple of locations, primarily in the South, the NTI Houston Campuses for certain programs. And as we move into '08, we do expect moderate tuition increases, so I'd say on the lower end of the range. And the way that that would impact rates certainly would be, again, in the lower end of the range because our tuition rate increases would be lower than normal. And we've been pretty aggressive in our use of scholarships, that's going to drive the rate down.

Okay, and I'm sorry the tuition increase was implemented when? And I've got a quick follow up. I'm sorry.

We typically do tuition increases twice a year; one in the fall months so September/October timeframe, and one in the February timeframe. And then you have to remember that it does take time for those to actually work through our business model because there's such a lag time from the time that the student actually enrolls to the time that they start.

Okay great, and as a follow up. Are you hearing from any potential students in terms of the beneficial impact of the increase in the Pell Grant limit or some of the Stafford loans? Is that helping alleviate some of the funding gap at all?

You know, it's got to help a little bit, but it doesn't begin to close the gap. And still the number one issue and challenge for us from a show perspective is closing that gap. And so, you know every little bit helps, but it's not beginning to fully close the gap in the way that we need it to and that's why we're being as innovative as we can with other funding solutions and alternatives.

Thank you. We have a follow-up question from the line of Bob Craig with Stifel Nicolaus. Please go ahead.

Yes, Kim, I think before you've mentioned a number of potential steps that you could take to fill excess capacity. Any that are under active consideration or those that you're going to move forward with over the next few months?

There have been a number that we have talked about. The first being to allocate space and partnership with some of our industry partners who require corporate training. And we have done a lot of that at the Avondale Campus specifically.

Two of the items that we have mentioned previously I believe was the relocation of our Harley-Davidson PHD training from our MMI Phoenix location to our UTI Avondale location. That allowed us to not increase capacity at the same level we were going to be required to, to serve [Hontex's] request for an extension of their elective. So we moved that out to the Avondale Campus. We have taken on additional corporate training contracts and committed space for some of our diesel providers out there.

And then we are effectively looking at every site in the system to look at effective or normal capacity levels given what we've experienced in the past couple of years. Are looking at how we can optimize the footprint at those sites and would consider even different real estate strategies to sublease unused space or integrate certain staffing or home office departments out at one our sites. So there are a number of things that we're looking at and we're looking at every campus that we have out there and what the opportunities are in that unique geographic region.

Kim, your strategic lean would be towards to increase revenue flow within those campuses; service ops, adding that program, different verticals, etc., or rationalizing space?

I'd say it's both depending on the market. And obviously, our first preference is to increase revenue and to look at those types of other programs that would attract incremental students and to drive a positive revenue stream whether it's coming from the students or our industry customers. In the event that we can't do it as quickly as we want, we want to make certain that we're utilizing that space as optimally as possible, so.

Could I get another quick one in there before the operator cuts me off here. The persistence rate you mentioned was down, I think, 114 basis points in the quarter. Why was that the case? Do you have any insights there?

We do know that our students normally take leaves of absences during the year, because our training is consistent, five days of week. Some are staying in school for a good year and they only have a week off during the Christmas/New Year's break. And so few students take leaves of absence in the winter months and the summer months. We don't necessarily know when they're going to be or when they're going to come back, but we do know in July that we had 6% higher students out on LOA than we had in the prior year. And most of the time it's a timing issue and they will come back in the next couple of courses.

We have not seen anything systemically that says we have persistent issues or challenges, so we believe that that's what it is at this point.

Thank you. Our next question comes from the line of Susan Hager with AG Asset Management. Please go ahead.

I'm hoping to get a little more clarification in my own mind in terms of going forward. The 8% in July, the negative 8% start, can you look at the quality of your leads and try to guess how that changes in the August/November period? Are those programs continuing to improve and kick in so that we might get a better number next quarter?

We continue to evaluate all of those types of things; the lead quality, the enrollment quality; looking at those things that are the best indicators of whether the students are going to show to school. And that would be whether or not their financial aid paperwork is turned in, whether they've made their housing reservations and all of those things.

And like I said earlier, we are cautiously optimistic that our efforts and investments in those areas will continue to improve as we focus on the remaining 75% of our starts for this large start season.

Because your leading indicators, you are seeing some improvement?

Well, we saw less decline. Still, when you look at -- when we look at our start season, it begins in June. And so for the first two months of June through July we saw 230 basis points decline, or approximately that. I think that's what it was; 230 basis points decline year-over-year, wherein the preceding months it had been about 390 basis points. So we started to see improvement or less decline, but we have not seen it improve year-on-year in a positive growth standpoint.

And what about the retention programs, they are not yet fully reflected?

Our retention initiatives have been underway for well over a year now and they've been working very well for us. So I think the retention at our schools while it continues to be a focus, our primary focus is on the front end of the business; which is about increasing the quality of applicants, improving the financing and customer service interface to ensure that the students start in school as scheduled.

Thank you. We have a follow-up question from the line of Mark Marostica with Piper Jaffray. Please go ahead.

Hi, it's Mark [Skatovich] for Marostica. Just a follow-up question. SG&A, could you just provide a little help there? Should that grow sequentially as a percent of revenue in Q4?

Giving guidance on the individual items of the categories, I really don't, I don't want to answer that.

What about bad debt in the quarter?

Bad debt in the quarter as a percentage of revenue was about 110 basis points. And I would expect as we talked about in our call, as we begin to expand more financing options for our students, I would expect that to continue to climb a little bit as we move into the fiscal 2007 timeframe. And as we understand better how much of those types of funds we'll utilize, we'll share that with you.

I can add that from a marketing or advertising expense, we have been talking about an increased spend in advertising as a percentage of revenue. We did not see that this quarter given the fact that we have been making several adjustments to our media buying strategy. But as we understand more and more what works we will continue to invest in that, and I would expect to see that increase as a percentage of revenue when we have the opportunity to do so.

Thank you. (OPERATOR INSTRUCTIONS). We do have a follow-up question from the line of Bob Craig with Stifel Nicolaus. Please go ahead.

I'm sorry to have to monopolize things here. Now that you're, I guess, newly flushed with additional cash perhaps you can review with us the priorities for using that cash. Particularly, I'd be interested in any share buyback plans?

Well, that is something that we continue to evaluate from a best use of that particular resource. And we did just recently close the transaction on our Sacramento property and are working on our Norwood property as we speak. I would say that we definitely want to see how well we do in the fourth quarter and evaluate our composite score, which is a Department of Education regulatory component and evaluate potential acquisitions and, of course, the share buyback is under consideration as well. I'd think we have more on the insight into how we might use those funds later this fall.

Okay. And one housekeeping item, Jennifer, where is the D&A adjustment recorded on the P&L?

That would be in Educational Services and Facilities.

All of it?

I believe all of it, yes.

Okay, great. Thank you.

Thank you. There are no additional questions at this time. I will turn it back to management for any closing comments.

Well, thank you very much for your interest and your questions. As you are all well aware, our operating environment continuous to challenge us. However, we do believe that we are making progress. Although it has not fully manifested itself in our results, we are and remain optimistic that our investment in these key initiatives relative to contract growth, funding and affordability solutions for our students, as well as making certain that the students show to school on their scheduled date will improve.

And we appreciate your patience with us and interest in our business and we will keep you posted on our progress that we make as we move through the fourth quarter. Thank you and have a pleasant evening.

Thank you. Ladies and gentlemen, this concludes the Universal Technical Institute's fiscal third quarter 2007 conference call. We thank you for your participation and for using AT&T. You may now disconnect.