Universal Technical Institute Inc (UTI) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Universal Technical Institute, Inc.'s third-quarter fiscal 2009 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 11, 2009 by dialing 877-344-7529 or 412-317-0088 and entering passcode 432399#. At this time, I would like to turn the conference 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 third quarter ended June 30, 2009 and then open the call up for your questions. The Company's earnings release was issued prior to the market opening this morning 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 provision 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 could 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 expanded 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, unemployment rates and general economic conditions, as well as 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 statement 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 morning, ladies and gentlemen. Thank you for joining us to review our third quarter of fiscal 2009 results. On today's call, I will provide a high-level overview of the quarter, an update on key business initiatives and some insight on how our longer-term business strategy will unfold as we move into our next fiscal year. 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 to your questions.

For the third quarter of fiscal 2009, our net revenues were $87.9 million, up 8.9% as compared to the prior year. This increase was primarily driven by an increase in our average student population of 10.1% for the quarter and an increase in tuition prices, partially offset by decreases in revenue due to the delay in recognizing revenue associated with our proprietary loan program.

Our average undergraduate enrollment during the quarter was 14,813, up 1361 students from 13,452 a year ago. By the end of the quarter, we had 14,281 students in school as compared to 12,478 at June 30, 2008, which is an increase of 14.4%, or 1803 more students. The improvement in average and ending student population marks the second consecutive quarter of positive growth in these metrics in two years.

Net income for the quarter was $1.9 million, or $0.08 per diluted share compared to a net loss in the prior year third quarter of $700,000, or $0.03 per diluted share. This is primarily attributable to an increase in net revenues partially offset by higher compensation and benefits expense as a result of intentionally increasing the size and strength of our salesforce, financial aid and other student support departments in direct response to strong growth in student leads, contracts and starts.

The increase in compensation expense was partially offset by lower advertising expense due to improved marketing efficiencies. Also offsetting the increase in revenues was a decline in interest income of approximately $500,000 due to lower cash balances than last year combined with lower interest rates.

Overall, I'm very pleased with the results for the quarter. As you know, we have been steadily transforming the business over the course of the past few years and are really beginning to realize the return on our investments across all dimensions of the business.

Let's look at the continued improvement across the student funnel beginning with lead generation. During the quarter, our advertising spend decreased approximately $1.7 million to 6% of net revenues compared to 8.6% of net revenues for the same period last year. This improvement was driven by an effective and efficient Web-centric strategy, national advertising campaign and favorable advertising rate. The 25% decrease in advertising expense produced 3% fewer leads than the same quarter a year ago, but exceeded our internal plan requirements due to continued improvement and overall lead quality.

This quarter, the marketing team continued its focus on search engine optimization efforts, achieving significant improvement with key term positions. We also enhanced our social media presence and engagement with our target audience. Our national TV-to-Web platform has proven to be a reliable lead generation engine that better qualifies the perspective student. We anticipate a favorable media buying environment through the remainder of the year and will continue to benefit from such.

Let's move on to student contracts. For the quarter, student contracts in total were up 9% compared to last year. Adult contracts were up 18% year-over-year due to the Company's commitment to grow the adult student segment with targeted marketing programs, a larger, more capable salesforce and enhanced sales processes. As a reminder, for the past two years, we have really focused our efforts on growing our adult student segment to better balance our starts and overall population during the nontraditional high school start season. This balance drives improved operating efficiencies across the business.

Moving to the high school and military sales channels, both teams' performances were on par with last year. This is especially pleasing given we have kept several remote territories open since the beginning of the quarter while we finish our high school market coverage strategy and territory alignment project, which we expect to complete within the next 45 days. Although this decision creates short-term student contract pressure on the high school sales channel, it is low risk given this is the time in which high school juniors or upcoming seniors are written, but not scheduled to start for 12 months. It is our belief that we can quickly make up any lost ground as the new school year begins. Further, we do not believe this decision had any negative impact on starts for Q3, nor will it in the next quarter as we have a team of people working with students from these remote unfilled territories.

The high school market study was launched to support our broader business strategy to increase market penetration in areas within close proximity to a campus and to better allocate resources to improve both operational and financial results. I am providing you this level of detail so that you understand some of the strategic drivers for the business from a sales perspective. We're working to continue to increase the number of local students coming from within close proximity to a campus, to improve the mix of adult students to high school students to fill the nontraditional start dates and balance the student population throughout the year and to implement the most efficient and effective recruitment strategies in remote territories.

So to summarize contract growth, we are up 9% for the quarter and 15% for the year, which is at the top end of our range for our guidance this year. As stated during our last call, we anticipate contract growth to level off in the low teens as we move through the remainder of this fiscal year.

Now let's talk about show rates. Our show rate for the third quarter improved sequentially from a decline of 130 basis points year-over-year in the second quarter to a slight decline of 70 basis points year-over-year for the third quarter. More promising was the sequential improvement month-to-month during the quarter. The show rate for June was better than last year by 160 basis points. More importantly, however, we achieved 32% start growth during the quarter on a year-over-year basis starting 2946 students compared to 2225 students a year ago. This is an improvement of 721 student starts and marks the fifth consecutive quarter of year-over-year organic start growth. Based on the positive trends across the student funnel, we expect solid start growth in the fourth quarter as well.

Our teams at each campus are working very hard to not only get students to school, but to keep them in school. Although stable, student retention has been more challenging than in years past given the current economy, but our teams are doing a great job of keeping students in school by delivering a quality education and by offering greater levels of customer service and support where needed. We are very proud that we continue to graduate about 70% of our students.

While the job market is more challenging, both our employment advisers and our graduates are determined to make the best of the situation and are working hard to do so. We are still tracking about 500 basis points behind our normal employment percentages for this time of year. However, we did see some improvement in our employment percentages by program since last quarter.

We are continuing to increase our communications with students and potential employers and improving our marketing efforts, which are increasing our number of job leads. As we mentioned during our last call, today, approximately 40% of our auto diesel graduates are accepting jobs in auto dealerships compared to 56% a few years ago. Another 32% of graduates are going to work in the aftermarket and 20% are pursuing careers in diesel-related jobs with the balance in racing, bodyshops and parts, etc. This obviously reflects a shift in the overall employment landscape, as well as our ability to respond to dynamic changes in the marketplace and build relationships across the transportation industry beyond automotive OEMs.

Our relationships with leading OEMs remain strong and continue to differentiate UTI as the industry's choice. We are proud that despite the challenges they face, we have been able to maintain our OEM relationship. Recently, we announced the launch of the Mercedes-Benz elective program as an alternative to the current graduate-level training program. Given that student interest in the Mercedes-Benz brand is very strong, we expect this program to be well-received by the students. This is positive for UTI as well as we have more flexibility with instructor/student ratios and are not subject to enrollment limitations other than by physical capacity. The program is more cost-effective for dealers as well.

Overall, the business continues to move in the right direction. We made significant improvement in sales and marketing and the future student experience. In retrospect, many of our efforts these past two years have been spent trying to better understand our student customers, their needs, beliefs values and behaviors. As a result, we have changed our marketing strategies and business practices in response to a changing customer profile and an increasingly dynamic and competitive marketplace. And it is working.

Yes, there is more work to be done and that is priority one -- to protect and grow our core business in existing markets. But mid and long-term future growth requires a parallel path to grow our core business in new markets. There remains opportunity to improve utilization at our current sites and we will continue to improve utilization rates as much as we can with a concentrated focus on local markets and the most promising student segments. We should not, however, expect the old big-box destination campus model to drive our future growth. Like all customers, our students want a more convenient and affordable education.

Furthermore, our industry customers have technician demands in certain markets that we simply cannot meet with our existing model. This is good news for UTI as it means there is more opportunity to grow our core business in new markets. I am excited to announce that we plan to open a new, albeit smaller, 100,000 square-foot automotive and diesel campus in Dallas, Texas during the summer of 2010. This is approximately one-third the size of our larger destination campuses and will accommodate 750 students on average, primarily from the Dallas-Fort Worth metro area and a few surrounding cities.

There are several factors that influenced our choice of Dallas for our new campus. First, Dallas is one of the top five US metro markets with favorable demographics and high population growth. Two, there is a high potential for acquiring students in the Dallas market that are currently not attending a UTI campus. And three, Dallas offers excellent employment potential for our graduates in the immediate and surrounding areas.

We are in the process of identifying a specific location for this facility and anticipate we will spend in the range of $4.5 million to $5.5 million on staffing and equipment for this campus over the next 15 months. We will begin to incur sales and marketing costs approximately nine months in advance of the opening of the new campus and anticipate that this campus will become profitable within nine to 15 months after opening.

While I know there will be more questions on the subject than we are prepared to answer today, we thought it worth mentioning as we fully expect the real estate transaction to be completed before our next earnings call at the end of November. With that said, there are a couple of important points that we can cover now to address some of the more likely questions.

First, we believe there will be minimal cannibalization to the Houston campus from the new Dallas location, which can be offset by increased local advertising in the Houston and surrounding markets. In addition, we fully expect the number of students currently attending a UTI campus from the Dallas area to increase significantly with a conveniently located campus.

Second, we believe that we can achieve similar operating margins even with a smaller scale campus given our investment in the development of a new state-of-the-art curriculum and educational delivery model, which provides a quality education on a lower cost basis.

In closing, let me make a few statements about our existing 10 big-box campuses. First, we believe they are located in the right cities. We have no intention of closing any one of them. However, we acknowledge that some may be larger than needed given the changes in customer preferences and the competitive landscape. We are focused on continuing to improve utilization rates across all sites with continued emphasis on local advertising and marketing programs and believe opportunity remains at all locations.

Simultaneously, we continue to consolidate space where possible with certain lease expirations and subleasing opportunities. As you may guess, trying to sublease space in this environment has been problematic, but the good news is we are continuing to improve our utilization rates and margins, which will be further enhanced by more efficient, local marketing, cost reductions due to a more efficient educational content and delivery model and eventually rightsizing if necessary. We look forward to sharing more with you on the subject during our next call.

Now 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 mentioned, net revenues for the third quarter were $87.9 million, up about 9% compared to last year. The increase was primarily driven by improvement in our average undergraduate student enrollments of 1361 students -- that is up 10% from last year -- higher tuition prices, as well as a decrease in our need-based tuition discounts of $1.3 million. These increases were partially offset by approximately $1.9 million of tuition revenue and loan origination fees, which were financed under our loan programs that were not accrued. As a reminder, we have the right to recognize the related amounts of tuition revenue as tuition revenue when such amounts have actually been collected.

Operating income for the third quarter was $3 million compared to an operating loss of $1.4 million in the same quarter last year. The improvement in operating income is due to the increases in net revenues just discussed, as well as decreases in advertising expense and contract services, partially offset by an increase in compensation costs.

Compensation and benefit costs increased $5.7 million to $48.4 million. The increase is primarily attributable to an increase in the number of salesforce representatives and the number of employees in our financial aid and other students work departments. As a reminder, we increased our staff in these areas in response to the increase in contracts that we have been seeing, as well as the changing student funding environment, changes in the general economic conditions and changes to our internal process. Additionally, I'd point out that there were several management changes in the quarter that we have already announced, which had a net addition of approximately $640,000 to these line items.

Advertising expense decreased $1.7 million for the third quarter from $7 million to $5.2 million. As Kim previously described, the decrease in advertising expense is the result of efficiencies gained through our lead generation efforts, lower rates on our national advertising, as well as efforts to reduce expenses while still meeting our internal plan for generating leads.

Contract service expenses decreased $800,000 for the quarter from $4.2 million to $3.4 million. The decrease is primarily attributable to lower spending in information technology, financial consulting services, as well as the setup fees that we had for outsourcing our proprietary loan program last year.

Interest income decreased $478,000 to $43,000 for the quarter. The decrease is attributable to lower cash balances than last year combined with lower overall interest rates, as well as an investment philosophy change moving our cash balances to lower risk, lower yield municipal bonds.

During the quarter, we invested approximately $17 million of our cash in pre-refunded municipal bonds, which are classified on our balance sheet not as cash and cash equivalents, but as current and noncurrent investments. These pre-refunded municipal bonds represent liquid debt obligations issued by states, cities, counties and other government entities. It is a laddered portfolio of short duration bonds, which have been fully defeased with US Treasury securities so they indirectly carry the full faith and credit of the US government while at the same time enabling us to earn higher yields than we had been and reporting some of the interest as tax exempt from federal taxes. Our provision for income taxes for the nine months ended June 30 was 38.1% versus 41.3% for the nine months ending June 30, 2008.

Finally, net income for the quarter was $1.9 million, or $0.08 per diluted share, as compared to a loss of $700,000, or $0.03 per share in the third quarter of last year.

Our balance sheet continues to be extremely strong. We had cash and cash equivalents of $50.1 million at June 30 compared to $80.9 million at September 30, but we additionally had the $17.3 million as I previously discussed that is now classified as investments rather than cash or cash equivalents. We generated $4.5 million in cash flow from operations during the third quarter as compared to using $100,000 in cash flow last year. And we continue to have no debt on our balance sheet.

During the quarter, we did not repurchase any shares of common stock. We currently have approximately 23.7 million of authorization remaining. I still would not expect the remaining authorization to be used immediately. Rather, I believe it will be used opportunistically depending upon a variety of factors, including market conditions, cash flow forecast, the student lending environment and our alternative investment opportunities.

During the quarter, we purchased $6 million in fixed assets compared with $3 million in the same period last year. This was primarily associated with information technology projects, primarily our new general ledger system, which was converted in May, as well as the ongoing replacement of equipment related to student training. Depreciation expense for the quarter was $4.5 million.

We continue to see good results from our internal loan program. As of June 30, we had committed to provide approximately $13 million. That represents just under 2300 loans at an average balance of $5,600 per loan. And we have approximately $11 million in loans outstanding under that program.

As of June 30, we have approximately $6 million in deferred revenue, which, as a reminder, does not appear on our balance sheet, but that we are entitled to recognize at the time we collect payments on these loans. Through June 30, we have collected $25,000 of an expected $39,000 on outstanding loans. As a reminder, when we initially implemented the program, as an abundance of caution, we assumed 100% default rate. Although we knew that wouldn't be the case. So while it is extremely early given that only $39,000 has migrated into a payment mode, I am still very encouraged that we have only a 36% delinquency rate. As a reminder, the Board has authorized up to $20 million currently under this loan program.

We are also continuing to make progress on our plans to implement the federal direct loan program. We are currently planning to pilot the direct lending program at one of our campuses later this year and I anticipate we will begin packaging students in the program early this fall for those students starting in the early spring.

Finally, I wanted to speak to the progress that we have made and where I think we are three-quarters of the way through the year and what my expectations are for the remainder of the year. The guidance that I gave at the beginning of the year suggested double-digit contract growth, high single to low double digit start growth and average student enrollments to turn positive on a year-over-year basis sometime in the second or third quarter. To date, we have exceeded all of these metrics. For the first nine months of the year, contracts are up 15%, starts are up 18% and average enrollment was up 10% during the third quarter after turning positive for the first time during the second quarter.

More importantly, I am particularly pleased with the acceleration of our start improvement. Over the past four quarters, our start growth has improved from 0.5% to 5% to 6.2% to last quarter 19.5% and now this quarter, we achieved over 32% start growth. And while I caution investors about the difficulty in comparing short time frames due to different year-over-year start schedules and calendars, the trend that we saw within this quarter suggested an ability to sustain double-digit start growth through the remainder of the fiscal year and into next year.

Specifically, on a year-over-year basis, April starts were up 24%. May were up 28% and June were up 43%. And while July results are still preliminary, they look like they are going to be up in the 20% plus range continuing the trend of accelerating starts. Now while year-over-year comparisons will start to get more difficult, I clearly expect to see double-digit start growth for the rest of the year.

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

I also mentioned that given the normal seasonality of our enrollments, I anticipated that the third quarter would be similar or slightly better to our second quarter from an EPS standpoint. With our performance in the third quarter, we are well on our way to accomplishing the $0.20 to $0.24 guidance I gave for the second half of the year. And in fact, we confirmed that guidance in the earnings release this morning and given the strong third quarter, we have even greater confidence in achieving those results. And I remain optimistic that we will achieve the final piece of the guidance I gave at the beginning of the year, which was the possibility of double-digit operating margins in Q4.

Most importantly, it looks like we will end July with over 2000 more students enrolled in school than a year ago. With the growth that I anticipate in the fourth quarter, it is reasonable to expect that we will be at a very nice starting point in terms of capacity utilization and earnings power as we enter the year 2010.

In summary, I thought this was an outstanding quarter for us. The quarter exhibited not only sustainment, but acceleration of our student metrics coupled with stable graduation and placement rates. Additionally, I was very pleased with our financial results. We generated solid revenue growth of 9%, which I will remind you comes after $2.5 million of deferral of revenue from our loan program. And despite digesting a net $640,000 of unusual costs, we had good expense control. Our expenses were up a manageable $2.8 million, or 3% on a year-over-year basis and as I suggested on our last call, they actually decreased $4.5 million on a linked-quarter basis.

Bad debt was stable and very manageable. The results in the quarter are indicative of the leverage in our business. And while our operating margin at 3.4% for the quarter is clearly not where we want it to be, we are extremely pleased to have increased that level during our third quarter, which is traditionally a quarter where we have our lowest total enrollment and revenue.

While we are continuing to focus our resources on the challenges the economy presents, we are clearly making progress and accelerating progress in getting students into school and utilizing our capacity, which I believe is and will continue to result in rewarding financial results, higher levels of EBITDA and improved margins. We certainly thank you for your time, your interest and your patience and now we would be happy to take your questions.

(Operator Instructions). Bob Craig, Stifel Nicolaus.

Good morning, everybody. First question is, Eugene, I think, last quarter, you had alluded to a certain seasonality between 3Q and 4Q and obviously you exceeded those numbers pretty handily in 3Q. Did 3Q in any way borrow some from the fourth quarter or are you just playing it pretty conservative with the guidance for both starts and EPS in the fourth quarter?

Well, there certainly is seasonality. Our fourth quarter, as I think everyone knows, tends to be our strongest quarter from a financial results standpoint. And the third quarter tends to be our lowest. I think -- and I hinted that -- as you pointed out to that in the last call, I think as people ran their estimates, they maybe made it a little bit more of a hockey stick than we would see, but we would still expect to see significantly better financial results in Q4 than we did in Q3.

To your point, did we borrow anything, no. I don't want to say we shifted earnings or anything. We obviously have a concerted effort on getting students in school quicker and faster, especially as the fourth quarter tends to have a high level of starts. So we certainly have strategies to do our best to accelerate students to get them to start earlier, but I don't really consider that borrowing from one quarter versus the other. We were successful in doing some quick starts, but that would not -- I don't want anybody walking away from this quarter thinking that we improved the fourth quarter -- I'm sorry -- improved the third quarter at the expense of the fourth quarter. That would not be an accurate characterization.

Okay, that is helpful. And as my follow-up, I just would be interested in your thoughts on how the industry is going to be able to absorb the displacement component with the pending dealer closures, which I think are certainly loaded into 2010, i.e. the temporary glut of experienced techs coming on the market?

Yes, I will take that question. Certainly, as we have been discussing for the last couple of quarters, we've tried to anticipate that in changing our students' expectations and redirecting them from dealership opportunities into the aftermarket and have been doing so, I would say, with very good success.

With that said, when you look at the dealership landscape, the dealerships that have been impact are the relatively small dealerships with low sales and equivalent in terms of their service department. So it is likely that these technicians will be absorbed by the larger, more profitable dealers in the areas. So we expect some of those more seasoned dealers to find -- I'm sorry -- more seasoned technicians to find those jobs in dealerships. At the same time, we do believe that the level of training, especially those with manufacturer-specific training, are a great value even at an entry level to the existing dealer network, as well as the aftermarket.

For many of the aftermarket employers, this is the first time that they have had the opportunity to have access to students with this level of training because historically the dealerships have absorbed all of those. So it is something we are dealing with and it is not too concerning at this point in time. It just takes more work and I think we are in the best position possible given the relationships that we have with leading OEMs to get entry-level technicians into these dealerships when you compare it to the other competitors or the community college network.

Great, Kim, thank you.

Bob, I wanted to just add one other thing on your first question. And I think it is just relevant because I saw a headline this morning that said, great quarter, we beat the quarter, but we lowered estimates for the fourth quarter. I don't know about short seller got to Reuters or whatnot. That is clearly not what we are doing. If anything, we confirmed the full-year number and I think given the strength of our results this quarter, it just gives us more confidence in our ability to achieve the full-year EPS. And obviously, with that confidence, there is more confidence of a positive surprise there.

So I think somebody got something a little lost in their numbers, but just to reiterate, this was a strong quarter for us and it was not in any way borrowed from the fourth quarter.

Right, we're innocent. We didn't do that, thanks.

Kevin Dougherty, Bank of America.

Thanks, guys. I guess I just wanted to drill down a little more about the new Dallas campus. Could you maybe just talk about how frequently you might be able to roll out some more campuses? Are you viewing Dallas as kind of just a test campus or is this going to be part of a bigger strategy going forward?

Well, I want wouldn't describe it as a test campus. We are fully committed to that. We have talked for some period of time about, over time, transitioning from larger, big boxes to smaller campuses that are more convenient for students, more convenient for our employers, as well as operating at margins that work for UTI and are more efficient. That involves both more campuses and the curriculum. But opening a campus is a big deal whether it is a 300,000 square foot campus or a 100,000 square foot campus in Dallas. This is the next one. You should not expect to see anything for another year, year and a half at the earliest and that would even be an announcement if we did something. This will take us clearly through year 2011.

Okay. Could you just repeat what you said about the timing of incurring some of those costs, when they will start to hit for the new campus?

I mean reasonable costs, we tend to start seeing some sales and marketing six to nine months prior to opening. The campus will open sometime in the middle of next summer in the June, July timeframe. So you will begin to see some expenses, which obviously we will break out for everybody probably in the October to December timeframe of this year.

And when would some of the staffing and equipment costs you called out start to hit?

Well, most of that will be capitalized. The staffing part of it, the marketing expense will hit at the beginning of 2010. You will start seeing that ramp up. The staffing won't come on until a couple months before opening. And the equipment purchases will be throughout, but those will obviously be capitalized.

And then just as a follow-up, just switching gears, if you could just touch on the outlook for revenue per student, how are you guys thinking about pricing and how that kind of balances out just with the drag from the loan program and some of the OEMs pulling back on the graduate training.

Well, we are still running at roughly 3% to 5% price increases that tend to flow through the system twice a year for a total of 3% to 5% per year. I don't want to say we have pricing power, but that has not been a detriment we don't believe to kids coming to school. Our loan program obviously helps some of that. The increases that we have seen in federal funding helps some of that.

The loan program right now generates a reduction in revenue, round numbers of about 2% from what it would otherwise have been had those students still come to school, but received their funding from another source. So it is not something that I am concerned about, especially since later in this calendar year and certainly as we get into 2010, a more significant piece of that starts coming due and for payment and you get -- it is not just going out, it is starting to come in at that point in time.

I guess just trying to reconcile, are there any other mix shift issues going on or why wouldn't we start to see maybe a positive change in the revenue per student given the fact that the price increases tend to be larger than the drag from the loan program?

Well, there are mix shifts. There are scholarships as well, but all in all, I think you will do that. Now we tend to -- we tend to try to sell longer programs and that involves a mix shift and it does get a little complicated, but that reduces the revenue per student in a reported period, but it increases the total revenue over the life of the student. So those dynamics make looking at that single metric a little bit confusing, but all in all, the prices are going up. If you look at it as what is our price sheet on a year-over-year basis, that continues to decrease it, as I said, at the 3% to 5% range.

Okay. Thanks, Eugene.

Mark Marostica, Piper Jaffray.

Thank you very much. I apologize, I had it on mute. My first question relates to your comment Eugene about having some success in accelerating some starts and I am curious whether or not you have had a meaningful level of starts in the high school market in July.

Bear with me while I get --.

I would say that the starts are up slightly from the field reps or the -- they are down slightly from the high school market. So we are seeing the adult population take a larger percentage of the starts for Q3, which is not that unsual given that the majority of high school starts occur July going forward. So I don't think that we've seen any meaningful pickup in Q3 from the high school side at all.

Yes, if where you were going, Mark, was were we successful in moving students, high school students that typically start in Q4 into Q3, no. What we were successful in, as we have been doing all along, is on the adult side on trying to reduce that amount of time from enrollment to start, starting them quicker and we did have some success at that. But again, that has been going on for some time period. It is not necessarily taking somebody that was scheduled to start in the fourth quarter and moving them to the third quarter as we go through the process trying to get them to start sooner when they actually enroll.

If I could add something. That again is a testament to the focus that we have on the local markets. We do see higher show rates, better student success with the students who do have a shorter timeframe from the time they enroll or make contract with the school to the time they show to school and that typically happens with those that live within a close proximity. So again, this is building on the strategy to focus on the local market with the students who have the ability to start school sooner.

Yes, and I guess what I was also trying to get at too is, based on your comment of 20% start growth in the month of July, I was curious whether or not that was -- if there was a meaningful start in the high school area, whether or not that 20% start growth was evenly spread across high school and adult or whether it is not even pertinent to look at July as a high school proxy (multiple speakers).

It is the latter. July is not a high school proxy.

Yes, that is what I thought. Okay, very good. Second question, I was just curious about persistence in the quarter, if you could quantify that change for us.

I would say it was down a little over 100 basis points as far as the persistence. It is difficult to compare against other competitors in terms of -- not competitors, but the peer group in terms of how we capture that. But I would say that we are tracking at 70% completion rate and it has been fluctuating between 20 basis points better and 80% or 80 basis points down. I think it is pretty stable.

Okay. And then regarding the uptick in comps for salesforce, financial aid and other support. Ex Dallas, are you about where you'd want to be for the rest of the year or do you anticipate another step up excluding Dallas, of course?

I would expect that as we build growth in our lead and try to improve utilization rates, we will see some additional headcount increases on both the adult recruitment channel, as well as the high school efforts. I think we will shift some of that again to focus more on the local area surrounding our campuses, but do expect that to increase as we start in the fall back out in the high schools and building on the success that we have had with the adult population base.

Okay, and then two quick housekeeping items. First, the tax rate for Q4 that is implied in your guidance?

I am sorry?

The tax rate for Q4 that is implied in your guidance?

Stable with the third quarter.

Okay. And lastly, Eugene, I thought you mentioned something about bad debt being stable. Could you give us the exact percentage of bad debt?

I believe it was -- I believe it was about 1.7%, but I need to verify that.

1.6%.

1.6%.

Okay, great. Thanks. I will turn it over.

Kelly Flynn, Credit Suisse.

Hi, everyone. It's [Patrick Ograbley] for Kelly. The first question, given the strong starts momentum during the quarter, the low teens guidance for Q4 seems a bit light. So I am wondering if you are just being conservative there or what factors are leading to that deceleration besides perhaps a tougher year-over-year comp.

Are you talking low teens guidance of what? Of starts?

On starts, yes.

I don't think I said low teens. I said double digits. So obviously things were starting to turn around last year, but the guidance for starts in the fourth quarter is double digits.

Okay, I was just looking at the press release. Okay. I guess the second question then on bad debt, the provision at least, yours is moving in the right direction while some of the peers are seeing that trend up. I am just wondering what kind of things you are doing there that is leading to the improvement despite the tough economy?

Well, I think the most important thing we are doing is we are graduating students and they are getting jobs and when that happens, they tend to pay their debts off. So notwithstanding all the issues that the auto industry has, we've continued to have good graduation rates and good placement rates and therefore, the kids have the capability to pay back those debts.

The second thing that we are doing is, on our loan program, we are not taking any revenue until it is actually paid. So there is no need to put up any provision, if you will and build an allowance for that because there is no revenue to be reversed if it is not paid. So I would say those are -- without knowing the inner workings of all of our peers -- that would be the two items that I would point to as the biggest differentiator.

Okay. And if I could just go back to that first question, could you clarify then what the percentage growth in student starts to be in the low teens, how that -- what that is referring to I guess versus the double-digit starts that you mentioned?

Well, look, my comment is, for the fourth quarter, we expect to see double-digit starts. Now I don't obviously expect to see a continuation of 30% plus growth in starts, but double digits I would define as anywhere from the low to upper teens and maybe at the 20% range, but that is about as specific as I am going to be at this point in time. The fourth quarter is a large start for us. It is a large high school start for us. We have a lot of initiatives that we are working on. We believe we are being very successful on those, but at this point, it would be a little irresponsible of me to look into the crystal ball and give you something more definitive than the double digits.

Okay, great. Thank you very much.

Trace Urdan, Signal Hill

Thanks. Good morning. Eugene, I want to go back. I think I heard you make a reference to an opportunity to get to double-digit operating margin. Can you just refresh what you were referring to there? Were you talking about the fourth quarter?

Yes, I was. For the fourth quarter, specifically. Obviously not for the full year. If you'll remember at the beginning of this year when we started putting out guidance, I said that that was a possibility if everything kind of worked the way we thought it might work. Obviously after the third quarter, we have -- well, after July, we have 2000 more students in school than we did a year ago. It is certainly not a layup, but if we can roll our revenues, grow our starts and control our expenses in the fourth quarter and not have any of the unusual fourth quarter kind of cleanup items that companies tend to have, I think it is a realistic goal for us and would be a big feather in our cap and a crowning achievement of a good year if we could get to double-digit operating margin.

Okay. So I thought I heard you say that. So when I look at the end-of-period enrollment growth up 14.4% this quarter, even assuming some slippage in revenue per student consistent with the loan program, you are still talking about kind of a low teens revenue growth. If you've got a double-digit operating margin, then the $0.14 to $0.16 that you are talking about for the fourth quarter -- I mean I just can't figure out how the number could be that low. It seems to me it would be significantly higher than that.

Well, as I said, it is -- I am not really interested in raising people's estimates at this point in time, but given what we did in the third quarter and where we are, we have greater and greater confidence, as I said, in achieving that number and potentially exceeding it. But I am not in a position to try to talk anybody up from that guidance at this point in time.

So then let me ask a related question if I could. The revenue per student number seems to have actually improved quarter-over-quarter in terms of the rate of decline. How are you thinking about that given sort of what you guys can see in terms of the loans you are extending? Have we flattened out on the revenue per student pressure as a result of the loan program? Could revenues per student go lower still before we hit that limit?

Well, you have offsetting factors. You have the tuition increases that flow through the system at different times because our tuition is locked in when the student signs a contract, not necessarily when they start school and offsetting that is the -- two things is the loan program and our desire to upsale students and get them to lengthen their education.

I think the -- I think we are still under a little bit of pressure from the loan program and it is still not in what I would call equilibrium of as much coming in as going out. So I think there are still pressures there. But all in all, I would expect revenue per student to remain roughly flat, possibly see some pickup.

But it is a very -- and I know it is an important metric for a lot -- it drives a lot in models, but it is -- you have to believe me on this. It is an extremely difficult number to project because not only are you looking at what we have priced and how we fund, but you are talking about student behavior and what they choose to do, whether they choose to lengthen a program, take an elective, shorten a program. That mix shift is very difficult to predict.

Okay. And then finally, can you comment on sort of what the economic model for the smaller campus looks like relative to the bigger campus? Are you limited in some way in terms of the kind of operating contribution you can see from a smaller campus relative to a bigger campus? Do you think the marketing costs might be higher because you won't be able to support the same number of manufacture programs at a smaller campus? How do you guys think about the long-term model?

I don't think we would be doing this if we thought that the margins would deteriorate or dilute the overall results. To the contrary, this is an ability to -- look, we are not doing this to add capacity to the system. We are doing this because we believe there are incremental students that we can attract at accretive margins to the core franchise.

So I think obviously we are limited somewhat by the size of the campus as we talked about, but within that is a much more efficient, we believe, model that revolves around higher show rates because a larger percentage will -- these are not destination campuses, so a much larger percentage of the students will not have to relocate resulting in higher show rates, which is obviously more efficient, as well as the teaching curriculum itself and the staffing involved in that we believe will be more efficient than the current big-box model.

Now eventually we will take that curriculum to the big-box models and make them more efficient, generating better results and/or the ability to attract more students to those depending upon where they are. But it is solely intended to add incremental students at accretive margins to the existing franchise.

Okay, thanks.

Corey Greendale, First Analysis.

Hi, good morning and congratulations on the progress so far. A couple of questions. The destination campus question, can you comment on to what degree the improving trends are because these starts are really not for people who are further from the campus and based on your local marketing or are you seeing more success with people further from the campus as well?

I would say that our efforts again have been focused on the local market and we are moving the needle there. Certainly the more students we can attract from within closer proximity, it improves all of the student metrics that we have talked about. We have seen some stable trends with the younger students who are moving across country. But we continue to see challenges for the older students who have to relocate and physically move their families, etc. So I would say more of our success is coming from the focus on the local markets and with the younger students who are more inclined and have probably less financial barriers to overcome with financial support of their parents in relocating. And kind of a mixture, but a key priority remains focusing on the local market.

And then would you expect that trend with younger students to persist? Presumably that would bode well for the high school start coming up?

Yes, it is difficult to predict what happens with 17 and 18-year-olds, but what we have seen in the last quarter -- although, as Eugene said earlier, it is not a significant amount of the students starting inside of the last quarter or even in July for that matter -- we are optimistic that it will stay steady and that the efforts and initiatives that we have invested in this year will help to drive that and even improve it from a high school standpoint. But it is very difficult to project what that will become.

Okay. And on the competitive front, interested to know what your reaction was when you heard about the Obama Administration Community College Initiative, whether it was, oh, this could really change the competitive dynamics or do you think, given your relationships, you can continue to differentiate and it doesn't change the competitive dynamic all that much?

I don't think it will change the competitive dynamics all that much. I think it will certainly help. Again, I think we are all pleased to see the administration focused on education and that tends to help all of us. But I do think that there is a significant difference in terms of the quality of education that UTI has with its OEM partnerships and in fact the way in which we deliver, not having the course content, have general education classes, as well as very attractive to students and they are willing to pursue this type of model over the community college even with more funding going to these programs.

I am not certain and don't have any information on how these funds will be allocated and to which programs. So I have no idea how that ranks in terms of the automotive priorities in terms of their curriculum, but I do know those community programs that have the strongest programs do have a higher level of OEM and dealership support. And it is difficult in these times to get dealership and OEM support to fund these capital-intensive type programs. So overall, I am not concerned about it and we will keep you posted as we see it start to unfold in the market.

That's great. If I could just throw in one more quick one. Eugene, given the -- let's assume that you can sustain kind of high single digit, low double digit start growth through 2010 just as a hypothetical, if you look at what you expect the startup costs to be for the Dallas campus, would you expect that you could overcome that impact on margins and exit fiscal 2010 with higher margins than you would exit 2009 with?

When you say exit, I am not sure how you're defining exit. Are you talking about fourth quarter-over-fourth quarter or full year-over-full year?

I am assuming that the full-year margin will be up, but I am asking, given that you then have the startup costs rolling in as the year goes on, whether, at the end of Q4, Q4 margin would be higher than --?

Yes, I would -- obviously, I am not prepared to give 2010 guidance yet, but I would certainly be disappointed if we didn't have fourth-quarter 2010 margins higher than 2009 fourth-quarter margins. Absolutely and that includes the impact of Dallas.

Great, thank you.

Gary Bisbee, Barclays Capital.

Good morning, guys. I guess a couple of sort of more big picture questions. How did you come to the decision to open a new campus when the utilization rate is still so far below what say it was five years ago or something? And the second question there, given that you made some comments that a couple of the big-box campuses may well be a little big for what the long-term local market would support, any further progress on considering adding non-auto programs to some of those campuses to soak up any of that extra demand?

As we have talked, about our strategy is first to grow the business in the existing markets, which we are working on and have made progress and still believe that there is opportunity there at a number of sites, which means that we may not have to rightsize a couple of those facilities down the line and would not have to consider any diversified program offering.

There may be some that we consider that for in the future, but that is several years off given the opportunity that we see in the existing markets where we have locations, as well as the opportunity to grow in additional markets, Dallas being one of those.

I think it is important to note that we have to -- we have to recognize that there is a changing landscape, a changing customer profile and that we cannot let real estate drive our business strategy and therefore, we are going where the students are and where the demand is for our core program offerings by looking at these new markets. Not abandoning the fact that we have lower utilization rates and opportunity at the existing sites. But we don't think that that should hold us back from taking advantage of the opportunity that exists in several other markets and as Eugene stated that we believe can be accretive to the overall business franchise.

And so we are doing it in parallel paths, working to improve utilization rates at existing sites, looking at and exploring opportunities in new markets, leveraging our core business competencies and expertise and brand power and then last would consider diversification if it made sense. But that is not something that we feel that we are forced to do at this point in time given the opportunities that exist in the current market, as well as new markets that we have yet to explore.

Okay, and then could you give us any sense of operating costs versus CapEx for the $4.5 million to $5.5 million startup costs in the new campus?

It is roughly split.

Yes, it is close to 50/50, but it is a little bit on the higher side of capital.

Okay, great. And then just one other, the last couple of quarter, you have had a nice decline in advertising expense and you have talked about both media rates and your improved efficiency of your spend. Is it realistic to think that, as we start to lap those in another quarter or so, that there can be further progress or are you likely in fiscal '10 to face growing add expense to continue to drive starts growth next year? Thanks a lot.

I do think that there will be a period of time where we continue to benefit from the favorable ad rates, as we have said. At least through the rest of this calendar year, we believe that to be the case. But as we start to ramp up again in the local market and with Dallas, we do think that we will see some increase in the advertising costs as we move past the beginning of calendar year 2010.

So we will continue to take advantage of any favorable rate, but at the same time, recognize that we are going to need to continue to invest, especially in new markets and as we gain traction in the local markets, we will continue to invest in and test new vehicles within close proximity to a campus.

Thank you.

Jeff Silber, BMO Capital Markets.

I know it is late; I will try to be brief. I think you referred to it a few times in the Dallas campus some efficiencies you are going to get on the curriculum and staffing side. Can you give us a little bit more color? Are you talking about larger class sizes at a smaller location versus the big-box?

No, we are talking more about being able to use the instructors more to -- students per instructor will increase making it a more efficient part. We are talking about a blending learning model, which means a combination of lecture, online and lab work, which we do not have now. It is strictly lecture and lab. That provides some efficiencies and provides the instructors more flexibility to teach more students. So that is really where that efficiency that I am talking about is in the throughput of students, vis-a-vis the variable costs of basically instructors.

Okay, great. And then just a couple quick questions on your guidance for the current quarter. Obviously, it implies some leverage on the operating margin side. Which one of the two line items do you think you will see the leverage? Is it going to be both skewed one more towards the other?

It will be skewed more towards revenue. I think what we would expect to see in the fourth quarter, vis-a-vis the third quarter, is obviously a significant improvement in revenue. I am not going to say costs are going to be down, I don't believe that will be the case like that was this quarter, but I believe they will increase at a much more -- a lower rate. So I would -- given that dynamic, I would answer your question by saying I expect more of the leverage to come from revenue than from expense control.

Again, would it make sense, since it's probably more fixed costs on the SG&A line item, you would see more leverage there?

Yes.

Okay, great. And then just what stock-based comp and share count are you -- implied in your guidance?

The share count is basically whatever we ended the quarter with. It is just under $24 million, $23.9 million something. What was the second part of your question?

Stock-based compensation.

Jenny is going to have to give that to you. I don't --.

No problem. Then one more quick one. You mentioned about $640,000 in costs related to management change in the third quarter. Which line item was that in?

The vast majority of it was in compensation and benefits. There was a little bit of it in just outplacement fees, which I believe are under contract services. Almost all of it was in the compensation and benefits line.

And is that on the SG&A line or the educational services line?

It is all in SG&A.

Great. Thanks so much.

Kian Ghazi, Hawkshaw.

Good morning, Kim and Eugene, appreciate your time. A couple quick questions. The first is about -- it looks to me that if you guys are successful in getting to the double-digit starts growth range that, Eugene, you referred to that you will end this year with enrollment growth, ending period enrollment growth, of 13%'ish. And I think as we all understand in this business model, next year's earnings and revenues are really driven by how successful you are in generating starts growth in the prior year, and where you end one year and as you start the next year it's really -- that is the key driver of revenues.

Am I right to think that if we are ending this year with 13%'ish enrollment growth to end this year, that that is a pretty strong indication of where revenue growth might be as we look to 2010?

Well, I think that is certainly a starting point. And your point is absolutely valid that there is an annuity like piece to this business that what we end the year at is certainly the jumping off point for the following year. And it is only really heightened or dampened by the success we have in the following year of adding additional students.

So yes, I think all else equal, you are talking kind of mid-teenish or low teenish ending numbers and, therefore, that revenue base should grow at that rate, plus or minus, whatever we do in starts in the following year. And quite honestly, plus or minus what we do early in the following year as far as starts.

Exactly. And given that the growth in starts really has accelerated towards the back half of this year, to your point, that is really a driver of 2010. It is not really helping, for the most part, revenue and earnings growth in 2009?

Right. I mean it will help a little bit, but as our largest starts are in the fourth quarter, we will get some pickup from that. But on average, you get maybe a half a quarter's impact. But then immediately in 2010, all those kids are there and you have not only a full first quarter, but as the majority of this growth that we had as it accelerated throughout the year came in the latter half, our typical student stays in school for a year and half, 15, 16 months. So you have absolutely a full year in 2010 of the revenue that those students generate.

Right. Now I am very focused on the incremental margins that you generated in your business. And I think in the past you guys have talked about, because of the low utilization levels, generating somewhere in the 50% to 70% incremental margin on each new dollar of revenue growth and that hasn't materialized earlier this year I think because you guys have had to staff up given some of the challenges you have had with show rates.

But we finally, in this June quarter, saw a nice improvement in incremental margins if I just take the change in profitability from last year's third quarter to this year's third quarter and divide that by the change in revenues from last year's third quarter to this year's third quarter, that incremental margin is roughly 60%, which is right in the middle of that 50% to 70% range you talked about. And that includes some drag from the compensation, one-time compensation charges you talked about and I suspect we would be closer to the higher end of the range without some of the other incremental costs you have built up to improve the show rates.

It looks like, given your guidance, you're also going to have a similar very strong incremental margin in the fourth quarter. And is it fair to think, given that we are now what looks like going to have two quarters in a row of these very strong incremental margins, that as we look at 2010, we should be in that 50% to 70% range for incremental margin, excluding the incremental impact of the new campus that you are opening?

Yes, I mean let's throw out Dallas for a second. But as I said in my comments, that is what we are beginning to see. We are beginning to see the leverage in the business. We have gotten much closer to an equilibrium where the costs that are generated are now starting to show -- we passed that longtime plane of the funnel so the costs are now resulting in revenue and yes, I would -- there is nothing at this level of capacity that suggests that that 50% to 70% is not still the appropriate kind of incremental margin that we ought to expect to see.

Now, if I understood the range of 50% to 70% incremental margins correctly, I think you have talked about -- the first dollars of revenue growth [when your earlier] and you are using up that excess utilization or excess capacity that you have, that we should be towards the higher end of that range. And then as you utilize kind of I guess some of the low-hanging fruit on utilization improvements, then we should get towards I guess the middle or lower end of that range. Am I thinking about that right?

Yes, that range is relatively good up until about 20,000 students. And there begins to be a step function there where you have to start adding additional staff and additional instructors. And with the caveat that the growth comes reasonably disbursed between when it starts and it is geographically spread. If that is not the case, you have kind of one-off scenarios, but that range is valid for up to about 20,000 students and it is -- really the key driver in that range is how do we get those incremental students?

Are we getting them because we are converting more that have already signed contracts into actually showing up for school, which would lead you to the high end of that range or are you getting them because you are going back to the front end of the funnel, doing more advertising, doing more of a sales effort, obviously more costly. If you get the students that way, it takes you to the lower end of the funnel.

So hence, that is why we talk about show rate a little bit because it is -- while starts are what really matter, the efficiency of the start is a result of the show rate and the higher we can get that show rate, the higher the incremental margin is of those students.

That actually leads right into my next question, which was the show rate, which I thought was a very good showing for your show rate in the quarter given that the comparison that we are looking at -- I think you had over a 500 basis point improvement in your show rate in last year's third quarter. To be down only 70 basis points has actually shown an increase in the month of June as you guys describe. It seems to me like you have got your show rate challenges well under control because if we had remained at the pace we had been at in the first part of the year, it seems to me we would have had a much more meaningful decline in show rates given the improvement, such a meaningful improvement you had last year at this time.

Well, we were very pleased with the show rate, but it is not something that we can sit on. It is still -- as Kim mentioned, those kids that have to relocate is still the biggest challenge that we have in the industry. And we have spent a lot of dollars staffing up the handhold kids and get them through a more difficult environment and a difficult process. That is starting to show some results as witnessed in the quarter, but that is something that we have to stay on top of and continue to keep stable and if possible, try to improve.

Now, a year ago at this time when show rates did improve 500 plus basis points and there was a great focus on show rates and continuing to drive an improvement there, we got derailed because of some of the challenges I think we had with the economy, particularly last fall. And it looks to me like you are kind of back where we started, almost back where we started on this path of improving show rates a year ago. Is it fair to presume kind of from here if you continue to be successful with the initiatives that you have put in place and the things that look like they are getting traction in your June quarter that the same goals and the same priorities that we had about a year ago at this time before we got derailed are still in place and there is a real opportunity to continue to improve show rates from here, which could have a very meaningful impact on starts and enrollment and ultimately, as you just pointed out earlier, has a very meaningful impact on the incremental margin?

Well, there certainly is an opportunity and it is certainly something that we consistently are working at. I would not caution anybody to just extrapolate up and say that -- it is tough work and we are going into a period where the high high school starts is something that our new strategies, we like them, but we haven't seen the results of them and we will see the results this quarter. But absolutely, there is the opportunity to improve show rates and that is something we spend a great deal of focus on and if we are -- at the end of the day, we are going to grow starts and if we grow them with a better show rate, terrific. That is the best of all worlds and it becomes very efficient and it flows into 2010 in an exceptional way.

If we are stable with our show rates, we are still going to grow starts significantly. We are still going to be in a very good jumping off place for 2010 as we enter that year and we will absolutely continue to work on it. But at the end of the day, our enrollments are increasing, our starts are increasing, our revenues are increasing and our costs are under control. And if we can do better through improvements in show rate, that is nirvana.

Just lastly, do you have a preliminary show rate number four July? You gave us a preliminary contract gross number.

I do not have it yet, but we will probably have it in the next -- within the next week.

Great. Thank you.

Ladies and gentlemen, at this time, I am showing no additional questions.

All right. With that, thank you all for your time and your questions today. We look forward to updating you on our fourth quarter and our year-end earnings call, which is scheduled for Monday, November 23. Hope you have a great afternoon. Thank you.

Ladies and gentlemen, thank you for attending today's conference. You may now disconnect your telephone lines.