Universal Technical Institute Inc (UTI) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Universal Technical Institute, Inc.'s first-quarter fiscal 2010 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 is being recorded. A replay of this call will be available for sixty days at www.UTI.edu or alternatively the call will be available through February 11, 2010 by dialing 877-344-7529 or 412-317-0088 and entering pass code 436889 #.

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 first quarter ended December 31, 2009, and then open the call up for your questions. The Company's earnings release was issued 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 expectation 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. 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, and think you for joining us. On today's call, I will give a high-level overview of the quarter and provide a review of key operating results. Eugene Putnam, our CFO, will follow with a more detailed review of our financial results and provide 2010 forward-looking information before opening the call up for your questions.

I'm very proud of our results for the first quarter of 2010. During the quarter, our average student population reached an all-time high and we achieved the highest revenues and earnings per share for an individual quarter in Company history. For the first quarter of fiscal 2010, our net revenues were $103.5 million, up 15% year over year. Net income for the quarter was $9.3 million or $0.38 per diluted share compared to $2.3 million or $0.09 per diluted share last year for the same period. Our average student population for the quarter was 18,782, up 2459 students or 15% from 16,323 a year ago.

Now let's briefly cover key operating trends across the student funnel beginning with marketing. During the quarter, our advertising spend decreased approximately $132,000 to 5.7% of net revenues compared to 6.7% of net revenues last year. As previously advised, we expect advertising costs to run between 6% and 7% of revenue for the full year. This is a slight increase from our current rate due to stabilizing year-over-year costs in the advertising environment and our continued focus on local yet more costly advertising to complement our national media campaign, as well as the desire and opportunity to increase student inquiries as the year progresses.

Let's move on to student applications. Student applications received during the quarter were down 6% year-over-year. As advised previously, the decline in large part is due to the significant changes we made with our admissions teams during the latter part of Q4 and beginning half of Q1. Specifically the decline is attributable to the elimination of 18 underperforming high school territories and a number of other process changes ultimately intended to improve our student customer experience and at the same time better utilize our financial, human, and technological resources.

As discussed, we knew that these changes would impact the number of student applications initially but believe the most relevant measure of success is the number of new student starts and the rate at which student applicants actually show to school. I share this with you for a couple of reasons.

First, in reviewing the past three quarters, you will see that beginning in fiscal year '09 Q3, we had 9% year-over-year increase in the number of student applicants followed by a 4% year-over-year increase in Q4. Then in the first quarter of fiscal '10, we experienced a 6% decline. However, in each of these quarters the number of new students starting school compared to the same prior year grew at a much higher rate. Beginning in Q3, student starts increased 32%, 15% in Q4 and then 16% in Q1 fiscal '10.

At the end of Q1, we had 10% more student applications scheduled to begin school during Q2 than we did in the previous year. (technical difficulty) our year-over-year show student show rate improved 700 basis points this quarter to a level we have not seen since the first quarter of fiscal year 2005. We believe this is both a reflection of the quality of student applicants and their willingness and ability to pursue a UTI education as well as our focus on more effectively serving students in the local markets around our campuses which has improved our students' ability to begin classes sooner and ultimately helps improve our overall show rate.

So in summary for the quarter, new students starting school increased 16% year-over-year. During the quarter, a total of 3850 students started school compared to 3319 last year. This equates to an additional 531 student starts and marks the seventh consecutive quarter of student start growth.

For the past two years, we have steadfastly implemented changes to our business model that improved the probability for student success and simultaneously helps UTI become a more efficient and effective educational institution.

Our educational outcomes remain very good. Student retention was flat for the quarter as compared to the prior year and student completion rates remain at 70%. As you might expect with the auto industry finishing its worst y0ear in many decades combined with the impact the great recession has had on many businesses across the country, the employment environment remains challenging for our graduates. We do expect continued pressure on employment rates throughout the year given the current environment and are continuing to invest additional resources in our employment services department to ensure we provide our graduates with the best possible employment opportunities.

With that said, I expect our employment rates for the year to be in the mid-80% range. And with that, I would like to turn the call over to Eugene. Eugene?

Thanks, Kim. As mentioned, net revenues for the first quarter of 2010 were $103.5 million. That's up 15% compared to the prior year. This is the first time the Company has achieved revenues over $100 million for any individual quarter. The increase over the prior year was primarily driven by an increase in average undergraduate students of 2459. And the increase in net revenue was partially offset by $2.6 million or a $1.4 million increase in tuition revenue and loan origination fees financed under our loan program that were not yet recognized during the quarter.

In addition, industry training revenue decreased $1.7 million due to reductions in and discontinuation of training for certain manufactured specific training programs. Our average revenue per student for the quarter was $5512, a decrease of 20 basis points from last year. The decrease in average revenue per student was the result of the items that I previously mentioned as well as the fact that approximately $600,000 in revenue was recognized during the first quarter of fiscal 2009 due to the one-week closure of our Houston campus in 2008.

Operating income for the first quarter was $15.1 million compared to $3.6 million last year. The improvement in operating income is due to the increase in net revenues, a decrease in bad debt expense of which partially was offset by an increase in compensation costs.

Operating income margin for the first quarter increased to 14.5% from 4% first quarter of last year. Compensation benefit costs increased $1.9 million to $49.4 million. The increase is primarily attributable to an increase in the number of salesforce representatives and employees in our financial aid and other student support departments.

Bad debt expense decreased $590,000 for the first quarter from $2.1 million to $1.5 million. This decrease is due to improved operating efficiencies as a result of the investment made in hiring and training additional financial aid and future student advisors during 2009.

Our provision for income taxes for the quarter was 39.1 -- I'm sorry, 39.1%. Net income for the quarter was $9.3 million or $0.38 per share as compared to $2.3 million or $0.09 per share for the first quarter of last year.

Our balance sheet continues to be extremely strong. We had cash, cash equivalents, and investments of $97.2 million at December 31 compared with $85.1 million at September 30. We generated $17.1 million in cash flow from operations during the three months ended December 31 as compared with $10.7 million during the three months ending December 31, 2008. As you know, we continue to have no debt on our balance sheet and we also did not purchase any shares of stock during the quarter.

During the quarter, we purchased $5.3 million in fixed assets compared to $4 million in the same period last year. The $5.3 million is primarily associated with various information technology projects, curriculum development, campus improvements, and ongoing replacement of equipment related to student training.

We continue to see good results from our internal loan program. As of December 31, we have committed to provide $19.1 million which is made up of a little over 3700 loans representing an average balance of $5,165 per student. We have approximately $18 million in loans outstanding under this program. Since the inception of the program, approximately $11 million in deferred revenue which as a reminder does not appear on our balance sheet has not been recognized. Because the collectibility is not reasonably assured, we will recognize that revenue at the time we collect payment on these loans.

Through December 31, we have collected $70,000 of an expected $151,000 in outstanding loans and as a reminder, we currently have $30 million of our capital dedicated to this program.

We continue to make progress on our plans to implement the Federal Direct loan program. We are currently piloting the program at one campus and have already begun packaging students who are scheduled to start at the end of February in the program.

We are making progress on our new campus in the Dallas-Fort Worth metro area. Through December 31, we have invested approximately $9.5 million on the building and land, building improvements, and equipment with approximately $200,000 of that investment occurring during this past quarter.

We anticipate investing an additional $10 million on building improvements and equipment over the next nine months. During the three months ended December 31, we incurred $607,000 in operating expense related to our new campus. We anticipate we will incur approximately $6.5 million in operating expense for the full year 2010 and expect to have a drag on earnings per share of approximately $0.11 per share. As a reminder, we anticipate that the campus will become profitable within nine to 15 months after opening.

Our curriculum transformation is also making progress. As a reminder, we are transforming our automotive and diesel curricula into a blended learning experience that combines several methodologies reflective of current industry training methods and standards and incorporates on-site classes and web-based learning. In addition to improving the overall educational experience for our auto diesel students, the new curriculum will offer more convenience and training flexibility while meeting industry standards. We will be running an evaluation of the program at our Avondale campus beginning in the spring of 2010 and then we plan to launch the new curriculum at the Dallas-Fort Worth campus when it opens during this summer.

In summary, I was tremendously pleased with the results of our first quarter. The number of students choosing to begin their education at UTI and the average number of students in school both increased in the mid teens. Our show rates improved meaningfully and we did an excellent job of managing expenses. The results were operating margins and reported earnings not seen by UTI in several years.

While much of the year remains, the results of the quarter raise my optimism of achieving our goal of full-year operating margins being in double digits. If we are successful in achieving that goal, I believe we will surpass the high end of the current analyst earnings estimates.

How do we get there? Based upon our start growth and even assuming flat revenue rates per student, we should be able to achieve mid-teen revenue growth for the full year. This quarter about 85% of our incremental revenue fell to operating income. Now that level is not sustainable over time but if you were to assume 60% incremental margins on that level of revenue growth, the math would suggest earnings above $1.20 per share.

Now nobody's crystal ball is perfect and obviously we need to get the enrollments to generate the start growth. We need to do so while managing our expenses to produce those in commercial margins, and we need to have a successful opening in Dallas. But if we are successful in the execution, the earnings leverage of our Com0pany is above what many of the analyst estimates currently suggest.

Finally before beginning the question-and-answer session, I would like to take a few brief moments to comment on the Department of Education's current negotiated rulemaking progress. We realize many of you have questions for us about our perspective on the DOE proposals, specifically those that relate to incentive compensation and gainful employment. In our opinion, the process remains very fluid and hence we believe it is inappropriate for us to speculate on either what rules might be proposed by the DOE, the likelihood of such proposals being ultimately enacted, and what refinements if any would be required upon our operations.

However, what we can tell you at this time is that the current proposal is much more complicated than some of the questions that we have been getting might suggest an understanding of. As an example, UTI has three institutions. We have well over 50 different programs. The combination and permutations equate to well over 100 different tests. Our initial review of our most recent three-year population of graduates suggest over 90% of our programs pass the 8% test and many of the remainder are extremely close.

Now these numbers still need to be vetted and obviously the population base if this proposal ever gets enacted will be different.

In terms of the 90% repayment tests, frankly we currently don't have any ability to estimate that particular metric. Now obviously as I said, the group of programs and the students that might ultimately be tested will vary from this sample set and we will continue to monitor any changes the department may propose. In the meantime, we will focus on the mission of UTI, specifically providing a quality education for those seeking careers in the auto, diesel, motorcycle, marine, and collision repair fields.

This is a mission that I'm proud to report we do very well. We have hired over 125 people during the past 12 months and we now have over 2300 employees. Over the past two years, we have invested over $45 million, which is more than double our profits in that time period in equipment, training aids, facilities, and curriculum, specifically to enhance the educational experience for our students.

And most importantly, over the past two years, more than 20,000 students have graduated from UTI in their chosen field of study and over 15,000 of those have been placed in a field for which they have been trained.

Kim and I both want to thank the 2300 employees of UTI that come to work each day trying to help students fulfill their educational and career aspirations. And we also want to thank you, our investors, for your continued interest and support of UTI.

With that, I believe we are ready to open the line for questions. Operator?

(Operator Instructions). Kevin Doherty, Bank of America Merrill Lynch.

Great, thank you. I guess maybe a question first for Eugene. Just following on some of the comments you made about the outlook for this year given how the first quarter came out in terms of the margins and the earnings. I know in the past you mentioned getting pretty strong leverage up until about 20,000 students and maybe some of the cost become more variable at that point. I'm just trying to understand if you can help us -- at what point would you start adding some of those costs back into the model if -- once you have visibility on that sort of level of enrollment if that would still hold true?

Kevin, I think that's kind of what my comment was made to address. While we are seeing 85% of incremental revenues fall to the bottom line today, as we get close to that number of 20,000 students, that revenue, incremental revenue number will come down towards the range that we have given before, somewhere in the 50% to 70% range.

Specifically as you look at our capacity utilization, our Orlando campus today is in essence full. So as we continue to grow there, you are getting to your point of having to add incremental costs. But on the whole, I think if you look at our student population, once it gets -- excluding Dallas -- north of 20,000 students, then I would for sure expect to be towards the lower end of that range of 50% to 70%.

Until that time, I think we will do a little bit better than that as suggested by my hypothetical 60% margin.

Okay, I guess I was just trying to understand if the 60% margin would hold true more towards the latter part of this year and then as we look out into next year, would that be more of a reinvestment year and you might not get back into that 50% to 70% range? Just trying to (multiple speakers)

(multiple speakers) I think if you looked to next year and the follow-up years, again excluding the new campus, if we are full then you are probably talking about somewhere in that 50% to 60% range. We will do a little bit better than that the first part of this year, and as we continue to fill up the campuses depending upon where the growth comes from, it will dilute that number downwards towards the middle of that range.

Okay, and I appreciate the commentary you gave on the regulatory front and just had one follow-up as it relates to the gainful employment proposal. Even if more of your programs would be meeting that 8% threshold, do you start to change the way you think about pricing those programs just to give you maybe even more of a cushion going forward?

Well, again, it's awful hypothetical at this point. You know, obviously we will think about it. We don't have a lot of price increases built in. I think we have 2% the rest of this year. I think it's premature to suggest that we would do something in light of a hypothetical proposal at this point.

But certainly we are monitoring the situation and we will adjust things if we need to. I don't really know what more to say about that at this point.

Okay, that's fair and if I can just get one last one in there, it looks like the cash balance has grown to nearly $100 million. Could you just talk about what would get you back into the market repurchasing shares and then maybe just discuss some of the other priorities for your capital?

You know, certainly our loan business is important to us now. We've always talked about wanting to see how the repayments go there. So I think helping students get an education is still the first priority for those that need help from our capital base. That's still the first priority. We need to get Dallas up and running and make sure our investments there are what we forecasted.

That said, repurchase of stock is something that we would look at. But at this point in time, there's a lot of uncertainty both within the market, within the overhang of neg reg, and within just our own operations. So I don't see us scurrying back to repurchase stock at any point in the immediate future.

Okay, thanks for taking my questions.

Kelly Flynn, Credit Suisse.

It's [Patrick O'Grobley] for Kelly Flynn. Can you give some color on the productivity trends of the experienced admissions reps during the quarter? And will the lower productivity of the newer hires, will that impact contracts or starts growth at all next quarter?

Yes, I think we have seen a slight decline across the board with both seasoned and newer reps for this reason. When you think of the high school market or the field team as we discussed, we did reorganize territories. So even some of the veteran reps are in new territories covering new ground, and that does impact their efficiency measures right out of the gate.

So we have seen a slight decline there, but believe that that will improve in the subsequent quarters here as they start to understand their new territories and have opened the doors with some new high schools. These aren't necessarily new high schools, it's just new representation in those high schools.

As far as the adults or the campus-based channel, we added a lot of new reps primarily in a call center function that is handling inbound inquiries from students and I'd say approximately 32 people were added inside of the last quarter and certainly their productivity is a drag on the overall performance. And as they get a quarter behind them and too moving into the second quarter, we would expect to see those efficiencies improve.

But it is a key area of focus in making certain that we improve the overall efficiency and effectiveness of both teams.

Okay and of the I think it is $4.5 million to $5.5 million you expect to spend on the new campus, is that going to coincide with the opening of the campus it seems like in Q3 or is -- I was just wondering how much was expensed in Q1 and what's expected three those couple of quarters.

There was roughly $600,000 that's hit expenses in Q1. That will ramp up some in Q2 as we start to hire folks there and actually have hired folks. So that will ramp up. It will be higher than that in Q2. The majority of it will hit Q3 and Q4 as we actually start teaching classes there.

Okay, thanks, and just one more quick one. The $1.7 million revenue decline from the manufacturer training programs, just wanted to clarify if there was anything new or unexpected in there? Thanks.

No, that's due to what we talked about either last quarter or in the third quarter about the discontinuation of some of our programs and the movement of some of our programs from manufactured sponsored to elective type programs.

Great, thanks a lot.

Bob Craig, Stifel Nicolaus.

Good morning, everybody. Kim, I heard your comments regarding the expectation that the placement rates should still be in the mid-80% range. Has there been any change in trend recently in job orders or prospects?

In talking to some of the front line department heads at our campuses, we have seen some slight improvement. Nothing that gives me any significant confidence that things have started to move in the right direction. But in certain geographic areas, we are seeing some positive comments with employers being more proactive with job openings. We are seeing that in both the aftermarket and the dealerships which was surprising to me because we have seen more activity from the aftermarket and in the diesel segment than across dealers.

When you look at the graduates, most recently 41% of those graduates were being placed in the aftermarket, 16% in the diesel category, 38% dealers, and the balance in parts, racing and other aspects of the overall marketplace. So it's still a really tough environment out there and we continue to add marketing and human resources to help our teams ensure the best opportunities for our graduates.

That's helpful. One more. I know your comments on contract flow, any change in your thinking regarding the expectation for double-digit contracts and starts for the balance of the year? Perhaps you could share your expectations for the show rate as we go forward here.

Well, based on what we are seeing, I'm not -- I don't know specifically as far as the exact rate of growth, but I still think as the year picks up we should see contract growth year-over-year. And if we continue with the show rate improvement that we are seeing as we witnessed in Q1, we should be able to achieve double-digit start growth. But with that said, it does require our sales organizations improve the efficiency and effectiveness levels throughout the year because we don't want to necessarily bank on continued show rate improvement at this level.

As I said in my prepared comments, a 700 basis point improvement is something we have not seen or achieved this level since 2005. So we are focused on both areas to make certain that we drive contract growth at a reasonable level to achieve the double-digit start growth.

That's helpful, Kim. Thank you.

Corey Greendale, First Analysis.

Good morning. First question is without getting into too much detail on the gainful employment [piece], and appreciate your talking about it as much as you have. When you say that 90% of your programs are in line with the 8% requirement, are any of the 10% that don't meet it particularly large programs or is the 90% pretty reflective of the percent of the population that would be okay under that rule as well?

Yes, actually it's the other way around. First of all, it's over 90% pass and of those programs that don't, it tends to be a small amount of at least the graduates that ran the population base against. Now, that could change, and as I said, it still needs some vetting and honestly some of those that didn't pass still need to be split up more because they were grouped together.

I realize everybody wants information but I don't believe there's a full appreciation of the difficulty of the task of trying to understand what the intent of the proposal is right now. So we've got more work to do there, but the purpose of my point is to suggest that while -- if the proposal went into effect today as written, as we understand it, which is a lot of ifs, we don't have a major problem. We might have a couple programs that need a little bit of a refinement either in timeframes, in tuition rates, in what we offer, but it's not a major impact to us again as we understand it at this point in time.

Okay, I understand the complexity and it is a big part of why I think it's appreciated that you are sharing as much as you are.

On the show rate, would you say that the significant improvement was basically a function of doing a better job of prioritizing the applications that were most likely to lead to students actually coming to school? Or is there anything else that you would point to that help there?

I think there are a couple of things. One is the focus on the local markets. We have been talking about that for several quarters and trying to penetrate those surrounding markets around our campuses within 100 miles. Those students that tend to reside closer to our campuses tend to start school sooner so you have less -- I don't know hurdles for them to overcome from the time they make applications to the time they show. So we've reduced the enrolled to show timeframe which again is helping contribute to an improved show rate.

There's also a shift in the mix of students and again inside of this quarter, we saw a larger number of older students and by older I mean not 17 but more 19-year-olds. And the older the student, the higher the show rate. So as we focused on key things that we know are going to contribute to the organization's success as well as the students' propensity and likelihood to be successful in UTI, I think we're starting to see some of those things come to life.

And it has been a good year's work worth of focus on process improvement, targeted marketing, and as well as sales process improvement to drive that type of switch.

Great. If I could just sneak one last one in, I just might have missed this, Kim, but in the past you have given out what [key] percentage changes in leads year-over-year. Do you have that number? I apologize if I missed it.

Leads on a year-over-year basis were down slightly.

3.5%. They were down 3.5% on a year-over-year basis.

And that was consistent with your plan?

Yes, they had actually over delivered to our plan and the reason that they are down on a year-over-year basis is there is something we are trying to always balance and that is as we grow our admissions team, we need to make certain that our leads are in alignment with that type of growth. So I mentioned earlier that we had added approximately 32 into a call-center type function at our home office and we have been ramping up the leads to support that team. But I would say that you will see most of that occurring as we move through second quarter and later in the year. So yes, it was ahead of plan and -- but slightly down from last year.

Okay, thank you.

Trace Urdan, Signal Hill.

Good morning. Eugene, one more question on the gainful employment, if I could. As you were doing the calculation, did you find that there was a meaningful difference between the median debt levels and the mean debt levels for your programs? And can you comment on it qualitatively if not quantitatively?

To be honest, looking at that big a database we ran the median. So I'm not prepared to answer that at this point.

Okay, fair enough. And then Kim, I'm wondering as you looked up the show rate improvement, can you -- are you seeing any difference between this phenomenon that you have experienced over the past I guess couple of years where you have had more difficulty with students that are relocating to your campuses versus students that live locally? Has there been any change in that dynamic at all? Are you finding that some students are finding it now easier to relocate to a tenured programs?

I would say that you still will see a higher show rate with students who live within closer proximity to a campus. But I will also say that we have seen improvement in the overall show rates for those students who live remotely. And I think that is because of the territories that we are focusing on, the types of students and the level of service being provided to them.

So it is an improvement we are seeing in both areas. But you are still always going to see a higher show rate for students that live within close proximity to a campus.

Okay. Fair enough. I'll let you move on, but I also want to just echo my appreciation for the leadership you have shown in trying to at least help us get our arms around the gainful employment issue.

Thank you.

Gary Bisbee, Barclays Capital.

This is (inaudible) on behalf of Gary. Good morning. Just two quick questions. Firstly just on a different manufacturer agreements, can you remind us if there are any that are up for renewal or should be impacted in terms of reduced revenue be roughly what it was this quarter going forward?

There are not any contracts that are pending renewal or review. For the most parts, we have things set in motion for the remainder of the year and I think as far as the revenue impact, that's (multiple speakers)

Yes, I think you have seen what you're going to see, so that should -- that year-over-year differential should continue throughout the year but it should not increase and the magnitude of it should remain the same as it was this quarter.

Got it, and on the capacity utilization obviously in the mid 70s now, I was just curious if you could give us any color on how you see that ending up sort of towards the end of this fiscal year?

Well, without getting overly specific, I think if you kind of take the guidance of mid-teens start growth, you will see us end up towards somewhere around 80%. Obviously it will change depending upon what quarter you look at it as we still have high fluctuations between first, second, third, and fourth quarters. But it's not unrealistic for us to get up around 80% towards the end of the year, obviously excluding the new campus.

Got it. Perfect. Thanks a lot, guys, and thank you for the information on the gainful employment stuff too.

Mark Marostica, Piper Jaffray.

Actually it's Mark Skitovich for Mark Marostica. Just a couple clarifications on the industry training revenues declines that you saw, can you just give some direction for the year, what you are sort of expecting there? Is that a run rate to sort of expect that you saw this quarter?

And separately on the lead growth or the down growth that you saw this quarter, can you just comment on what percentage of that is coming from aggregators versus direct to your website would be helpful? Thanks.

I will take the revenue number. The $1.7 million that is about what you are going to see a year-over-year decline basis, I don't expect that to increase. That's just basically the impact of programs that we had last year that we don't have this year. Some of that is somewhat offset in the tuition revenue line because some of those programs (technical difficulty) have changed as I said from manufactured to specific and hence being reimbursed to us to a student and elective, but honestly it's 1% of our revenue base.

So it's going to get lost in there, but the $1.7 million is roughly the number that on a year-over-year basis will be steady throughout the year.

As far as the lead aggregators, approximately 70% of our total leads, maybe a little bit higher now closer to 75% are coming through the Internet and I would say approximately 20% to 25% of all leads, so that's 100% are coming from leads consolidators or lead aggregators.

Okay, great that's helpful. And then just one other clarification, Eugene, you mentioned on the 10% that didn't pass your internal test, could you just clarify -- I realize this is sort of a first look on your part, but you mentioned you are not too concerned with that number. If you look sort of waive just tuition changes that you make there, what other areas do you see as not being that meaningful or somewhat in your control of handling that 10%?

Well, in this short period of time, that is all we have really had a chance to run. We haven't fully vetted whether those are the appropriate salaries to use, how the student might get financed. There are a host of variables that we believe could change. But it's just really too premature to say what if anything we might do around something like that if and when something like this becomes law. So it's very premature.

If I could just add one thing on that one, we looked at the overview of the programs. You will see some students who are very passionate about taking a large number of electives that are manufacturer-branded. And so in that instance what we would be doing is limiting the manufacturer electeds that the students can take so that the program link is not continuing to go on just to meet their -- the student's needs. We would make certain that we keep that in balance with their overall earnings.

So if a student wants to take Nissan, Ford, and Toyota in the future perhaps they can take one of them or two of them. Those are the types of things that we would be looking at and all of that would be dependent upon the return on investment the student is seeing relative to the increased tuition costs associated with a manufacturer-branded program.

But those things jump out that some students just want to take all of the manufacturer programs that they can and that is where you might see some issues. That's not the majority of students, however.

Great, that's very helpful. Thank you.

Paul Condra, BMO Capital Markets.

Great, thanks you guys. Great quarter and thanks for all the detail as well. I just -- most of my questions have been answered, but I had a question about the blended learning program. I wondered, does that have the potential to increase your capacity, your ground campuses, and can you -- if so, can you tell us by how much or what kind of impact that might have?

Yes, good question, yes, it does. That is not the reason that we are doing it, but it's a nice outcome of what we are doing. Now that said, it will be some time before it increases capacity, because we are starting the program at Dallas, which is a new program, obviously, so it's not going to increase any capacity there. And I would imagine it will be well into 2011 before we start rolling out the curriculum at some of the legacy campuses. But when we do and when we in essence finish teaching out the old methodology and fully implement the new methodology, there is the potential to see double-digit increases in capacity.

Great, thanks. Then just one more follow-up on the gain point (multiple speakers)

Let me rephrase that so nobody gets too crazy about it. By double digits, I meant kind of low teens.

Okay, thank you. I had just one more follow-up on the gainful employment and I know you have talked a lot about this, but when you were looking at your student base, did you find a lot of your students are coming into these programs with a lot of prior school debt that maybe doesn't relate to the programs they are in or --

I don't have the information on that, but I don't -- I would be surprised if we found that. We don't have a lot of transfers in. I am not going to say there are none, but obviously that's still a major point of contention in the rulemaking process. But I would be surprised -- I don't know, but I would be surprised if we saw much of that at all for us.

Okay, great. Thanks again.

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

We would just like to thank everybody for joining us on our call this morning and look forward to next quarter's call, which is scheduled for Tuesday, May 4. Have a great day.

This does conclude the teleconference. You may now disconnect your lines.