Universal Technical Institute Inc (UTI) 2010 Q3 法說會逐字稿

Good afternoon and welcome to the Universal Technical Institute, Inc. third-quarter 2010 conference call. All participants will be in a listen-only mode. (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, 2010, by dialing 877-344-7529 or 412-317-0088 and entering passcode 442-530 followed by the pound sign.

At this time, I would like to turn the conference call over to Miss 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, 2010, and then open the call up for your questions.

The Company's earnings release was issued after the market close today and is available on UTI's website at www.uti.edu.

Before we begin, we would like to remind everyone that except for historical information presented, the matters discussed today may contain forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. I will refer you to today's news release for UTI's comments on that topic.

The Safe Harbor statement in this release, which I will not repeat here in the interest of time, also applies to all statements made during this conference call. Information in this conference call, including the initial statements by management as well as answers to questions related in any way to any projection or forward-looking statement, are subject to this Safe Harbor statement.

In the prepared remarks you'll hear today, we will make reference to EBITDA. EBITDA for all periods discussed during our remarks is a non-GAAP measure representing net income, exclusive of interest, income taxes, depreciation and amortization. The schedule provided in the earnings release reconciles EBITDA to the nearest corresponding GAAP measure net income.

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

Thank you, Jenny. Good afternoon, ladies and gentlemen. Let's start with the headline.

The third quarter of fiscal 2010 was a very strong quarter for us, both financially and operationally. Our revenues were $107.5 million, up 22% year over year. Net income for the quarter more than tripled on a dollar basis and on a per-share basis. Net income was $6.3 million or $0.25 per diluted share compared to $1.9 million or $0.08 per diluted share last year for the same period.

Our average student population for the quarter was approximately 17,900 -- up 3,100 students or 20% from a year ago. Now let's move onto the underlying drivers of those results and what lies ahead for the year, beginning with student [inquiries].

Student interest in UTI training programs was very strong this quarter. On a year-over-year basis, our student inquiries increased 38%. This was largely attributed to an increase in our overall advertising spend, primarily national and local television.

As we mentioned last quarter, we increased our advertising investment for a couple of reasons. First, roughly 60% of our advertising budget is spent on television, which remains a necessary and effective medium for us.

This year, the TV ad market experienced an influx of money from retailers, automakers and movie studios that was not spent in 2009. This drove advertising rates higher and reduced overall availability. To offset double-digit rate increases and secure placement, we invested $3.6 million more than last year.

Second, although more expensive than national advertising, we continue to see the value in local market advertising, which drives greater awareness for students who live within commuting distance of one of our campuses.

Last, our admissions team has the capacity to handle an increase of student inquiries. Our advertising spend during the third quarter was 8.2% of revenues compared to 6% in the prior year quarter, and 8.5% in the previous quarter. While the cost per student inquiry increased 29% year over year for the reasons I just mentioned, we did see a 7% decrease from the previous quarter, which suggests the advertising environment has stabilized, and we are improving our media buy efficiencies. We expect that we will see continued improvement as we launch our new ad campaign and our website redesign scheduled for Q4.

As guided to previously, we expect advertising expense of 7% to 8% of revenue for the full year.

Now let's look at student applications. For the quarter, student applications grew 7%. As a reminder, there are typically a couple of months lag time between the point a student inquires with UTI and then makes application. Then it usually takes another few months before the student begins school. So the applications this quarter are most likely to drive student starts in a subsequent quarter.

Looking at each of our admissions channels, student applications for both adult learners and military grew by double digits. The number of high school applications decreased in total approximately 8%, due to the elimination of the nonproductive territories made at the beginning of the year.

However, individual productivity measures for high school representatives were equivalent to the prior year when measuring the number of student applications accepted on a per [rep] basis.

During the year, our admissions teams did a really nice job of balancing the number of student starts throughout the year, driving double-digit student start growth year over year in each of our first three quarters. It is worth noting here that while high school applications received during the quarter were down 8%, as I just mentioned, the number of student starts, generally those aged 19 and younger, were up 63% for this quarter. The total number of students scheduled to start during the third quarter exceeded the prior year's quarter by better than 30%.

This fact, combined with an improved show rate of over 150 basis points, drove an additional 1,100 starts for 35% growth in the quarter. This marks the ninth consecutive quarter of student start growth. And the show rates for the first nine months of this fiscal year are among the best the Company has ever recorded.

Looking forward to the fourth quarter, we anticipate our student starts will be flat and perhaps slightly down for the quarter for a couple of reasons. First, we intentionally accelerated student starts to the third quarter, when possible, to better balance student loans. Second, the number of students currently scheduled to start in Q4 is approximately 5% less than last year at this time. Third, we are hesitant to predict a significant improvement to show rates, given the large concentration of high schools in the quarter, which is typically a population that is more difficult to predict their behaviors. All things considered, we expect high single-digit start growth for the full year.

Throughout the year, we have seen solid growth in student starts and improved show rates, yet there remains opportunity to improve efficiency levels across our admissions team. To that end, we rolled out training and new tools for all of them last week at our national meeting. The teams are excited about the new tools for the year ahead, and are very supportive of the leadership changes we made a month ago.

Moving into fiscal 2011, we expect very few changes with our field or high school admissions team and structure. We do intend to add 10 to 15 additional representatives to our adult and military team, based on certain student segment and geographic opportunities.

Moving on to education and employment outcome. Given the challenging economic environment, I continue to be very proud of the work our campus teams have done, from both an education and customer service standpoint, to ensure our students get a high-quality educational experience. Our student persistent rates remain stable across our campus network and our student completion rates, also known as graduation rates, remain at 70%.

Not surprisingly, given the general state of the economy, the employment environment remains quite challenging. Currently, we are running 7 to 8 percentage points behind last year at this time, which has improved slightly from our last call.

To ensure we're doing all that is necessary to help our students find employment following graduation, we continue to invest resources as required to provide the best level of service for both our students and our employers. While we expect the end markets we serve to continue to face challenging times for the foreseeable future, our employment services team remain optimistic that our employment rates overall will be in the low 80% range by the end of the fiscal year.

Before I hand things over to Eugene, I want to take just a minute to recognize a couple of major milestones that were achieved this quarter. In June, we saw the culmination of many years of hard work become a reality as we opened our new Dallas-Fort Worth campus and, with it, launched our new blended curriculum. This campus launch marks the first implementation of our Metro campus model, which features a smaller campus footprint driven by sustainable local employment demand targeted at the commuter population. Coupled with our leading-edge blended curriculum, we are offering convenience and flexibility to our students, using a combination of interactive online learning, lab and classroom instructions offered three sessions each day.

And it's going great. Each of our class starts so far have been completely full, and initial student feedback reflects positive results from the new curriculum model. A lot of people worked very hard to bring this reality to be, and nothing can validate that success better than the positive student reactions and outcomes and a staff that comes to work every day, completely energized about their new campus. We would like to congratulate both our campus launch and education teams for a very successful beginning to what we feel is the bridge to UTI's future education model.

And with that, I would like to turn the call over to Eugene. Eugene?

Thanks, Kim. As mentioned, student starts for the quarter increased 1,100 students over the prior year's third quarter or 35% growth. For the year, we were up 2,400 students -- starting students or 24% as compared to the prior year. At quarter end, we were at 67% utilization of our capacity.

Now I should note that historically we have disclosed our capacity as the total number of seats available at our campus, even though because of scheduling sequences, room for retakes, etc., we never actually would fill all those seats. So starting next year, we will report our capacity based upon the number of seats we actually managed to, in order to account for what are, in essence, planned open seats.

Moving onto the financial recap, revenues for the third quarter were $107.5 million, up 22% compared to last year. This improvement over the period was primarily driven by an increase in average undergraduate student enrollments of 3,100 students or about 20%.

During the quarter, we had $2.4 million in tuition revenue from our loan program that was not recognized. That amounts to about 2.2% of revenue. Nevertheless, our average revenue per student for the quarter increased 1.4% to approximately $6,000 per student.

Operating income for the third quarter was $9.9 million compared to $3 million in the same period last year. The improvement is due to an increase in revenues that we just discussed, partially offset by an increase in compensation and advertising expense.

Operating margin for the third quarter increased to 9.2%, which is up from 3.4% in last year's third quarter. Compensation and benefit costs increased by $5.1 million to $53.5 million. This increase is primarily attributable to the number of salesforce representatives, as well as an increase in the number of instructors and employees in our financial aid and other student support departments to support the growing student population.

Additionally, I'd like to point out that there were several management changes during the quarter and other compensation and accrual items, which had a net addition of approximately $990,000 or more than $0.02 a share to various expense line items. This was an unusually high amount this quarter, which we do not believe will reoccur at [this] in future quarters.

Advertising expense increased $3.6 million to $8.8 million for the quarter. As Kim previously discussed, we experienced an increase in overall advertising costs, as well as the decision to increase the local market support necessary for the Dallas campus launch.

Our bad debt expense increased $225,000 for the quarter from $1.4 million to $1.6 million. This increase is primarily due to an increase in student enrollment. Bad debt expense as a percentage of revenue actually declined for the quarter from 1.6% to 1.5%.

EBITDA for the quarter was $14.9 million, nearly double the $7.5 million for the third quarter of last year.

And finally, net income for the quarter was $6.3 million or $0.25 per share compared to $1.9 million or $0.08 per share last year. Through the first nine months of the year, we are at $21.6 million in net income or $0.88 per share versus $0.17 in the first nine months of last year.

We are also starting to report return on average equity for the trailing four quarters ended June 30. That was 26.4% compared to 11.3% for the trailing four quarters at September 30 of 2009. And I'd like to point out that we are reporting our average ROE, based upon a trailing four quarters rather than analyzing the current quarter's income so that the results are not impacted by the seasonality of our quarterly earnings.

Our balance sheet continues to be extremely strong and liquid. We had cash and cash equivalents of roughly $99 million at June 30, compared with $85 million at September 30. During the quarter, we generated $13.1 million in cash flow from operations, which was up from $4.4 million during the three months ended June 30 of last year.

As you probably know, we also continue to have no debt on our balance sheet and, during the quarter, we did not purchase any shares of our stock. The Board of Directors did declare a special cash dividend of $1.50 per share on June 8, which totaled about $36.3 million and was paid in July. We continuously will evaluate our cash position in light of growth opportunities, operating results, general market conditions, and, periodically, we may return capital to shareholders through cash dividends, stock repurchases or a combination thereof.

During the quarter, we purchased $12 million in fixed assets. That was up from $6 million in the same period last year. $9.3 million of that $12 million that we purchased this quarter is related to the buildout of the Dallas campus as well as the development of our new curriculum.

Our loan program continues to meet the objectives of enabling students who are qualified and desire to attend UTI but, for whatever reason, lacked sufficient federal funding or third-party resources to still be able to enroll. As of June 30, we have committed to provide approximately $23.6 million under this program, and have nearly $20.3 million in loans outstanding. The average loan per student is now about $5,000. And since the inception of the program, we have not recognized tuition totaling $16.4 million that we will recognize over time as it is collected. Roughly 12% of our current students now have loans under this program.

During the quarter, we recorded $67,000 in revenue and interest from cash payments that we received, bringing the total since inception to just over $200,000.

As Kim mentioned, the opening of the Dallas-Fort Worth campus in July was highly successful. We have students starting there every six weeks and, so far, the results have been excellent. We started 96 students on June 21, our first start, and we had our second start yesterday with an additional 97 students. Both of these starts surpassed our projections. Through June 30, we have invested approximately $16 million in this campus for the building, the land purchase, improvements in equipment with approximately $4.6 million of that occurring this past quarter.

During the three months ended June 30, we had $2.4 million in operating expense related to the Dallas campus. We anticipate we will incur a total of $7 million in operating expense for the full fiscal year of 2010, and expect the Dallas campus to reduce earnings per share by a total of $0.09 this fiscal year.

The impact for this quarter was $2.4 million in expense and $4 million for the first nine months of the year. This had a negative impact of $0.05 per share in the quarter and $0.06 per share year to date, respectively. And as I mentioned, we still believe that this campus will become profitable within the first nine to 15 months.

We've previously mentioned the process of implementing the Federal Direct Loan program. That has been done at all of our campuses and was done prior to the effective date of July 1 and is going basically without any significant issues.

I wanted to take just a moment now to talk about the current Department of Ed.'s negotiated rulemaking process. The most significant of the proposals for our business are related, as we have said before, to gainful employment, incentive compensation, and [clocked] at credit hour conversions. We have submitted our comments and recommendations yesterday to the Department on the initial 13 topics, and we will, of course, submit another comment letter prior to the 45-day expiration period in September.

As you all know, the gainful employment calculations are very complex and require certain data that, unfortunately, we lack access to. And therefore, we cannot accurately predict how programs would fare against these proposed metrics.

Our default rates at all three of our institutions are in the mid-single digits and have actually been improving. So if you use these rates as a proxy to the proposed repayment test, that would put us in a very favorable position. It should be noted, however, that this is just a proxy, and there are several factors which could result in individual programs having repayment rates, as the Department has currently defined them, that could differ significantly from the default levels used as a proxy.

In terms of the debt to income test, while we currently track starting salaries of our graduates, we have no visibility into wage data beyond that that the Department is proposing, and therefore cannot easily assess compliance with the proposed metrics.

In terms of incentive compensation, while we have numerous questions and needs further clarification on the current proposal, we believe we will have to eventually modify our compensation plans to meet the proposed regulations if they become final.

Currently, our representatives are eligible for retention and graduation bonuses. We believe that these types of plans encourage and reward our representatives for helping students who are both committed and capable of pursuing education at UTI. Because admission representatives have no involvement or ability to impact whether the student successfully matriculates through to graduation, we believe it's an appropriate way to compensate and recognize their efforts of focusing on students who are a good match for UTI.

With these programs, there is no incentive for them to recruit students who are not committed or capable of benefiting from the UTI education. That said, we are working on plans that will comply with the new regulations, and we will transition these new plans when and if the regulations are finalized.

With regard to the proposed changes to the definition of a credit hour and the associated modification of the clocked to credit hour conversions from non-degree programs, the obvious consequence is the reduction of federal aid to eligible students. Based on a sample of our programs, we estimate that the proposed conversion ratio could result in a reduction in federal aid to each eligible student, ranging from a couple hundred dollars to several thousand dollars. If the proposed regulations are implemented, we will evaluate a wide range of options to minimize the negative impact that the department's regulations may have on our students. These options could include, but are not limited to changes of curriculum, offering of degrees, expanding funded options as well as tuition pricing.

Finally, I'd like to mention that while we strongly support the department's initiative to protect students against fraud and abuse, but it seems like many of the proposed regulations function as a broad brush to paint nontraditional educators as a negative force in the industry. We strongly disagree with this general perception of the role that educators like UTI play in providing skilled training to the American workforce. And we worry greatly about the unintended consequences that the current proposals are bound to have.

UTI has built its reputation over the last 45 years as a leading provider of education for students seeking careers in our professions. That value to our graduates is measurable in jobs and return on their educational investment.

During the past two years, we have graduated over 20,000 students and have helped to approximately 14,000 -- I'm sorry, 17,000 find jobs in their chosen field. Even last year, in which the transportation industry experienced bankruptcy filings of two of the top three domestic automakers, experienced a reduction in the number of dealerships by 8% and saw nationwide unemployment rate in excess of 9%, our placement rate is holding in the 80% range.

Moreover, the unemployment rate for our primary student segment, males age 20 to 24 has exceeded the national employment rate by 4.5% on average for the last three decades and is currently more than 8.5% above the national rate. We believe UTI is serving a key segment of the workforce that would otherwise be very challenged to find employment.

Moving on to looking at the fourth quarter. As we already mentioned, we expect starts in our fourth quarter to be flat to slightly down. We are just beginning our budgeting process for 2011 and, obviously, with the two NPRMs outstanding, there exists a great deal of unknowns.

What we do know is this -- we believe that there is sufficient interest in our education that we provide our students. We believe there is sufficient capacity at our campuses and that there is sufficient employment opportunities to enable us to target low double digit start growth for 2011.

In summary, I am very pleased with the results of this quarter and for the first nine months of this year. For the year, our students starting school are up 24%, and our average population is up 18%. The number of students choosing to begin their education at UTI and the average number of students at schools both have increased by double-digit rates.

We have reported three great quarters of start growth as a result of improving the enrolled to show time frame by moving starts earlier and writing shorter contracts which yield higher show rates and improved revenue. And as was our goal at the beginning of the year, I still expect starts for the full year to be up high single and possibly double-digit rates for the year.

As we move into the fourth quarter in 2011, our focus is clear. We must continue to successfully ramp up our Dallas campus. We must maintain our ability to be nimble and adjust to whatever regulatory changes are ultimately made. And we must continue to aggressively manage our expense base.

Most importantly, we must remain committed to providing our students with the quality education that our partners and industry covet and which makes UTI industries' choice. I am confident that we will maintain this focus and, by doing such, we should produce continued improved financial results.

And with that, we are ready to open the lines for questions. Operator?

(Operator Instructions). Sara Gubins from Banc of America.

Thanks. Good afternoon. Thank you for the comments around the regulatory environment. I am wondering about trying to calculate the debt repayment metric. Some have talked about using the national (inaudible) database or guarantee agencies for repayment information. Do you -- have you been able to get anything from them?

We have not. What we have received from them is a response that that data, at least as we have requested it, is not available at this time, That they are working on abilities to generate reports, but that the timing of that is unknown.

We've also obviously received some input from the department that has basically said, in regards to how do we get this information so that we can proactively look at how our programs are doing and adjust anything importantly, the response has been please submit that in your proposal.

[Further] comment.

In your comment letter, yes.

Okay, so you have any sense of when you would -- I don't know if you know yet, but do you have any sense of when you would be able to really comment on the potential impact of it?

No. I think the comments on both the repayment test and the debt to income test, unfortunately, both of those have meaningful and significant variables that we don't have accurate information on today. As I said, we do have proxies for some of them that give us some level of comfort. But until we actually see those as the department may eventually do find we can only go so far with giving our comfort.

Okay and then, more broadly, the tone of your conversations in Washington, I'm assuming that you are having conversations with people in Congress. And I'm just wondering how those are going, both with respect to the NPRM and just more broadly?

I think that we're doing pretty much what others are doing in trying to get the message out as we all share the same sentiments. Most of that effort has come through our [Career] College Association. And that organization we have not specifically invested in any sort of lobbying effort or those types of things and are working now with our campus president and local representatives to carry our message forward.

And certainly as Eugene mentioned in his comments, we've published our comments on the issues that have already been -- well, the 13 of the 14 program integrity issues. And then we expect to do so integrity issues and then we expect to do so within the guidelines for gainful employment in the near future.

And then to the extent that you can talk about this, if you -- if you are able to actually get to the low double-digit start growth in 2011, very broadly, what would that mean for margins?

Well, that is a difficult question at this point in time because I think the key driver there, you know, obviously, you can get a pretty good basis for what will happen to revenue. I think the key variables for what will drive our margin next year is going to be on our cost structure, and it is going to be the cost structure -- not so much to educate to the students once they are in school, that is pretty well-known as far as instructor costs, training aids, etc. -- but on the cost to actually get that, attract that student, get them through the financial aid process, the onboarding process.

And then as Kim mentioned, given where the economy is right now and the challenges and placement, the additional expense, probably above and beyond where we are today to help on once a student graduates, and actually getting them better placements to opportunities out there.

So it is a little early to give guidance in terms of margins. Obviously, the guidance for this year was double-digit margins for the full year. Hopefully we will achieve that. If you -- I would expect us to report margins in excess of that next year if we achieve those. How much in excess will be dependent upon those unknowns so far in the cost structure.

Okay. Thanks very much.

Paul Condra from BMO Capital Markets.

Hello. I just wanted to double check. When you said the starts growth was flat to down, you meant year over year, right? Fourth-quarter?

That is correct.

For the fourth quarter, yes.

Okay. Great. And I wonder can you give us any sense around, just a little detail around [BSF] expense, SG&A expense in the fourth quarter? Just how those might be trending compared to what you reported for the third quarter?

In absolute dollars or percent --?

(inaudible) as a percent of revenues. Sorry.

The Ed. Services line should be flat to slightly down. Depending on what we do with advertising dollars, that could impact the SG&A line. But I would expect both of them to be down as a percentage of revenue.

And then I wonder on the high show rates, can you describe what you think are the biggest factors driving those show rates right now?

Yes, I will take that question. I think a couple of things. One has been our focus on students within the local market and those students that we've described as living within a commuting distance and, therefore, the investment in local advertising.

Two, we have improved the quality of services and the type of interaction that we have with students from the time that they make application to the time that they actually show to school, specifically addressing a pretty complex financing process. So we have increased our level of resources in that regard to help those students increase training, etc., and have been able to help those that live close to a campus and those that have to relocate.

So I think, focusing again on the students in the local market, those who have a shorter time -- so we call it an enroll to show time frame, focusing on those students who can actually begin school sooner than nine to 12 months out, which has been our focus on a little bit of an older student, in combination with the high school markets, has driven that.

And I will also say that, again, as Eugene mentioned, our student demographic has been particularly hard hit with this recession. With the 8 million jobs being lost, three quarters of them were men. And so, we do offer an opportunity for these students to pursue a different career path and they are taking advantage of that opportunity.

So I think, improved execution and the environment that live in today has been helping to improve those charades.

Great. Thanks. And when you talk about getting out of some of the markets, I guess, are more difficult to execute in, is that process more or less completed? Or are you still sort of -- I don't know if the word is downsizing, but maximizing, I guess, your footprint a little bit?

Yes. I assume that you are talking about the high school territories that we eliminated last year. And I would say at this point, we are basically starting to lap those changes as we go into the next high school year.

So we are not anticipating any additional cut in those territories. There may be some territories within closer proximity to a campus where you might see an additional admissions rep locally there. But we don't anticipate any additional cuts with the high school market.

I would like to say that, although this did impact the number of student applications that we received and I commented on high school applications being down 8%, the number of students start coming from this high school team focused on the younger student has really exceeded our goals in the first three quarters from a student start standpoint. So that tells me that we did make the right decision in eliminating those territories. And we continue to see positive results from those changes.

Thank you. That's it for me.

Kelly Flynn from Credit Suisse.

Yes. Hello, it's actually Adam for Kelly. I guess, can you refresh our memories on where some of the starting salaries of your graduates register?

Yes. I can tell you on an hourly basis. Depending on the program, Motorcycle to Auto, you can see some hourly wages beginning at $10 to $12 an hour. If they have manufacturer-specific training, it can go from $12 to $15 to $18 an hour.

I share that on an hourly basis with this caveat. It is not reflective of their annual salary for a full year, given that many of them work on flat rates and are given incentives for project completion. So that is what we capture the moment in which they are hired, but as they gain experience on the job, you typically see not only hourly wages increase, but their overall earnings capacity, given they get more productive on the job.

And that is the piece that we have not tracked over time and, typically, rely on feedback from our manufacturers and BLS data that is more general in terms of what the technicians who have manufacturer-specific training and our graduates actually earn.

Thanks for that. And then on the blended learning curriculum, can you update us on your plans for that and how fast you'll be rolling that out, and to which campuses?

Well, we started it at Dallas. You know, we did do one pilot course, for one pilot program at Avondale, but Dallas is the first place where it is being taught. We are in the third class of it at Dallas right now. So that's three out of 17 at a minimum and more, depending upon electives and diesel.

So we are not close to rolling it out to other campuses at this point. I would hope that we would begin that process in 2011, but that remains to be seen. We need to get through more of the teach at Dallas before we start rolling it out to the legacy campuses.

Okay. And then just a final one, I know like default rates are that high for you guys, but are you able to comment on how the '09 rates for the -- or rates for the '09 cohort are trending?

Is that the draft one?

No.

No, the latest we have are the draft ones for '08, I believe.

Right.

Okay. Thank you.

But just to follow up on that was what I was referring to when I said they were actually improving.

Right. Okay thank you.

Corey Greendale from First Analysis.

Good afternoon. I wanted to delve into the Q4 start just a little more. Could you just talk a little bit more about the dynamics on (inaudible)? I think if you look back over the past couple of years, you've only had one quarter where growth in contracts was negative. So you've got, you would think a lot of wind at your back there. And you've also got you said I think starts were up 38 -- that leads were up 38% in the quarter.

So there's a lot of reasons to think that it's just a capacity issue as you said. But at the same time capacity would suggest flat starts are not actually down, in some place, it could be down and I would assume that you get some benefit from the Dallas campus as well. So could you just say -- you know, talk a little bit about how we get confidence that what we're seeing there is just a seasonal capacity issue and not going to sustain into 2011?

Yes. On the fourth quarter there is -- there are a couple of factors at play. One we talked to in our comments and that was we did intentionally try to accelerate some of the starts from Q4 into Q3. And did so successfully. And we are limited on what we can do because you have high school graduation that prevents students from starting earlier than the traditional Q4.

With that said, that is our largest quarter and it's nearly 50 -- it's 40 something percent of our total starts for the year. And so, on a year-over-year basis, it is difficult to grow that because you have to align everything programmatically at specific campuses where there may be capacity. And you are trying to do it on some pretty large numbers.

So I think there is some capacity constraints from the start standpoint that are, in fact, the case out at a couple of campuses. And then we do have the fact that our contracts, student applications have not been growing at double digits and we did have the quarter where they were down. The good news is, they are continuing to improve and grow and I think you will see that as the year progresses. But honestly we just did not want people to extrapolate the growth that we have seen in the previous quarters to Q4 on a base that large, given the fact that we do have some capacity constraints and we've not seen double-digit growth in our student applications at this point.

So we are trying to give you all the data that we can and are confident that we are moving in the right direction. But the reality is that is where we are at today.

So your expectation right now, and I know, Eugene, you talked about at least targets for start growth in 2011, but that Q -- that the September quarter will be kind of the outlier and that when you get into the December quarter, it's not that you are going to have greater than 30% start growth. But you can get that more toward what you have been doing -- closer to double digits, anyway?

Yes, I think that's the goal for 2011 and that's the target that will be out there, will be double-digit start growth. Now, you know, obviously just like this year that you know, double-digit -- it is not going to be a flat -- let's just call it 10%. That is not the guidance I'm giving. I'm sticking with double-digit, but that doesn't mean it's going to be the same percentage every quarter for some of the factors that Jim just mentioned.

So we will see volatility in the year-over-year quarterly start numbers. But just like this year on a whole, we would expect to see double-digit start growth.

Okay. And just operationally, that 38% growth I think you said, you saw in leads. Do those then apply -- I don't know exactly what the typical sales cycle is, but do those leads apply more to fiscal '11 so that essentially you don't have high growth in leads but spoil on the vine because there is no capacity to serve those students, if they're interested?

No, I think that we have -- well, we've done a couple of things. One is we want to make certain that we are keeping those students in the pipeline that we are nurturing them. And when you consider the lifecycle from the time the student makes inquiries application, and then actually start school, it's several months.

So two thirds of our student inquiries typically will make application within 90 days. And then you have several months before they will actually start. Some of which will start inside of the same quarter. Others will be stretched out, regardless of when their preference and ability to start is.

We have changed our services to make certain that we are staying in contact with them, and making certain that we are removing barriers so that they can show the school when it's an appropriate time for them and what's occurring in their life. So I think we are geared up to handle that, and you'll see that in the future quarters as you have seen improvement throughout this year.

Okay. And just one last one on the regulatory front. I know you said there's a wide range of outcomes in terms of starting salaries. And then it goes up from there. And I know you don't have information, but given the information you do have, if you only use the starting earnings levels can you give us any sense of how far off you would be from meeting the hurdles as they've laid them out?

Well, you know what? Not with the way they lay them out. I mean, what we used, I think six months ago, was the 25th percentile of DLS data. And so, if you use that as the wages, we looked to be in real good shape. I think it was less than 10% of our students would have been impacted somehow that we would have had to make some adjustments for.

But you know that's where it starts getting tricky is then going from the BLS data to however they propose to come up with this wage data; and just, honestly, there's a lot of unknowns out there. What happens to an individual that starts work in October of a year? Does that count as a full year and therefore reduces the average?

There are just a lot of unknowns. And honestly, we don't have access to that data at this point in time.

Yes, I understand. But the timetable aside though, you are still comfortable that a typical UTI graduate has greater earnings potential than, let's say, a non-UTI graduate on average entering the field?

We certainly believe that there is a value proposition there where the potential student receives an excellent return on his or her investment. But you know, I can't get into all the iterations of what they did something else somewhere else. But I think we clearly have data that would support somebody coming to UTI to get an education and going to work in that field. It appears to be justly rewarded from a financial standpoint.

And I would say this in terms of the data that we do track. Those students who have manufacturer-specific training generally are hired in at higher wages and have the opportunity to accelerate their earnings potential at a greater rate than those students who even graduate from UTI without manufacturer training. So, given the fact that a large number of our students to take an elective that is manufacturer-specific, I believe that that gives them an edge up in the environment whether they are going to work for a dealer of that specific brand; a dealer of a differing brand because there is value and they are paying for it to have expertise from a competing brand on staff, as well as in the aftermarket.

And this has been a rare opportunity for the aftermarket to take share from dealer and they are doing it through the service side of their business. And our graduates are finding good success there. So I (multiple speakers). Go ahead.

I was just going want to thank you for the response but didn't mean to cut you off.

No, I'm finished. Thanks.

Okay. Thank you.

Gary Bisbee from Barclays Capital.

Regarding the commentary on incentive comp, if you -- what you said you were working on potential change if you had to. And I hear your concerns with the proposal but what would the likely part of that change be? Or what would the impact be? Would you likely have to have higher base compensation or base salaries for your reps if you had to stop doing the persistence or graduation-based bonuses in -- any way you could size sort of order of magnitude at this point?

I think, you know what, what we believe is that we would have to make changes to our plans. We would have to remove any sort of retention and graduate bonus opportunities for our representatives.

We don't think necessarily that it will increase the cost of the program per se that we are going to have to pay people more. What we do believe will happen is that, at times, it will be less efficient. And so there could be times where you are paying people more than what you would like to or less, based on their productivity levels from a traditional sense.

So it would be more salary-based sort of compensation plan and, you know, we have to evaluate and change the programs with the rules and regulations and how it impacts our business. But overall, we don't see a significant increase required. We just see it as being less efficient and probably not nearly as motivating as some of the plans in place today for representatives that are focused on enrolling quality students.

Okay. I realize it's a Board decision, but I figured I would ask anyway. What was the thought process behind the special dividend rather than considering ongoing common stock dividend?

Well, I think, given our levels of cash and cash needs and excess cash, we just felt that putting in place an ongoing dividend at this point in time, given tax laws, potential tax law changes, we could have put in place a sufficient enough ongoing dividend to either take advantage of the tax legislation, or to -- if you will -- put a big enough dent in our excess cash without setting up too big a hurdle in the future.

So I think we chose to do it in this method which gives us more flexibility going forward to look at doing additional dividends and/or if we choose to return capital, depending upon the point in time. You know, not doing it in a dividend, but doing it in a share repurchase. So I think it was a combination of timing, but the added flexibility that the special gives us as opposed to an ongoing.

Okay, and then just a last question. I realize the timing of this might seem sort of funny, given how strong your results have been recently. But looking back a couple of years ago, you and your peers in the auto space were somewhat challenged by probably somewhat company-specific, but I think the real strong job market. You know, given that at some point, it would seem like the job market would come back and be stronger amongst your target audience.

What are you doing today when you think about planning over the next couple of years? I know you resisted the temptation to diversify more broadly away from Auto. But what's the thought process or plan to keep growing the business at some point when we do have a much stronger economy? Thank you.

I think the things that we have been doing focused on the core business are in response to that. And I'd say specifically the focus on the local market student, students that live within closer proximity to a campus have the ability to attend school and work without having to uproot their families and move across country. So that helps. So if they are able to work and go to school at the same time, having more campuses out there within closer proximity to them helps us address that.

I think the -- certainly the improvements that we have made from an execution standpoint and service delivery will definitely help with changes in any sort of economy.

And then the last thing that we talked about was our curriculum creates much more convenience and flexibility for the students with a percentage of it being web-based, conveniently located, and 4 1/2 sessions a day versus 6 hours. And so we are trying to address those types of things that are typically barriers in a tight labor market and a tougher economy, at least for us.

I can say this, though, you know. When you look at our demographic and Eugene commented on this during our prepared remarks, this population is trending at higher unemployment than it has in 30 years and when you look forward at the projection, it is not expected to recover for some time. Especially when you consider the types of jobs that really supported a really strong economy for these people -- construction, manufacturing.

Some of those jobs we don't think are coming back and certainly not anytime soon. So we have a lot of opportunity over the next couple of years. And we will continue to learn as we implement the things that we talked about with our conveniently located campuses, our blended curriculums that -- convenient and more flexible and our improved service delivery for our students.

Okay. Thank you.

Jason Anderson from Stifel Nicolaus.

Good evening. I'm here for Jerry and Bob. I have a couple of questions on the loan program. Is there --? Could you give us an update on the expected repayments you expect to see in fiscal '10 and fiscal '11?

Well, fiscal '10, we only have one more quarter so I would expect to see somewhere slightly up from where we were this quarter which was, you know, $70,000. So I'd expect in the fourth quarter to be in the $80,000 to $90,000 range of repayments.

That, obviously, is extrapolating up fairly quickly since we started the program two years ago. So fiscal '11, I would expect about another $2 million of note value, okay? Not $2 million of repayments, but $2 million of note value to enter repayment and then, of course, you'd have to put your probability on what portion of that gets repaid. But it is a 10-year amortization.

So it is beginning to ramp up. It is not set up yet, but I would expect us, hopefully in 2011, to at least double the inception to date contribution. So I would expect it to be somewhere in the several hundred thousand dollar range.

Okay. Thanks. And could you give us an update, too, on the default rate in that program? I think last quarter, you mentioned 64%, I believe.

I don't have last quarter's in front of me so I don't remember it off the top of my head, so I can't confirm that. But the -- let me flip it on you. The recovery rate, which is what we can kind of track a little bit easier and doesn't get messed up in some of the nuances, we are collecting about 30%, 35% of what is due to us today.

And, you know, that number is still being influenced by a higher percentage of students that have dropped courses and dropped out of school early on. As I said, we are just getting into where we are starting to see kind of normal graduations from people that have been in the program since its inception.

So I would not make any guarantees, but I would hope that that repayment rate goes up a little bit.

Okay. Great. I was -- actually, you elaborated on what my next question was going to be. And then just finally, do you expect to need to increase your $30 million commitment in '011?

Yes, I would expect we would do that. But I also know, as we've talked about capacity at some of our campuses in essence being full, at least in certain quarters, I would expect us to tweak how we use the program. Not significantly, but in terms of how much we allocate to individual campuses. Whether we require a higher hurdle to participate in it, whether we require a parental signer on it, things like that.

So I would, first of all, yes, absolutely anticipate an extension of the commitment. And I would also expect for the program to be tweaked in some minor ways.

Great. Thanks.

(Operator Instructions). Paul Condra from BMO Capital Markets.

Thanks. Just a quick follow-up. I just wanted to ask about the capacity. If you could talk about just how is that distributed across your campuses? Because I think you mentioned a 67% capacity and then, you know, for any [unusual] capacity issues and you also mentioned an alternative measure of capacity that you would be beginning next year. And I wondered if you provided (multiple speakers)?

Yes. I -- you know, again, you know, we have tended to treat capacity like you would a baseball stadium. Where there is a set number of seats and the idea is to fill them all up. And that is kind of what we've reported on.

That is probably not the best way to view how we actually manage the business because, as I said, we in essence have to plan on some vacancies because of sequencing of our starts, the ability of students to take leave of absences and come back and get in the right class at the right time. So as we move forward, I want to give investors a better understanding of how we are doing versus what we are actually trying to fill up, as opposed to just here's how many seats we have, go count them because we know we are not going to fill them all.

So that is what we're going to try to do going forward.

To your question about how is the capacity utilization spread between campuses. Again, it depends upon the point in time of the year, but our Automotive campuses in the Orlando campus. So the Automotive campus here in Phoenix, the Orlando campus I don't want to say they are full, but depending upon the specific start date, they have to close down admissions to those starts, because those starts are full.

Those are probably the only two locations that are in that situation. So that's not to say they can't take additional students, but they at times have to close starts down earlier than other campuses than our franchise would.

Okay. Great. Thanks.

(Operator instructions). And at this time I'm showing no additional questions and would like to turn the call back over to management for any closing remarks.

Thank you very much for joining us today. We certainly appreciate your time and interest in Universal Technical Institute and we look forward to updating you on our year end earnings call, which is scheduled for Tuesday, November 30. Hope you have a great evening. Good night.