Universal Technical Institute Inc (UTI) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Universal Technical Institute, Inc.'s second quarter fiscal 2009 conference call. (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 May 12, 2009 by dialing 877-344-7527 or 412-317-0088 and entering passcode 429925.

At this time I would like to turn the conference call over to Ms. Jenny Bruso, 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 second quarter ended March 31, 2009 and then open the call up for your questions. The Company's earnings release was issued after the market closed today and is available on UTI's website 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 provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations, and are subject to a number of risks and uncertainties that can cause actual performance and results to differ materially from those discussed in the forward-looking statements.

Factors that could affect the Company's actual results include, among other things, changes to federal and state educational funding; possible failure or inability to obtain regulatory consent and certification for new or expanding campuses; potential increased competition; changes in demand for the programs offered by the Company; increased investment in management and capital resources; the effectiveness of the Company's recruiting, advertising, and promotional efforts; changes to interest rates; low unemployment; general economic conditions; and other risks that are described from time to time in the public filings of the Company. Further information on these and other potential factors that could affect the Company's financial results may be found in the Company's filings with the Securities and Exchange Commission.

The Company expressly disclaims any obligation to publicly update any forward-looking statements, whether as a result of new information; future events; changes in expectations; any changes in events, conditions, or circumstances; or otherwise.

Information in this conference call, including the initial statements by management, as well as answers to questions related in any way to any projection or forward-looking statement, are subject to the Safe Harbor statement.

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

Thank you, Jenny. Good afternoon, ladies and gentlemen. Thank you for joining us to review our second quarter of fiscal 2009 results. On today's call I'll provide a high level overview of the quarter and an update on key business initiatives. Eugene Putnam, our CFO, will follow with a more detailed review of our financial results and provide an update on our 2009 forward-looking information before opening the call up for your questions.

For the second quarter of fiscal 2009 our net revenues were $89.1 million, up 1.1% as compared to the prior year. This increase was primarily driven by an increase in tuition prices and an increase of 2.4% in our average student population for the quarter, partially offset by decreases in revenue due to the delay in recognizing revenue associated with our proprietary loan program, and one less revenue-earning day during the quarter ended March 31, 2009.

Our average undergraduate enrollment during the quarter was 15,457, up 365 students from 15,092 a year ago. By the end of the quarter we had 15,391 students in school, as compared to 14,637 at March 31, 2008, which is an increase of 5.2% or 754 more students in school.

The improvement in average and ending student population marks the first positive growth in these metrics in two years. Given the continued investment and improved execution in the areas of marketing, sales and customer service, our key operating metrics continue to improve. Yet, as we advised previously during our earnings call, we remain a few quarters away from achieving the operating income improvement we expect.

So, for the quarter we had a net loss of $80,000 compared to net income of $1.9 million for the same quarter a year ago. As expected, this was primarily due to high compensation and benefits expense as a result of intentionally increasing the size and strength of our sales force, financial aid and other student support departments in direct response to strong growth in student leads, contracts and starts.

This increase was partially offset by lower advertising expense due to improved marketing efficiencies and a favorable advertising rate. Also contributing to the lower net income was a decline in interest income of approximately $800,000.

Before I move on to update our key business initiatives, I think it important to recognize and remind our investors that we have been working on transforming our business for the better part of two years. Yes, it has taken longer than any of us would have liked given the nature of our business model, but we have made steady progress and now have consistent demonstrative evidence that our investments and efforts are starting to pay off.

As both Eugene and I have been saying for the past several quarters, we were willing to accept lower quarterly earnings and margin erosion in the short term to do what was best for the business for the long term. Had we not made these investments, we would have compromised our ability to generate and sustain the profitability we all want in future quarters.

Now, I'd like to talk more specifically about the improvements we're seeing in our business as a result of our investments. Let's begin with lead generation.

During the quarter our marketing team delivered a 47% increase in leads and a 44% decrease in cost per lead compared to the same quarter a year ago. During the quarter we launched enhancements to our creative media and online marketing component of our integrated TV-to-Web platform, which drove the 47% increase in leads for the quarter while delivering a more efficient cost per lead.

Our advertising spend decreased $1.3 million to 8% of net revenues, compared to 9.6% of net revenues for the same period last year. This decrease is the result of a return to a more normalized advertising spend compared with the higher advertising spend last year associated with the launch of our new advertising campaign.

Now, let's move on to student contracts. For the quarter student contracts in total were up 15% compared to last year. The adult segment recruitment efforts produced 27% growth year-over-year for the quarter. This is the reflection of the continued investment in our adult recruitment sales channel and our marketing and lead generation efforts. Since January of 2008 this team has steadily improved year-over-year performance.

Our high school and military-based recruitment efforts continued to improve as well. For the second quarter high school and military contracts grew 5% year-over-year and is tracking to our internal plan.

For decades UTI has had a very strong and effective high school recruitment program using tried and true strategies. Given the changing environment in secondary education, we believe that there is opportunity to further strengthen our presence and expand our penetration in key high school markets. We plan to do this by leveraging proven methods with new innovative marketing and coverage strategies, just as we have successfully implemented such with our adult recruitment program.

To build on the tremendous success that Bob Adler, our Senior VP of Campus Admissions, and Rick Crane, our Senior VP of Marketing, have had in building an efficient lead generation engine and turning around our adult recruitment sales channel, I'm pleased to announce that Bob Adler will now assume responsibility for both our high school recruitment programs, as well as our adult recruitment channel. He will effectively become the Senior VP of Admissions.

This announcement coincides with the retirement of Joe Cutler, our Senior Vice President of Field Admissions, a 25-year UTI veteran. While we will certainly miss Joe, we're very excited about the potential of this team under Bob's leadership, in partnership with Rick and the marketing team.

So to summarize contract growth, we are up 15% for the quarter and 17% for the year, which is at the top end of our range for the full year. As we move through the remainder of the year, we anticipate contract growth to moderate in the low teens, but expect fluctuation on a quarterly basis as we face some tougher comparisons in quarters where we had already implemented new strategies and added additional headcount.

Now, I'd like to talk about the sow rate for a moment. This is a measure of the number of students who start school as a percentage of those who were scheduled to start during the same timeframe. A show rate is a measure of efficiency and effectiveness. While important, it is not the only measure that matters, nor is it the only lever we have or use to drive what matters most, increased starts and growth in our average student population.

During our last earnings call we spent a significant amount of time discussing show rates and whether a decline in show rates would prevent us from achieving our ultimate goal of increasing start, our average student population, improved utilization and, ultimately, operating income. While we reported a decline of 220 basis points in our show rate during our first quarter, we also increased our starts by 6.2% year-over-year.

As you may recall, the last quarter of 2008 was a tough quarter for American in general. The whole country came to a standstill and these realities did impact some of our adult students who are required to physically relocate to attend a UTI campus. As we moved into January, we did continue to feel the effects of lower consumer confidence in a weak economy. Therefore, the show rate was down in January, as one might expect, although it was better than we saw in December.

It is important to note that, by February, our show rate had improved year-over-year by 90 basis points and March was off by only 20. Given that starts during our second quarter are heavily weighted in January, despite continued improvement in the balance of the quarter our show rate was down slightly at 130 basis points. However, we did achieve 20% growth year-over-year starting with 3,381 students compared to 2,829 students a year ago, which is an improvement of 552 students.

This marks the fourth quarter of year-over-year organic start growth and we expect to see this continue through the remainder of 2009 given the continued growth in contracts, which is why it is so important for us to invest in the recruitment, training and development of additional financial aid and future student advisors well ahead of any financial benefit to the organization, even if it negatively impacts quarterly earnings in the short term.

It is absolutely critical that we invest appropriately to ensure we provide the level of customer service needed to accommodate the increasing number of student contracts. If we do not, we simply weight the significant investments we've already made and are marketing and sales efforts to get the students to this point. The payoff does not occur when students make application or sign a contract. It occurs when they start and, more importantly, when they graduate from school.

To address the specific improvements and investments we are making in the areas of financial aid and future student services, let me first recap what was accomplished in the first phase of this initiative that we launched last year as it formed the foundation for phase two, which we began in January of this year.

Last year our focus was largely on improving the customer interactions with both our students and their families. Specifically, the role of financial aid advisors was very transactional and our people were very focused on the mechanics of the job versus building a rapport and a relationship with students.

First, we outsourced a lot of the front end administrative and transactional work so that our people could spend quality time servicing our students. Then, we provided customer service training, teaching people how to address student concerns while reinforcing the value of a UTI education.

We shifted our front line's focus from an internal process-driven perspective to that of the student and the influencer. Then we started to evaluate, measure and drive different behaviors and outcomes.

Phase two of what we call our Success Initiative launched in January. During the second phase our focus is on improving and simplifying the customer experience by adding sufficient staffing to meet the increased number of students scheduled to start, by continuing to train and develop existing and new team members, by evaluating and implementing changes to work flows and processes using technology and analytics; and lastly, by measuring what matters most with new performance management tools.

The organization is well into phase two at this point, readying for the upcoming summer and fall starts. While there are not any guarantees given the current economic climate, I feel we are better equipped, staffed and prepared to help our students than we have been in years past. We remain focused on the things that we can control.

As I said before, investing in this area of our business is worth it. Once students start school, better than 70% graduate. Our graduation rates remain strong, despite the obvious challenges our students face to stay in school. I commend all of our staff and our instructors who are committed to helping our students get the education they need to become gainfully employed in their chosen field.

Let's talk for a moment on graduate employment rates. As you can imagine, with all of the turmoil in the auto industry, our employment services teams have been working very hard to assist both our students and our employers during this challenging time.

Under the circumstances, I'm very pleased with the progress our team is making. We are tracking about 500 basis points behind our normal employment percentages for this time of year; however, we are improving from the prior quarter. Diesel placement rates are the strongest, near 90%, with auto, motorcycle and marine lagging behind.

During the quarter we did see some positives on the job front. We had better than a 35% increase in automotive job openings. Motorcycle job openings nearly tripled and marine job openings even grew beyond that. We did see a 40% decline in diesel job openings in the quarter as this industry tends to lag automotive. Hopefully, it will do the same and rebound nicely in the next quarter, just as automotive did this quarter.

As we talked about during our last call, we are seeing a shift from graduates taking employment with dealerships to other areas of the industry. Our most recent data suggests that 41% of our auto/diesel graduates are going to work in dealerships. 32% are going to work in the aftermarket, and the remaining -- I'm sorry, 18% are working in diesel fields with the balance in racing, body shops, parts, etc. In years prior, greater than 50% went to work at dealerships.

UTI remains committed to working with our OEM partners to provide both elective and advanced training opportunities for our students. At this point, we have basically completed most of the contract renewals with all of our OEMs and we are pleased with the outcome overall. We have partnered with them to modify the agreements to best meet their training needs, whether it be dealer training, graduate level training or student-elected base training.

We have continued to consolidate some of the training centers to improve operating efficiencies for both the OEMs and UTI. We have canceled a couple of classes for certain manufacturers based on dealer demand and cost constraints and are working with others to incorporate elective programs into the training mix.

At this time we are in discussions with Mercedes-Benz USA and anticipate they will launch an elective program as an alternative to their current graduate-level training program. While all of these changes create some short-term income issues for our custom training group, the Mercedes-Benz USA elective program should be positive for UTI and our students as more students will be able to participate in the manufacture-specific training programs.

Now, I'd 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 mentioned, net revenues for the second quarter of fiscal 2009 were $89.1 million, up 1.1% compared to the prior year. The increase was primarily driven by higher tuition prices and an increase in the average undergraduate students of 365, or 2.4%. As Kim mentioned, it's important to note that this is our first increase in average enrollments in over two years, and we achieved this milestone sooner than we anticipated.

Two items negatively impacted our revenues for the quarter. First, approximately $1.8 million of tuition, revenue and loan origination fees financed under our loan program were not accrued. And as a reminder, we will recognize the related amounts as tuition revenue when those amounts have actually been collected, after the student graduates from school.

Additionally, our revenues were decreased by approximately $1.4 million related to one less revenue-earning day during the three months ended March 31st. The third and fourth quarter of this year will have the same number of earning days as last year.

The combination of these two items negatively impacted revenue by $3.2 million, or approximately $0.08 per share.

Operating loss for the second quarter of 2009 was $200,000 compared to income of $2.3 million in the same period last year. The decline is due to increases in compensation costs, partially offset by lower advertising expense.

Compensation and benefits increased $4 million to $48.3 million. The increase in comp and benefit cost is attributable to increases in the number of sales force representatives and an increase in the number of employees in our financial aid and other student support departments, as Kim discussed.

We increased our staff in these areas in response to several factors -- the large growth in contracts since the beginning of January of 2008, the changing student funding environment, changes in the general economic conditions and changes to our internal processes. And we also experienced an increase in benefit expense due to increased expenses under our self-insured employee benefit plans.

Advertising expense decreased $1.3 million for the quarter from $8.5 million to $7.2 million. As Kim previously discussed, the decrease is the result of a return to more normal advertising spend compared with higher advertising spend last year during the second quarter, which was related to the launch of our new advertising campaign. Going forward, we would anticipate advertising expense as a percentage of revenue to be in the range of 6% to 7% for the second half of the year, reflecting the significant efficiencies that we have achieved.

Additionally, we recorded approximately $580,000 in fixed asset write-offs and approximately $600,000 in severance during the second quarter. These two items negatively impacted earnings by $0.03 per share.

And also as Kim mentioned, interest income decreased $807,000 to roughly $60,000 for the second quarter due to moving a large chunk of our cash to a lower risk, lower yield US government securities mutual fund.

Our provision for taxes for the six months ended March 31st was 39%, down slightly from 39.2% for the six months of 2008.

Net loss for the second quarter of 2009 was $80,000, which rounded to $0.00 per share, compared to a gain of -- to positive net income of $1.9 million, or $0.07 per share, for the second quarter of 2008.

Our balance sheet continues to be extremely strong. We had cash and cash equivalents of nearly $70 million at quarter end compared with $81 million at September 30th. During the quarter we generated $3.5 million in cash flow from operations as compared to $1.6 million last year. And we continue to have no debt on our balance sheet.

During the quarter we purchased approximately 1.6 million shares of stock at an average price of $10.87, for a total cost of approximately $16.9 million. We currently have approximately $3.5 million of repurchase authorization remaining. And as you may have seen, we just announced that our Board of Directors has approved a new repurchase plan in the amount of an additional $20 million.

I would not expect the new $20 million authorization to be used immediately, however. Rather, I believe it will be used opportunistically, dependent upon a variety of factors including market conditions, cash flow forecasts, changes to the student lending environment and alternative investment opportunities.

During the quarter ended March 31 we purchased $4.4 million in fixed assets compared with $3.9 million in the same period last year. These purchases are primarily associated with information technology projects, primarily the conversion to a new general ledger system which occurred this past -- successfully occurred this past weekend, as well as ongoing replacements of equipment related to our student training.

Let me spend just a minute or so on the lending and regulatory environment. We recently completed a formal request for information for the 2009 channel award year to determine the composition of our suggested lender list for FFELP and private alternative loans. We have added five additional FFELP lenders to our list, bringing the total now to 10 lenders, and we also added an additional lender to our private alternative loan list, where we now have four.

With the potential of the FFELP program being eliminated under the Obama budget proposal, we continue to move forward on plans to implement the Federal Direct Loan Program. Although our preference is to remain with FFELP, all of our schools are fully approved to participate in the direct lending program and I anticipate running a pilot program at one of the campuses before year end.

We continue to see good results on our internal loan program. At March 31st, we have committed to provide approximately $9.8 million, made up of 1,758 loans representing an average balance of just under $5,600 per student. And we have approximately $7.5 million in loans actually out in the program.

As of March 31st, we have also had $3.5 million in deferred revenue which, as a reminder, does not appear on our balance sheet, but that we will recognize at the time we collect payments on these loans in the future. Given the positive results that we're experiencing with this program, coupled with our strong balance sheet, our Board has authorized an additional $10 million to be allocated to our loan program going forward.

I'm also pleased to report good results on our draft cohort default rates. Our rates for fiscal year 2007 ranged from 6.2% to 6.8% across our three [OEAIDs]. That is an improvement compared to 6.5% to 8% range for fiscal year '06.

Now finally, I want to speak to the progress that we have made and where I think we are midway through the year and what my expectations are for the remainder of the year.

The guidance I gave at the beginning of this year suggested double-digit contract growth, high single to low double-digit start growth, and average student enrollment to turn positive on a year-over-year basis sometime in the second or third quarter. To date we have met or exceeded all of these metrics. For the first six months of the year, contracts are up 17%, starts are up 12.5% and our average enrollment turned positive by 2.4% during the second quarter, as I mentioned, sooner than we anticipated.

More importantly, I'm particularly pleased with the acceleration of our start improvement. Over the past three quarters our start growth has improved from 0.5% in the third quarter of 2008 to 4.9% in the fourth quarter to 6.2% in the first quarter of this year. And now, this quarter we achieved nearly 20% start growth. And while I'm the first person to caution investors about the difficulties in comparing short timeframes due to different year-over-year start schedules and calendars, the trend that we saw within this current quarter suggests an ability to sustain double-digit start growth throughout the remainder of this fiscal year.

Specifically, on a year-over-year basis, January starts were up 8%, February starts were up 38% and March starts were up 18%. And while the April results are still preliminary, it looks like they are going to be up in the 20%-plus range, continuing the trend of accelerating start growth. So, I clearly expect to see double-digit start growth for the rest of this year.

So, what should that mean to our financial performance? Given the start growth that we are anticipating and accounting for the continued investment in sales and student support personnel, I anticipate that, absent any unusual items or significant macroeconomic events, that we will earn in the range of $0.20 to $0.24 during the second half of this fiscal year.

Now, that said, it will not be spread evenly over the last two quarters. Given the normal seasonality of our enrollments, I would expect our third quarter earnings to be similar or slightly better than our second quarter, with the bulk of our second half earnings coming in Q4. If that plays out, it is quite possible that we will achieve the final piece of the guidance I have at the beginning of the year, which was double-digit operating margins in Q4.

And finally, it looks like we will end April with roughly 1,000 more students than we had at the end of April a year ago. With the growth that I anticipate in the second half of the year, it's reasonable to expect that we could be up 2,000 or more students at year end, which would produce a very nice starting point in terms of capacity utilization and earnings power as we enter fiscal year 2010.

In summary, I thought this was an excellent quarter for us. While we are continuing to focus our resources on the challenges the economy presents, we are clearly making progress, accelerating progress in getting students into school and utilizing our capacity, which I believe will soon lead to rewarding financial results.

We certainly thank you all for your time, interest and patience. And with that, we'd now be very happy to open the lines and take your questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS.) And our first question comes from Kevin Dougherty from the Bank of America. Please go ahead with your question.

Great. Thanks, guys. I guess, just looking at the EPS guidance, could you talk about what sort of assumptions you're making in terms of revenue growth? I guess there were a couple of factors impacting the revenue growth this quarter. It looks like there'll be some sort of an impact from the revenue recognition going forward. If you could maybe just talk about that and talk about how pricing might influence that metric as well.

Sure, Kevin. I'm not going to give absolute guidance as far as revenue. What I will say is the assumptions are as follows. As you pointed out, we will continue to see some compression of revenue, probably in the neighborhood of roughly 2% that we are not accruing due to our loan program.

Now, that said, towards the latter half of this year, we will begin to see some of the students that were packaged when we began this program roughly a year ago to start entering their repayment terms. A few already have, but it's not significant yet. But by the -- by our fiscal fourth quarter and the first quarter of 2010, we'll start to see some meaningful amount enter repayment. And obviously, at that point in time we'll get some better estimates as to what the default rates are on those and whatnot. But we have certainly assumed that we will continue to utilize the additional $10 million that we have, and that will have some dampening effect on revenue.

That said, that will be overly compensated for in our belief by the additional start growth that we're seeing, the contract growth that we're seeing, the pricing increases that we've had over the course of the last year work their way in. But quite honestly, that's very difficult to model as our prices are fixed at times of signing the contract. So, it works its way in the system over the course of six months or so.

So, we would expect to see obviously not as good a revenue growth in the third quarter, but we are clearly, based on the guidance I gave of EPS, suggesting fairly significant year-over-year revenue growth in the fourth quarter.

Okay. That's helpful. And just as a follow-up, could you just talk about the expectation for the high school market in the second half of the year?

Yes. The second half of the year, as you know, it winds down in terms of our contracts. But given the growth that we've seen in contracts with the high school sales team this year, we're anticipating a solid delivery of starts through the balance of this fiscal year.

We will regroup under Bob's leadership and deploy different or new strategies as we launch the fiscal '10 sales year and that launch is in August. So, we're going to continue to build on the things that have made us successful in the past, but we believe there's opportunity to leverage both Bob and Rick, as well as a seasoned team out in the field to take advantage of new opportunities as we go into fiscal '10.

Okay. Great. Thanks.

Our next question comes from Mark Marostica from Piper Jaffray.

Hey, thank you. The first question gets back to, Eugene, your Q3 guidance. You mentioned EPS should be similar or slightly better than Q2. And I just want to clarify. When you make that statement, are you talking about a Q2 that excludes the $0.03 from the fixed asset write-down? And I believe you said severance as well. So, it's be comparing to like a $0.03 Q2 adjusted versus a flat Q2?

No. I'm referring to the reported number.

Okay. Fair enough. Thanks for the clarification there. And then you were kind enough to give us the start growth that you saw in April. Could you give us the same for starts -- excuse me, for contracts, adult and high school/military, and also the show rate in April?

The show rate is not final yet. It will mirror fairly closely to what we reported on a growth or decline basis to the second quarter. So, I anticipate, based on preliminary numbers, that it'll be down slightly on a year-over-year basis.

The contract growth numbers will be right smack in the middle of the range that we talked about of low to high double-digit -- I'm sorry, low to high teens.

Okay. And last question then I'll turn it over. This gets to the cost per start trends we saw in the quarter. Obviously, you spent up on the selling and marketing line due to the investments you talked about. But when should we start to see that cost per start to moderate?

Well, I mean, if you're looking at current quarter costs divided by starts, which I guess is probably the only way you really have to look at it, that won't really moderate until the fourth quarter. Because as you know, seasonality, our third quarter is -- on an absolute basis is a low start quarter for us and our fourth quarter is a very high start quarter for us. And while our expense trends are variable, they're not that variable. So, if you just -- if your metric is cost divide -- current quarter expense divided by current quarter starts, you won't see improvement on that, I don't believe, until the fourth quarter.

Okay. Fair enough. And maybe one last add-on to that. With the show rate comment, I don understand the point there. But if you look at just rep productivity on a per rep basis, do you feel that your reps are as productive as you are planning for them to be productive? Or how is that trending relative to internal plans?

I'd say that the field and military are exactly where we expected. And for the most part, campuses with one exception. And campuses are adult recruitment channel. It is slightly down and that is because we allocated some of our headcount to a pilot and that's dragging down some of the efficiency. But if you carve that out, I'd say it's where we wanted it to be. So, it's slightly down for the adult channel.

Okay. Thank you.

Our next question comes from Jeff Silber from BMO Capital Markets.

Thanks so much. Actually, it's Jeff Silber. Going back to the comments regarding the potential for double-digit operating margins by the fourth quarter. Where would we see that leverage coming from, which specific line item? And any details on that would be great.

Well, you'll see it -- and again, to clarify, I'm talking about in the fourth quarter, for that quarter specific; obviously not for the full year.

I got it.

You will see it obviously in the revenue line. That is a big revenue quarter for us typically. The -- and you'll see it basically with holding expenses fairly flat. In fact, probably declining somewhat from second quarter reported numbers, with significant improvement in revenue.

I'm sorry. Let me clarify. Which specific expense line item? Education services or SG&A, or both?

You'll see it in both probably, a little bit more in SG&A.

Okay, great. I appreciate that. And then the two one-time items you mentioned that you booked in the second quarter regarding fixed asset and severance, where were they booked exactly?

Boy, I have to get back to you on --.

I'll check the queue. If not, we can follow up offline. Thanks.

Okay, we got it. Go ahead, Jenny.

The severance was recorded in the educational services and facilities expenses. And the fixed asset write-offs was in selling, general and administrative.

Okay. I appreciate the color. Thanks so much.

Our next question comes from Gary Bisbee from Barclays Capital.

Just following on that one, what were the two numbers for the write --?

The write-offs?

Yes.

The fixed asset was $585,000, I believe, and the severance was $600,000.

Okay. Are you getting any feedback from students that are enrolling or maybe signing contracts that can help you determine how much of the rebound you're seeing here is sort of the benefit of the weak economy, particularly in that adult channel, which has perked up a lot, versus the changes you've made? Is there any way to parse that apart?

Well, it's a good question and it's difficult to do. But I think we all believe that the weak economy is helping us in certain segments. So, we talked in earlier calls about the population that lives within close proximity to the campuses. Those student segments are benefiting by a weak economy, or UTI is benefiting by that. But those who have to physically relocate are being harmed by it, specifically the older students. So, those that may have had a spouse or parent that lost a job, have not been able to save sufficient resources to relocate, they are negatively impacted at this point by the economy. So, we're seeing it from both sides.

I do think that there has been significant improvement in terms of our marketing and sales strategies, and the execution on those strategies is helping to drive it. So, when things were going the opposite direction, we said it's probably a 50/50 mix. And my guess is it's probably a 50/50 mix at this time. It's just difficult to quantify it.

Okay. And then just the follow-up. It's pretty obvious given the acceleration you're seeing why this year would be so backend loaded. Do you have any ability to think what next year could look like? Because the seasonality obviously historically before the top line challenges started was much more even. In fact, I think in several years the first half of the fiscal year was a lot stronger than the second half, I guess that being summer. Is that something that might be likely to happen next year, or do you think you'll still be in such a ramping mode on the top line that we might see something more similar to what you're talking about this year in terms of backend loaded?

I don't believe 2000 -- or I'm sorry, 2010 will be as backend loaded as 2009. Obviously, what I was -- the point I was trying to make is, if our plans play out the way I spoke to, we will have a significantly higher amount of students in school as we begin fiscal year 2010 than we have in the past. And while we certainly expect to continue growing that population, I don't think we continue to believe that it's going to grow exponentially like it has this year.

So, I think next year, while we will still see significant seasonality, specifically in our second and third fiscal quarters, I don't believe you'll see as big a trough and a peak, if you will, between our high points and our low points as you will in 2009.

Great. Thanks.

Our next question comes from DeForest Hinman from Walthausen & Co.

Hi. Just had a couple questions on the loan program. When -- I just want to make sure I have a good understanding of it. When we take the cash off the asset side, based on the disclosures in your 10-Q, it sounds like we don't book a deferred revenue, at least to me at least. How -- can you help me understand the flow through on the balance sheet, how that works?

Yes. Well, first of all, the cash doesn't really come off because the cash is simultaneously being lent out to the student but payable right back to us. So, it never really leaves the Company.

On our sub-ledgers what you'll have is a loan receivable from the student and deferred revenue, which eliminated consolidation. So, when you look at our balance sheet you don't see the deferred revenue amount associated with the loan program, nor the receivable.

Once that student starts making payments, what you'll see is cash -- seen through the income statement is cash coming in represented as tuition revenue. And then on the sub-ledgers you won't really see any change to the balance sheet other than the increase in cash and increase in retained earnings. The change in the loan to the student and the deferred revenue will only really show up in the footnotes.

Alright. So, why aren't we booking the -- that loan balance, I guess, has some sort of separate line item from cash.

Because accounting rules don't allow that until you have sufficient history, which we clearly don't. It's obviously -- it's the most conservative way that we can account for it. What we did not want to do is accrue a bunch of revenue not knowing what the default rates were going to be going forward and then have a significant amount of bad debt really making our income statement extremely volatility from quarter to quarter.

Alright. Thank you.

You're welcome.

Our next question comes from Trace Urdan from Signal Hill.

Hi. Good afternoon. I don't mean to drag us back to the mundane, I apologize. I just want to be crystal clear to be sure, Eugene, that I understand your guidance. You're suggesting that in the third quarter earnings could be effectively somewhere in the range of what we saw this quarter. And that the $0.20 to $0.24 of back half earnings that you pointed to in the press release would come essentially all in the fourth quarter. Is that correct?

Well, I said expect $0.20 to $0.24 over the course of the next six months, of which I said similar to or slightly better. So, we had $0.00 so take it $0.00 to whatever you want to assume is slightly better, $0.02 or $0.03 in the third quarter, with the remainder coming in the fourth quarter.

Okay. And then again, I'm sorry for this, to be so mundane here. But I also thought I heard you saying that certainly in the fourth quarter, as a percentage of revenue, both of the major expense lines would likely be lower than the percentage of revenues reported in this quarter, but that on an absolute basis the number could be lower as well. Is that also correct?

I don't believe I said that, but that is -- I certainly said the first part. But I would be cautiously optimistic with the second part as far as them being absolutely down could be correct as well.

Okay. I'll have to go back and check the transcript.

You are correct. I would certainly expect in the fourth quarter the leverage to appear in both the expense line items. And it's conceivable, absent unusual items or anything like that, that the absolute dollar of expense could be flat to slightly down.

Okay.

But it's close and that's going out on the crystal ball a little bit.

And the third mundane question. Would you expect your tax rate on positive earnings in the back half of the year to sort of jump back to its historical range? Or is there any reason why that might be lower than normal?

No, I would expect it to be fairly close to the historical range.

Okay. Fair enough. And then, Kim, maybe the last question for you. It sounds like you've been having conversations with some of the manufactures. And I don't want to put words in your mouth, but it almost sounds like they may be going a little bit more positively than you might have anticipated. I wonder if you could just give us some -- a little bit more color than you did in your prepared remarks about how they're thinking about the program in terms of investments that they're making versus the sort of competition in this environment right now. What are you hearing from the car companies?

Well, as it relates to UTI, we were very pleased that, for the most part, we have one manufacturer, although we have verbal commitments, we haven't signed the renewed agreement. But you may recall that these contracts were in flux and we had not signed them ahead of the year. And so, we are pleased that those have been completed. Very pleased that they basically renewed in some way, shape or form. However, as you can imagine, they're very focused on cost containment, cutting costs. And specifically, looking at the needs of their dealer network.

So, some of them have been innovative in terms of how they're going to seed the technician pipeline for the future, as they believe this is a temporary situation. But they also respect that dealers may not be able to come out of pocket and pay thousands of dollars for a technician in the graduate level training program. So, they're really trying to keep in check both the supply and demand, the balance of those two factors with respect to technicians.

That being said, we are seeing some of the manufactures increase their elective programs. And as a reminder to those on the call who are following the story, the elective programs are student paid and that gives more students the opportunity to take the manufacture-specific programs versus graduate level that is funded by the dealers or the OEMs and really limits student participation.

Electives over all are more profitable for UTI. So, while we're seeing some short-term impact in terms of revenue and operating income for our custom training group, over the long haul this is probably more favorable to UTI, to our student populations and certainly to the dealer networks given their focus on cost containment.

So, we're pleased with the quality and stability of the relationships and are being as flexible and adaptive to both the OEM partner needs, as well as the dealer needs, during this turbulent time for them.

And you guys have been reaching out to independent shops over the last several quarters now. How are those overtures being received? How are those types of hiring outlets, I guess, receiving UTI grads?

Very positive. And I think you see the aftermarkets use us as their opportunity to take market share. So, they are very welcoming and receptive to our calls. We're tackling it from a B2B business perspective at the corporate level, as well as in local markets where we have our campuses and the local markets where our students expect to return.

And so, we've seen that shift or a migration of the graduate mix moving from dealers to the aftermarket. And at the same time, have seen wages for that population stay relatively flat, which I think is a good outcome given that most of the time those going to work in dealerships were getting paid a higher level. So, those trends are positive and we'll keep focusing on both ends of the market, trying to match both our student preferences and needs with our employers.

Our next question comes from [Gretchen Saunderson] from Hawkshaw.

Hi. Could you update us on some of the things you're doing to improve the show rate and whether that benefited the March quarter and, if not, when you think it might help?

We've been doing a number of things, which I tried to cover at a high level in the prepared remarks. And I'd say that the most specific things we are focused on is making certain that we have adequate staffing; that our training is in place for both our existing and new hires; that we are focused on process improvement, identifying certain student types and the types of services that they need and organizing ourselves around the students' needs versus our own internal processes.

While we are gearing up for the large summer and fall starts, that is yet to be seen. And I hope that we see inside of the Q3 and Q4 start timeframe.

With that said, it is difficult to predict. We feel that we are doing everything in our power, focusing on the things that we can control. But certainly, the economy tends to throw out the new curve ball, well, at least every week or month, thereabouts. So, I don't believe that we've fully seen the benefit of these efforts and expect to see that unfold as we move into the second half of the year.

Our next question comes from Jerry Herman from Stifel Nicolaus.

Thanks. Good afternoon, everybody. Kim, I just wanted to follow up on the manufacture-specific training issue again. You guys in the past have helped frame roughly what that contribution is. Can you talk about what you expect that change to be, maybe in terms of the contribution to revenues, either in fiscal '09 or -- I know that a lot of the contracts changed as of December 31st or thereabouts, maybe on a calendarized basis.

I'd say that it's relatively insignificant in the big scope of things. All of our manufacture partners and revenue through the custom training group related -- or I guess it's less than 5% of our total revenue. And it's difficult to say what the full impact will be given that some of that revenue, typically seen on the graduate level programs, will now migrate into the campuses with some of the elective training programs, as well as the offset with dealer training.

But that's something that we remain flexible to their needs as the year progresses. It's not something I can speak to now. I wouldn't be that overly concerned, though, in terms of what the revenue impact would be. It's still relatively small compared to the core business.

So, a lot of folks on these type calls are asking for corporate reimbursement percentages. Notwithstanding any sort of shift in the business, you think that number is insignificant.

I think, certainly for our business, we don't have a lot of corporate reimbursement type revenue.

Well, yes, I put it in that category.

Right. But the big shift would be that the dealers and the OEMs would not be paying for all of the graduates coming out of the manufacture-specific programs. The students would start to absorb some of that tuition if they prefer that type of training. So, it's going to shift, but there will be a period of time where we may not be earning the revenue in the same way that we had before. But overall, it's not significant.

Okay, great. And Eugene, a question about the financial aid support, student services support. I'm wondering -- obviously you guys are investing there for the ramp in students that are occurring. But I'm wondering how you think about those dollars spent in sort of today's environment relative to maybe a couple of years ago. And what I'm getting at is do you see a shift in the cost structure today versus what it was a couple of years ago? Is more support in fact needed?

Well, with the caveat that I wasn't here a couple years ago --.

You can get off the hook, right?

I would still say, yes, I do. Simply put, we're putting more dollars to students that have -- towards supporting students that have already signed contracts. And that time between they've signed a contract and they're expected to show up for school, that part of the equation has changed over the last couple of years and it's changed for two reasons. One, we had a lot more of those students and, two, we believe -- and we think it's true and we believe that at least a large percentage of those students need more time and more effort and more hand-holding and more support to successfully bridge whatever hurdles that they have between signing that contract and actually showing up for school.

So, from that standpoint, yes, I think we put more of our spend there today than we would have two or certainly five years ago. And I think the third part of it is it's a different type of employee that we have now than we had five years ago.

And I may be oversimplifying this, but five years ago it was much more transactional related, where it was, okay, let's do this paperwork and, thanks, John, for signing up for school. We'll see you in six months. Make sure you fill out your forms. Over-exaggerating here, but on the other end of the spectrum. Whereas today, it is much more a relationship business which requires different skill sets, requires different training, it requires different coaching, requires different measurements of what's expected of those individuals to be successful, that is more aligned in how we want to approach that student going forward.

So, it's a different quality, a different type and quality of person; additional resources that are put towards the fact that we have more students and more contracts; and finally, the fact that they clearly need more time per student.

Great. Thanks very much. Appreciate the comments.

Sorry for the long answer.

(OPERATOR INSTRUCTIONS.) And ladies and gentlemen, at this time I'm showing no additional questions.

Okay. Then we'll bring the call to a close. I'd like to thank you all for your questions and your time today. We look forward to updating you on our third quarter earnings call, which is scheduled for Tuesday, August 4th. Hope you have a great evening. Thank you.

That concludes today's teleconference. You may now disconnect your telephone lines.