Universal Technical Institute Inc (UTI) 2008 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to Universal Technical Institute Inc.'s third-quarter fiscal 2008 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 this call will be available for 60 days at www.UTI.edu or alternatively the call will be available through August 13, 2008 by dialing 1-800-405-2236 or 303-590-3000 and entering pass code 11117052 followed by the pound sign.

At this time, I would like to turn the conference over to Miss Jenny Swanson, Director of Investor Relations 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 third quarter ended June 30, 2008 and then open up the call for your questions.

The Company's earnings release was issued after the market close today and is available on UTI's Web site at www.UTI.edu. 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 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 in any way to any protection or forward-looking statement are subject to the Safe Harbor Statement.

We have updated our historical business statistics for those who have asked for our Company's trend information. We have posted a slide presentation on our website under the investor relations section to provide greater transparency on key operating statistics. At this time, I would like to turn the call over to Kim McWaters, Chief Executive Officer. Kim?

Thank you Jenny. Good afternoon ladies and gentlemen. Thank you for joining us to review our third quarter results. On today's call I'll provide a high-level overview of the quarter and share the continued progress we're making on key business initiatives.

Eugene Putnam, our CFO, will follow with a more detailed review of our financial results. He will also provide an update on our new private loan program as well as the current lending environment with the pending reauthorization of the Higher Education Act before opening up the call for your questions.

Before I begin the overview, I like to remind you that under the best of circumstances our third quarter is traditionally the most challenging given the lower number of student starts in this time period. So as expected, this quarter was clearly more challenging from a financial standpoint than in years past due to be insufficient contracts and starts in prior quarters that contributed to fewer average students in school.

However, from an operational standpoint, we continue to make solid progress on our business initiatives such as lead generation, contact growth, and show rate improvement which are keys to improving our operating and financial performance in future periods. For the third quarter of fiscal 2008, our net revenues were $80.6 million down 5.3% from the prior year.

This is primarily due to an 8.1% year-over-year decline in average undergraduate student enrollment from 14,630 to 13,452. Net loss for the third quarter was $724,000 as compared to net income of $3.9 million for the same quarter a year ago.

While a decrease in revenue due to a lower number of students in school certainly contributed to the net loss for the quarter, an increased investment in advertising and contract services to specifically improve lead generation, student financing and show rates were necessary and the right decisions for the business but contributed to the loss for the quarter. Specifically the increased investment in these areas cost approximately $0.09 in EPS.

In addition on a year-over-year basis, occupancy cost for the quarter were higher and compensation costs and depreciation expense were lower. These factors contributed to diluted loss per share of $0.03 for the third quarter of 2008 compared to diluted earnings per share of $0.14 a year ago.

Let me be perfectly clear here. I'm not pleased to report a loss for the quarter but as I have stated previously, we will continue to invest in business initiatives that are producing a strong return on investment even if it means we must incur a short-term loss.

So let's switch gears for a moment and let me explain these initiatives and the positive results we're seeing, beginning with marketing, specifically lead generation. The third quarter of fiscal 2008 represents a successful maturation of our revised lead acquisition strategy.

Our revamped Web strategy is producing significant results including generating new productive leads from telephone calls tracked to Web visitors, increased lead volume from free natural search visits that don't require lead purchase, flexibility to support local markets and key programs such as diesel and collision repair, and it is laying the foundation for accelerating future growth based on an efficient and effective lead production engine. We discussed in our second-quarter earnings call that we were seeing momentum in our lead generation efforts and we continue to build on that momentum throughout the third quarter.

We ended the third quarter with 41% more leads generated than the prior year and our cost per lead decreased approximately 10% to the third quarter as compared to the prior year due to the efficiencies gained in the new Web based model which have allowed decreases in local media spending and other less insufficient media while increasing lead productivity. In response to the positive results of our marketing efforts, we continued to increase our advertising spend during the quarter to 8.6% of net revenues as compared to 6% of net revenues during the prior year third quarter. We expect advertising expense for the fourth quarter as a percentage of revenue to decline slightly from Q3 and prior year fourth quarter due to efficiencies we've gained through our national advertising campaign.

Now let's move on to student contracts. For the quarter, combined student applications for both high school students and young adults were up 21% compared to last year. The last time we experienced this type of growth was during fiscal year 2005.

Campus admission, which is the team focused on young adults and career changers, accounted for the majority of the year-over-year growth. In fact, they achieved 45% enrollment growth year-over-year due to more effective marketing, leadership, sales processes as well as staffing and development.

Since January, this committed and talented team has steadily improved year-over-year performance. With the significant increase in lead volume, we added 15 additional campus admission reps during the third quarter in order to effectively work those leads and anticipate adding 10 to 15 more as we move into next year.

I'm also pleased to share we're seeing progress with our field admission team which is dedicated to high school and military base recruitment. It has been about a year since we consolidated 24 underperforming high school territories and changed the lead policy to drive more business to campus admissions.

And we continue to see increased productivity from the field admissions team with fewer headcount. During the third quarter, field contracts improved 2% year-over-year with nine fewer representatives equating to individual rep productivity improvement of 7%.

We do believe there are additional opportunities to further penetrate the high schools in select territories and some military markets based on pilots tested this year and will add 13 representatives to take advantage of the emerging opportunity. As I mentioned previously, taking into account the performance for both the campus and field sales team combined, contracts improved 21% for the third quarter and it looks like we're off to a good start for the fourth quarter as well.

Together, campus and field teams enrolled 33% more students in July than they did last year for the same month. Campus was up more than 50% and field was up more than 14%. This was really a terrific job by both teams. Now it's all about ensuring they show to school, which brings me to the next critical performance indicator.

Show rates, specifically that's the measure of the number of students scheduled to start during a specific time frame and the number of students who actually show to school and attend classes as scheduled. As I have discussed in previous calls, we've made significant process changes with respect to financial aid and future student services to improve show rates.

We outsourced a significant portion of the initial paperwork compilation and quality control for financial aid processing. We have invested in the training of our staff to improve overall skills and customer service (inaudible).

We've now completed the rollout of the customer service training for our financial aid and future student services team at all campuses including our outsourced partner. This training is paying off and we continue to see solid progress in our show rate improvement.

As a reminder, our show rate first stabilized on a year-over-year basis in quarter one of this year. In the second quarter, we reported a 40 basis point improvement over the prior year and at third quarter we improved our show rate by 530 basis points as compared to last year. And we started the fourth quarter with continued show rate improvement.

For the month of July, we improved our show rate approximately 440 basis points over the prior year. The remainder of the quarter, August and September, are typically heavily weighted with high school students who must relocate to attend UTI. So while we're seeing positive results from the campus side, we anticipate the improvement in the show rate for the fourth quarter to be lower than the third quarter.

Now that we're seeing the positive momentum in lead generation, contract growth and show rate improvement, our focus is on start growth. The number of student starts are driven by contracts and show rates.

In Q3, we started 2225 students compared to 2214 a year ago which is a 1% improvement. Although a slight improvement, it is the first quarter in which we achieved year-over-year start growth in more than two years. And we now believe we will see further start growth in our fourth quarter and Eugene will provide more details on that later in the call.

We announced at the end of July that Eugene Putnam who has served as our Interim CFO since January, has accepted the role of Chief Financial Officer for Universal Technical Institute. In a very short span of time, yet during a critical transition period for the Company; Eugene's wisdom, experience and leadership brought significant value to the Company.

He was instrumental in the development and launch of the new private loan program and will play a very important role in our future. So please join me in welcoming Eugene to UTI. And with that, I would like to turn the call over to Eugene for a detailed review of our financial results for the quarter and fiscal year. Eugene?

Thanks Kim. As reported and as Kim mentioned, net revenues for the third quarter were $80.6 million, down 5.3% compared to the prior year. The decrease was primarily driven by a decline in average student enrollment of 1178 students or 8.1% and an increase in need-based tuition scholarships as well as military and veteran discounts which amounted to $2.1 million.

These declines were partially offset by average higher tuition prices. Operating and net income margins for the quarter remained under pressure due to both lower revenues and increases in advertising expense, contract services costs and occupancy costs; some of which were partially offset by declines in compensation cost and depreciation expense.

Compensation cost decreased $1.4 million for the quarter to $42.7 million. This decline is primarily related to aligning our cost structure with our existing student population and maintaining expense discipline during a time of capacity underutilization. This decline is partially offset by an increase in severance for certain individuals of approximately $200,000 and an increase in expenses under our self-insured medical plan.

Advertising expense increased $1.8 million in the quarter to $7 million primarily due to additional investments in response to the positive results of our new advertising campaign and redesigned website. These expenses we believe are investments in our core business and they're intended to drive higher levels of contracts, improve our show rates and ultimately generate higher student counts and improve revenue and margins.

Contract services costs increased $1.7 million for the quarter to $4.2 million. This is primarily related to outsourcing the front-end financial aid process as well as contract employees which are used to fill some open positions and some consultants and to provide additional marketing and advertising research as we continue to invest in our previously mentioned national advertising campaign.

Additionally, we incurred onetime set-up fees of approximately $300,000 in this category which was associated with the outsourcing of our new private loan program which I will elaborate on in a few minutes. Occupancy costs during the quarter were $9.6 million up from $7.8 million a year ago yet depreciation expense was $4.5 million for the third quarter compared to $5.7 million in the prior year.

The change in both occupancy cost and depreciation expense are primarily related to the sale and leaseback that we did last year over Sacramento and Norwood facilities. Other income during the third quarter was $183,000 which represents sublease rental income at locations that have excess capacity, in this case primarily our home office here in Phoenix.

Going forward, we would expect this line item to be approximately $100,000 on a quarterly basis. But obviously it will fluctuate depending upon our success at subleasing certain locations.

The provision for income taxes for the nine months ended June 30 was 41.3% of pre-tax income. That's up from 38.4% for the nine months ended last year.

During the quarter, we established a valuation allowance of $300,000 for deferred tax assets that relate to certain state operating losses. In anticipation of smaller state tax credits going forward, we expect our full year tax rate to range between 39 and 41%.

The income statement had several unusual or non-runrate items that negatively impacted the quarter. And I want to summarize at least three of those.

During the quarter, we incurred approximately $385,000 that related to the start-up of the private UTI loan program. We recorded another $220,000 in severance costs for individuals previously mentioned as well as establishing the previously mentioned $300,000 tax reserve. The combination of these three items impacted EPS by roughly $0.03.

In summary, the loss for the third quarter was $724,000 or $0.03 per share compared to last year's net income of $3.9 million or $0.14 cents per share. Through nine months, we have net income of $7.7 million or $0.30 per diluted share versus just under $17 million or $0.62 last year.

In this environment of both tight credit and liquidity challenges, I think it's important to mention that our balance sheet continues to be extremely strong. We had cash and cash equivalents of $72 million at quarter-end. This compared to $75.6 million at September 30 and only $30 million a year ago.

During the third quarter, we used $100,000 in cash from operations as compared to generating a little over $9 million last year. This decrease was obviously primarily attributable to the decline in net income as well as some process changes related to the changing lending environment.

And finally, it's important to note that we have no debt on our balance sheet. We continue to have an open authorization to purchase approximately an additional $20 million of common stock but as we have stated before, we believe it is most appropriate use of our cash to subsidize funding alternatives for our students and maintain a strong and liquid balance sheet. And hence we did not purchase any shares during the third fiscal quarter.

During the first nine months of the year we had capital expenditures of $13.4 million in fixed assets compared with $38 million in the same period last year. The $13.5 million is primarily associated with some new industry based elective training programs such as Cummins freight liner and Toyota elective as well as some ongoing replacement of equipment related to our student training.

Let me switch to our loan program which we previously mentioned and some of you have heard me talk about before. At the beginning in July, our Board of Directors authorized $10 million to be directed toward this program.

This program is intended to assist select students who have exhausted traditional Title IV financing and are otherwise unable to qualify for credit based alternative loan programs. It is intended to ensure that students interested in attending UTI have adequate access to fund any tuition gap they may have and that access is provided at more palatable rates, terms and conditions than currently exist.

The program is intended to replace the funding which was previously available through the Sallie Mae Opportunity Fund and discount programs which ceased new funding in February of this year as well as the current funding that we have under our Genesis program. The loans are under the First Century loan program, will be originated by First Century Bank.

They will be originated for our students who meet specific credit criteria with the related proceeds to be used exclusively to fund a portion of their tuition. So the cash never actually really leaves UTI. We will purchase the loans from the bank on a monthly basis at a fee of 40 basis points of the principal balance. In July, in our first month, we will go ahead and place a $2 million deposit with First Century in order to secure our commitment to purchase these loans and our obligations therefor.

We will classify that $2 million on our balance sheet as restricted cash. The loans will bear interest at market rates, however the principal and interest payments will not be required until six months after the student completes his or her program.

After the deferral period, monthly principal and interest will be required over the related term of the program. So in essence the loans basically mimic the Title IV programs in terms of repayment.

UTI will bear all of the credit and collection risk resulting from these loans. Essentially we're providing the students who participate in this program with extended payment terms for a portion of their tuition and as a result will account for the underlying transactions in accordance with our current tuition revenue recognition policy.

Since collectibility of the loan is not reasonably assured, we will defer recognition of the tuition associated with that loan as well as any related interest income until we have actually received cash payment. And consistent with that approach, the loans and the related deferred tuition revenue will not be recognized on our balance sheet at least for a few years until we have obtained sufficient collection history.

In our first month at the end of July, we approved loan applications of roughly 200 loans totaling $1.2 million under this program or roughly $6000 per loan. Now in addition to the loan program, we have seen significant positive developments on the legislative front. As you know in May the College Cost Reduction and Access Act was passed.

With this new legislation Pell Grants which students do not need to repay, increased an additional $420 and unsubsidized Stafford loans increased a total of approximately $4000 for two-year programs. These changes will decrease the Plus loan needs for many of our dependent students and it will decrease the alternative loan needs for our independent students.

And additionally, for some of our independent students, they will no longer require any alternative loans. And finally, the passage of this act now allows parents the choice to defer payments on Plus loans until six months after the student leaves school.

These two things -- the loan program and the legislative change -- are having a significant impact and will continue to have a significant impact going forward. I wanted to illustrate that.

If you look at a typical independent student taking our most popular $25,000 program, in the past he may have funded his tuition with Title IV money and then probably would've been required to fund his remaining tuition gap with our Genesis program. Had he done that, he would have had total financing needs at a weighted average interest rate of about 13% and that would have equated under the terms and conditions of those two funding alternatives to a monthly payment of about $405.

Now, he'll be able to borrow more money under Title IV and with our new loan program, he will have a lower alternative loan need for that program. The same student would've had a weighted average rate not of 13% but of 8% and a monthly payment not of $435 but of $315.

So the loan program and the funding changes not only lower the monthly payment, they also act to improve the value proposition by lowering the total cost of the education. So it has impacted both the value and the affordability issues that we have been fighting in this credit environment. So it's a very positive impact for us. And finally it appears there may be additional positive legislation that has passed both houses and is awaiting the President's signature.

This reauthorization of the Higher Education Opportunity Act will be the first one since 1998. The reauthorization will increase Pell grants from a current maximum of $4700 to $6000 for the coming award year. And additionally those awards are scheduled to continue to increase each year moving upwards to a maximum $8000 for the 2014 award year. These grant increases coupled with an anticipated simplified going from seven page to two page FAFSA for lower income students should enable even more of our students to achieve their UTI education with less difficultly and with less long-term debt.

Finally, the legislation also includes changes to the 90-10 rule allowing institutions to include the unsubsidized Stafford loans in the 10%, the nonfederal cash receipt portion of the calculation whereas historically they would've been included in the 90% portion. In closing I want to remind you that we don't provide earnings guidance but I do want to talk about some of our leading indicators and make some comments about both the fourth quarter and 2009.

We ended the third quarter with 12,478 students in school and as Kim mentioned and most of you know, the third quarter is historically our weakest quarter in terms of starts and in terms of actual students in school. We're seeing positive trends in our sales efforts but we are starting the fourth quarter with nearly 940 students below where we were last year. With that said, there are some metrics that are causing me to be optimistic about our start growth both in the fourth quarter and in 2009.

When you think about revenue which is what really matters to us, it boils down to three things. How many contracts we're writing, when the contracts are scheduled to start and how successfully we are at converting contracts into starts.

You have heard us talk for several quarters that we've had an insufficient number of contracts written to produce acceptable year-over-year start growth. And that has led to our declining enrollments. The improvement Kim mentioned in first lead generation, then initially in our campus sales efforts and finally with our field sales efforts has greatly improved our numbers. And I would like to give you an example of that.

At the end of May of this year we had 1341 fewer contracts on our books that were scheduled to start for the remaining fiscal year and for all of 2009 than we had at the same point for the same period last year. Said another way, we were in the hole year-over-year 1341 students.

As of August 1, that shortfall has been erased and we now have 831 more contracts on the books scheduled to start through the end of the next five quarters than we did at this point last year. And given the improvements that Kim and I have both mentioned, I'm optimistic that this trend of increased contracts will continue.

I'm also optimistic regarding the fourth quarter starts. As of August 1, even if we don't write another contract to start for the remainder of this year and we will write some, but even if we don't, we will have almost 3% more contracts scheduled to start in the fourth quarter than we did last year.

What that really means is if we don't see any improvement in last year's fourth quarter show rate, we should still have approximately 175 more starts in the fourth quarter than we did last year. And obviously to the extent that some combination of our internal efforts, the improvement in the legislative standpoint and the implementation of our new loan program to the extent that those help improve our show rates that start number should be greater.

In closing, I've mentioned before the meaningful leadtime between the execution of our business strategies and watching that execution translate into financial results. Make no mistake about it. Our GAAP financial results for the quarter were not where we wanted them to be. But I do feel good about the investments we're making and more importantly the progress that we're seeing in our leading indicators as we enter into the fourth quarter.

And among other things, that progress is one of the main reasons that I'm pleased to be with UTI on a permanent basis rather than an interim basis. And with that, I think Kim and I would be ready to open it up for questions. Operator?

(OPERATOR INSTRUCTIONS) Mark Marostica, Piper Jaffray.

I wondered if you could comment on student persistence in the quarter?

I would say overall it is relatively flat. We have seen some fluctuation at different sites depending on geography but it's not significant deterioration or improvement.

And then just one follow-up here. Regarding your comment on advertising expense, I think you said it was going to be for the fourth quarter, correct me if I'm wrong, a little bit less than Q3 and the year ago period. Is that correct?

Yes.

And perhaps if you could give us what it was a year ago in Q4 that would be helpful.

Maybe Jenny can look that up for us while we're here. I don't have it right at my fingertips. (multiple speakers)

I do.

She's looking. Hold on one second.

Okay.

It looks like total advertising cost -- I don't have it for the quarter, I'm sorry. I just have it for the fiscal year. Let me keep digging.

Why don't we go to the next question and we will answer that on the call here while she looks it up.

Kelly Flynn, Credit Suisse.

I know you don't give guidance but I'm going to ask you for some guidance. Is there any way you could give us a rough estimate of how your overall expenses may trend in the fourth quarter versus the third-quarter levels?

Well, I guess without giving guidance, we mentioned that there is roughly on an after-tax basis if you do the math on the three items I laid out, close to $600,000 in after-tax expense from those unusual items. Those as I said won't continue.

So I think to start with, we are lower on that. We will have some lower advertising expense but there are also things that will be going the other way. So I guess the best way to say it is I wouldn't anticipate a significant change in the raw dollar of expense is one way or the other.

Trace Urdan, Signal Hill Capital Group LLC.

Eugene, I want to understand the loan program and I thought I heard you say that on the portion that you're funding that you are going to essentially take 100% bad debt allowance until you start to receive cash from the student. Am I understanding that correctly? You recognize no revenue from for that period until cash -- until the student is out of school basically?

Well you have it partially right. The second thing that you said is correct. We won't recognize any revenue on the loan piece until we actually get a cash payment. What I think you may have misstated is the bad debt. We won't take a charge for bad debt.

So how do you account for that then if you're not recognizing your revenue during the period the student's in school?

It's deferred tuition revenue. It's just like we do right now with discount programs and with the Genesis program. That piece of that student's tuition -- and in fact was the same with the Sallie Mae discount and opportunity funds. Until we actually get payment for that piece of the revenue, there is no recognition of that revenue.

Kevin Doherty, Banc of America Securities.

I just had a question on utilization. As we think about the utilization, how might that vary among your destination campuses? I guess I'm just trying to get a sense here. Have you seen any improvements at certain of those campuses?

I know today one of your competitors kind of called out three of their schools that were particularly strong so I'm just kind of curious if you can provide any color there.

There is not a meaningful distinction between the ten different campuses with the exception of those that might be motorcycle-only or something like that and it's kind of a sub-campus. But for the most part, all of the campuses are within 3 or 4% of the overall number.

Gary Bisbee, Lehman Brothers.

Yes, I guess I'm having trouble following you as well on the loan program. So if you're not going to recognize revenue until you get cash but the kid won't pay principal or interest until six months after they graduate, the kid is long gone and then all of a sudden you're getting -- recognizing revenue from them after the fact? That seems like that's crazy to me. I guess a little more color would be helpful.

Well I can't comment on whether it's crazy or not without commenting on GAAP but that's the way GAAP works iWhen you don't have any collection history or any determinant metrics as far as collectibility. So everybody is clear, let me give an example.

If we have a $25,000 tuition program of which the student has a $5000 -- just to make the numbers equal -- loan in our program, the $20,000 -- the 25 less the five revenue will be recognized as normal as that student matriculates through his classes. The $5000 if and when the student makes payment on that and/or any interest will be classified as revenue when that comes in.

That's the way the accountants tell us it needs to work and that is the way we will do it until they tell us otherwise. So in essence, if the student never makes good on that, what we have in essence done is provided that student education at a discounted rate.

Jerry Herman, Stifel Nicolaus.

Again to follow up on that, Eugene, so just to be clear the effect would be a reduction in revenue per student initially, correct?

Well yes for tat individual student. But remember that what this program is intended to replace is the Sallie Mae opportunity discount fund and the Genesis program which certainly the Genesis program was the same way. We weren't recognizing any revenue other than about a 3% upfront fee of what they paid us on the loan balance until that student actually graduated from school.

I think there was one intermittent payment if they were -- sufficiently completed enough courses. Similarly, in the Sallie Mae discount and opportunity fund you were getting revenue after the student got out based on some discounted amount.

So yes on an incremental basis is the example I gave. The average tuition for the first year of that student would be $20,000 as opposed to 25. What this is replacing is a program for students that already in essence was pulling down our average per student tuition anyway. Does that make sense?

[Inaudible question - microphone inaccessible]

Maybe he got cut off.

Cory Greendale, First Analysis.

I'll ask my two questions at the same time to make sure I don't cut off. The first question is on -- this may be stating the obvious but I wanted to give you a chance to correct what may seem obvious which is if you are seeing in a quarter 21% contract growth and show rate is improving, would that suggest that at some point you're going to see a quarter where start growth could be 21% or higher? And the second question is, is there a specific criteria you're looking for before you would start going back to opening new campuses again?

I'll take the first part of that. Yes, the math works out that way. If you have -- I forget your example -- but if you have 10% contract growth and flat show rate, you'll have 10% start growth on an apples-to-apples basis. I will let Kim answer the second part there.

I think the only caveat there I would say is that there is a significant component related to timing. And so when you have contracts written inside of a certain month, there is not a guarantee as to exactly when they're going to start.

Typically campus-based representatives focus on the adult or career changes are going to start sooner than those that are coming from the high school market. So it's not as easily predicted as one might think by just putting those two numbers together and I just offered that for a bit of clarification.

As far as new campus openings, our first priority is to increase the utilization rate at all of our existing sites and are recognizing that there are differences in those various geographies. We are currently working as we have been talking about for several quarters on ways to penetrate the surrounding markets to do a better job of increasing utilization rates there and at the same time are exploring the other markets that we know have potential to accommodate a UTI campus of some size although we believe it to be smaller than what we currently have with the 10 campuses.

This is something that senior management and our current Board continues to evaluate but wanted to make certain that we first focus on doing what we need to to improve utilization at existing sites especially given the progress that we're seeing and knowing some potential remains untapped in certain markets. And then if I could just get back to Mark's question on what our advertising expense was for. Q4 last year it was $7.4 million.

Arieh Coll, Eaton Vance Management.

I had a question about the historical show rates. Can you give us a sense for where they are? They at 50% or 30%?

We traditionally haven't disclose the actual number but it is much closer to the 50 give or take.

Okay and if I was looking at a graph of your show rates, is it fair to say that the show rate number whatever it is has been pretty flat and you've only really seen the real improvement here in the third quarter, the 530 basis point improvement or has the show rate been highly variable?

Well in the first quarter on a year-over-year basis, it was flat to the year prior and in the second quarter we reported the 40 basis point improvement. So Q3 is where we did see the significant improvement of 530 basis points.

(inaudible)

You said that leads were up 47% in the second quarter and up 41% in the third quarter. But you also said that contracts were only up 21% in the third quarter and I was wondering if the delta here is because these leads are less productive leads or if an alternate reason is that there aren't enough staff to work the volume of the leads and turn them into contracts and when you hire more people you think that you will be able to convert more of these leads into contracts.

It's a very good question. We do not believe that we've seen a decrease in the quality of the leads. Certainly we have increased the volume and we do need to make certain that we are increasing our staffing levels to work those leads as effectively as possible.

And I mentioned the fact that we were committed to doing so and will continue to do so as need be. The other is that I think something that is changing in the school business or industry in general is that people are slower to make decisions. So the lag time between the time a student makes initial inquiry or begins to investigate especially given the presence of the Internet, it actually is taking a longer time to convert students that we might have seen two, three, five years ago.

That's something that we've really focused our sales teams on because historically we could get a commitment pretty easily. And if we didn't get a commitment from students that we traditionally called enthusiasts, we were ready to move on to the next lead. And I think with new leadership and sales processes, we have determined that there's more gold in there.

And if we're patient and we nurture these leads through a longer sales cycle, it does begin to pay out. So that's why you see increases in leads and you may not see necessarily the sales cycle in alignment with that but certainly the staffing level is a critical component and it's something that we are trying to balance and stage in so that we're effective in both marketing and sales.

(OPERATOR INSTRUCTIONS) Trace Urdan, Signal Hill.

Kim, I wonder if we could maybe just take a step back here a bit. You put an enrollment number this -- I have got to go back to June of '04 to find a comparable level of enrollment.

So what do you now believe has happened or has been happening in your business to account for the pressure that you felt with respect to enrollment growth? Is it simply the effect of the economy and are we simply seeing that now start to fade? Has there been some other factor that you think may have contributed to this that you are addressing in some way? Could you just sort of talk about the big picture here a little bit?

I think as we have been talking for the past couple of years that it is both macro factors as well as internal factors. And the macro factor certainly has been from an economy standpoint, the labor market and we do tend to track start growth very -- there's a strong correlation with male unemployment rates for those aged 20 to 24. So that has been a factor.

When the job market is really strong it's hard to get especially the older adult students into school. The other factor is that it's been very difficult to finance students. And just inside of this last year, we have started to see some really positive changes on the legislative front as well as some of the initiatives that Eugene mentioned at lengthen in the script.

The other thing is that from an execution standpoint, I think we needed to recognize that the generation of students, they're spending patterns, buying behaviors and those things started to change and our approach and systems was not necessarily in alignment with them and that's why we have made the investment in our training our people differently and we're now starting to see that type of a return.

So I think it's both and as I said before I think it's 50-50. 50% was kind of self-inflicted and 50% was the environment around us. Now we're benefiting from better execution focused on the right things as well as the changing economic environment that's more favorable to our students.

Gary Bisbee, Lehman Brothers.

Can you give us any sort of ballpark sense of the size of the commitment you plan to make for the loan program and how much that may have changed given the legislation we've seen? I would assume that it's a fair amount less now than you might have thought a quarter or two ago. Thanks.

Sure, the legislative change obviously has helped or we certainly believe it will help; no reason to think it won't. The commitment is $10 million. I think not so much had the dollar amount changed but I think the -- what we didn't necessarily put a timeframe on it, I would expect $10 million to still be the number. I just think it will take us longer into the future to utilize the whole $10 million because we will have fewer people or fewer average balances as people come through that program.

But we haven't changed the amount of the commitment but we also as I said didn't put a timeframe on it. That $10 million will take us to wherever it takes us. We would expect it to take us longer now and then we will reevaluate it based upon the use and successive of it at that time.

Can you clarify in what period the 200 or so applications you have had to date that you've approved was in? Was that in July or was that during this whole third-quarter?

No, that was in July. But I don't think you should view that as a full run rate because there was a little bit of pent-up demand. There were some things that were in June some students in June or May that may have got packaged through that. But that was all done in the month of July.

Jerry Herman, Stifel Nicolaus.

Could you talk a little bit about the average leadtime from a contract to a start maybe in terms of what it is on average and then how that would vary on the campus side versus the field side and are you seeing any changes?

Sure. I can talk about that a little bit. I'm going to give you kind of a lot of numbers. On the campus side, I guess the best way to think about it on the campus side about 50% of the contracts that are written are written to start within the next three months; 50% on the campus side scheduled to start in the next three months.

About two-thirds of them are scheduled to start within a six-month timeframe. So that gives you a little bit of the bell curve there. On the field side, 50% are within the first seven months. So as we've said obviously there's a longer leadtime on field. To get to kind of a cumulative two-thirds, that takes you out to about nine months.

Am I still in?

Yes, you're still in.

Let me ask an unrelated question, Eugene. With regard to the loan commitment or the loan program commitment and the share repurchase authorization, has your stance on that changed at all given what might be reduced requirements on private loan and would hopefully (inaudible).

Not really. I mean we still have the authorization out there and I'm not mentioning it to try to fool people into think that we're going to use it. There's no hidden message there.

The authorization is there but we are not having any meaningful discussions about using it at this point in time. Quite honestly, we want to see how the loan program is used, how successful it is. And two, we do have as I mentioned counterparties that are important to us in that program. And in this time of tight credit and liquidity, the strength of our balance sheet was significant in getting as favorable of terms as we can get with our counterparties and even getting commitments (inaudible).

So, right now, I am personally not really looking to do any significant analysis on buying back shares. It is something that we believe is an appropriate use of cash. It's just on the pecking order isn't the right priority and until we get a little bit better feel for how this program is working, I don't think you should expect to see anything.

(inaudible)

You said your contract and lead growth was significantly higher for the campus reps than for the field reps and I was wondering why the campus reps are seeing more of an improvement from your initiatives than the field reps and where you see this trending.

The field reps are growing at a lower rate due to a reduction of 24 territories that we made last July. So this is the first month -- July marks the first month in which you can compare kind of apples to apples. Throughout most of this year they were down 24 territories.

And we made those changes because the territories were unproductive and we discovered that if we redirected leads from some of those territories into adjacent territories or back to our campus-based reps that it was a more efficient and effective sales channel. We also changed our lead policy that historically allowed our field sales force, those primarily focused on high school students, the ability to work leads up through the age of 20. And we cut that threshold back to nine months within graduation to ensure that the focus was really on penetrating and working the high schools deeper.

At that point in time it switched that lead flow over to the campus reps as well as those other territories I mentioned and we started to build some of the momentum with the campus base. Campus based teams are also the primary beneficiary of the improved marketing efforts. Typically field representatives are responsible for generating the vast majority of their own leads through high school presentations whereas campus-based representatives are dependent upon the leads generated from our marketing and advertising efforts. And so as we continue to increase in that lead engine if you will, this team has been very responsive and productive in the process and we will continue to support that growth.

With that being said, I believe in our prepared remarks I mentioned that we had added 15 campus reps in the third quarter. We expect to add between 10 to 15 in the next 90 days or so and we will continue to add throughout the year if the lead levels support it and we can create that balance I spoke of earlier.

From a field standpoint we will add a couple more military reps and we have identified a couple of territories that we will add in I would say what we call a territory surrounding a campus; so again giving us further penetration in the local markets as well as putting a couple in training so that we can make certain that our vacant territories are filled quickly throughout the year. So I would expect to see continued growth from both sides, both campus and field but that is the reason that campus is growing at a faster rate than field.

Mark Marostica, Piper Jaffray.

I would like to go back to the comments surrounding ad spending in Q4 being expected to be below Q3 and year ago levels. It just seems despite presumably higher TV ad costs in front of the election that this is counterintuitive. But I would like to go back to the thoughts that you have around what is TV ad spending as a percentage of the overall mix implied in Q4 versus the year ago period and last quarter.

I would like to share that with you but I'm not willing to share what the spend is from a competitive reason because our strategy has changed so much in terms of the mix with the television spend and Internet that I prefer not to share that given the momentum that we're seeing at this point.

Would it be fair to say then that TV as a percentage of the overall mix is down than from the year ago period and from even -- expected to be down from Q3 and Q4 of this year?

I would say that the mix in how we are advertising, the creative is different and that we are doing less on the local broadcast stations that we were trying and testing a year ago. We just gained significant efficiencies with our national television advertising and so we've continued to see cost per lead decreases with that. But it is still a significant portion of our overall advertising spend.

Danny (inaudible) Blackrock.

Obviously you guys are seeing some increased activity here but you made reference a few quarters ago to possibly rationalizing your footprint and subleasing some of the facilities. Are you still looking at that and can you update us on that?

Sure. Yes we're still looking at it but I don't think it would be wise for anybody to think that there's some big announcement coming. We have a couple portions of campus leases coming up in the next six to nine months that we're trying to work to rationalize. But as you can imagine when one of four buildings comes up, it's a little bit more difficult.

And quite honestly it's not the best sublease market out there right now. But yes, we are still looking. We certainly recognize that we have the excess capacity. The best use of it is to fill it with students. But we clearly recognize that there are things that we can do and are trying to do on a sublease standpoint. But there's nothing imminent at this time.

Kevin Daugherty, Banc of America Securities.

Just a follow-up on the last one. Can you just update us with your outlook for utilization I guess particularly given the turn in starts? I know last time you talked about maybe early '09 before the starts really start kicking in, maybe any change to that time line?

Well I think last quarter I was I guess maybe cautiously optimistic that we might have year-over-year start growth in the fourth quarter. I don't recall exactly what I said but I know I was less optimistic than I am -- than I said this quarter. So I'm very hopeful that we will see -- we saw a little bit here in the third quarter which we didn't really expect.

Expect to see some in the fourth quarter and hopefully there is nothing that would suggest that those trends shouldn't continue. I think it's more a question of the magnitude of the improvement that we can get in our show rate and the continuation of those contracts are on the books. But not a real specific answer to your question but I would expect to see capacity utilization continuing to improve.

If I could add to that too. Not only has the business been focused on the front-end, we are also looking at especially giving new funding options for our students. Many were not able to avail themselves of the industry based electives. And so internally there will be as we go into fiscal '09 significant focus on increasing program length because there's more funding for the students to now get the industry training at an elective level and that too helps overall utilization.

I add that because we've spent a lot of time talking about the front end of the business but meanwhile our operations teams are very focused on making certain that once a student gets to school, they stay in school and that they're able to optimize all of the training options that UTI provides them with the industry connections that we have.

And can you just talk about what may be the size of that opportunity for electives is?

I would say it's significant at this point given the fact that we have rolled out a number of electives out to all of the sites. Most of the sites have some form of an elective at this point in time. And with students having less access to funding, we have seen a reduction in utilization of these elective classes at certain of our campuses.

So now that they have more access to funding, we will focus on trying to increase that program length. And I don't have specific numbers to give you but I can tell you that there's significant opportunity in terms of available capacity with some of these electives and that's a big focus for our operations team moving forward.

Corey Greendale, First Analysis.

Since several people have asked about the Q4 ad spend, I just wanted to clarify you said it would be down as a percent of revenue not as an absolute dollar figure. Is that correct?

Yes.

I'm not sure that was clear. Secondly, it sounds like you are seeing positive trends in terms of show rates. But have you seen any sort of indication that gas prices are affecting students decisions in any way particularly people who have to move to the area?

We have not seen that so much as an excuse for students on the front end but we are seeing it at the campuses in terms of students' explanation as to why they may not make it to school one day as if they could not fill up their gas tank and UTI's attendance policy is very strict. And so I know that the campus teams are looking at ways to help the students budget properly, carpool and those types of things to ensure that the students are able to stay in school.

With that being said, the cost of fuel has always been one of those things that concerns me about students having to relocate or drive across country to attend UTI. So we're focused on it and tuned into it and are prepared to help students in any way that we can.

Miss McWaters, there are no further questions at this time. Please continue.

Well in summary, I'm very pleased with the progress our teams are making and that we continue to see positive momentum in the marketing, admissions and show rate improvement and I acknowledge and I'm asking you to recognize that given the nature of the business it will take several quarters to rebuild the average student population in revenue. But the front-end drivers of the business are moving in the right direction.

We will continue to invest wisely in our core business to drive more leads, contract starts as well as the average student population to increase densities in electives while maintaining very strong cost controls across the business to make certain our cost structure is in alignment with our average student population and revenue. And we remain committed to being industry's choice and not compromising our commitment to our students and our industry customers.

We will be presenting at a conference in September and we hope to see some of you there. Otherwise we look forward to updating you on our year-end earnings call which is scheduled for Monday, November 24. Have a great evening.

Thank you and ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation and at this time you may disconnect.