Universal Technical Institute Inc (UTI) 2012 Q4 法說會逐字稿

Good afternoon and welcome to the Universal Technical Institute Inc. fourth-quarter 2012 conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation there will be an opportunity to ask questions. 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 December 7, 2012, by dialing (877)344-7529, or (412)317-0088 and entering passcode 10020666. At this time, I would like to turn the conference over to Mr. John Jensen, Vice President and Corporate Controller 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 fourth quarter and all of fiscal 2012. We will then open the call up for your questions.

The Company's earnings release was issued after 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 within the meaning of Section 21-E of the Securities Exchange Act of 1934 and Section 27-A of the Securities Act of 1933, as amended. I'll 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. The 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.

In the prepared remarks that 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, John. Good afternoon, ladies and gentlemen, and thank you for joining us. With me is Eugene Putnam, UTI President and Chief Financial Officer, and today we will review our fourth quarter and fiscal 2012 results and discuss key operating trends and business priorities.

For UTI and our industry as a whole, the story in 2012 was the dramatic drop in the number of students attending school. As economic doldrums persisted and regulatory changes took hold, our students found themselves with less money to pay for school, and fewer options to finance their education. New regulations added complexity to our business. Competition ramped up, operating costs increased, and our financial results declined. We went into the year with fewer students, and as the economy continued its slow recovery, consumers seemed even less willing to take on debt or make an investment in education. New student application and starts were down throughout the year, and we saw an 8.5% decline in net revenues, which came in at $413.6 million. That dynamic meant more competition for the same students, and more investments to get people interested in a UTI education.

Along the way, fixed costs related to regulatory compliance continued to rise, as well. We were able to relieve some of the pressure through efficiencies and careful cost management, but in all, lower student population levels, coupled with our high fixed cost structure drove revenue and income declines for the year. While the difficulty of 2012 certainly affected our financial performance, it did nothing to dampen our resolve or diminish our ability to respond. Our business remained healthy, and even in the face of challenges, we strengthened our leadership position. We continued to deliver strong student outcomes and offer high-quality education options tailored to our students and industry customers, in order to meet their challenging needs.

In summary, 2012 was a year of balance. While we worked to address the near-term challenges, we also stayed focused on the future, and how we will grow the business in both size and profitability. With that, I'll turn it over to Eugene, who will discuss the financial results in greater detail, and then we can cover some of the specific business drivers and operating trends in the quarter. Eugene?

Thanks, Kim. As anticipated, our financial outcomes were down from last year as a result of our lower student population. This decrease was mitigated to some extent by the focus placed on efficiencies and managing costs during the quarter, as well as the reduction in workforce of approximately 195 people undertaken last year. Additionally, on October 1 of this year, we announced another reduction of workforce, which impacted approximately 50 more employees nationwide, and further aligns our workforce with the anticipated student populations for the coming year.

Revenues for the fourth quarter were $101.3 million, a 9% decrease compared to last year's fourth quarter. This decline in revenues primarily related to a decrease in average student enrollments of 9.8%, partially offset by an increase in net tuition rates. During the fourth quarter of fiscal 2012 and 2011, tuition excluded $4 million and $1.9 million respectively, related to students participating in the Company's proprietary loan program, which as you know, will be recognized as revenues, when payments are actually received. Average revenue per student for the quarter increased 1.2% to approximately $6,500. Operating income for the fourth quarter was $2.3 million, compared to $9.6 million last year. Operating margin for the quarter was 2.2%, compared to 8.6% in the same quarter last year.

While we continue to manage our variable costs to align with our student population, our high fixed cost structure and investments in advertising continued to contribute to a decline in operating margin. Compensation and related expenses declined slightly by approximately $1.2 million this quarter, when compared to the same period in the prior year. The decrease was primarily attributable to decreases in both bonus expense and stock-based compensation. This was partially offset by severance costs of approximately $1.9 million, related to the reduction in workforce in October, which I previously mentioned. Approximately half of that severance charge impacted the SG&A line, with the other half impacting ed services and facility expense. We would expect to see about a $5 million reduction in annualized cost savings in fiscal 2013 as a result.

During the year, our focused efforts on collection activities led to lower out-of-school student balances and lower bad debt expense for the quarter, as compared to the same period last year. In addition, we collected approximately $600,000 on a note receivable that had previously been written off way back in 2004. Bad debt expense was 1.3% of revenue for the year-ended September 30, and we would anticipate that bad debt expense could be in the range of 1.4% to 1.5% of revenue in 2013. EBITDA for the quarter was $8.4 million, versus $16.2 million last year. For the year, it was $39.5 million, as compared to $70.6 million last year.

Net income for the quarter was $1.6 million, or $0.06 per diluted share, versus $5.6 million and $0.23 per diluted share in last year's fourth quarter. Excluding the severance costs of $1.9 million for the quarter, our net income was $2.8 million or $0.11 per diluted share. Net revenues were approximately $413.6 million for the year. This represents an 8.5% decline versus $451.9 million last year, and our operating margin for the year was 3.4%, down from 9.9% last year. For the full year, net income was $9 million or $0.36 per share, compared to $26.9 million, or $1.09 per share last year, and again the reduction in workforce impacted the full-year by $0.05 this year. Return on equity for the trailing four quarters was 6.2% compared to 21% for the trailing four quarters ended September 30, 2011.

Looking at our balance sheet, we had cash, cash equivalents and investments of roughly $102 million at September 30, compared to $110 million last year. The decline was driven by the lower net income, and I've mentioned again that we continue to have no debt on our balance sheet. For the year ending September 30, we generated $18.5 million in cash from operations. We invested $11.3 million in fixed assets, primarily to purchase new and replacement training equipment for our ongoing operations. We continue to be focused on managing our capital expenditures, as well as our operating expense. We returned $9.3 million to shareholders during the year, through a combination of dividend payments and share repurchases.

During the fourth quarter, we also entered into a build-to-suit facility lease agreement and a construction management agreement to relocate our Glendale Heights campus, which is near Chicago, and design and build a campus in Lisle, which is about 12 miles away from the current Glendale Heights location. Glendale Heights, for those of you that have visited, is an older multi-building site, while the planned Lisle campus is a new single-building site which will be optimized for delivering our new blended curriculum. We intend to open that site late in 2013. Concurrent with this lease agreement, we've also invested $4 million to acquire an equity interest of approximately 28% in a joint venture on this facility. And now, I'd like to turn it back to Kim to discuss our marketing and admissions efforts in a little bit more depth.

Thanks, Eugene. First, let's talk about marketing. During the past fiscal year, we've been sharing with you the focus and investment we've made to strengthen our overall brand awareness and improve student inquiry generation. During the year, we re-launched our Universal Technical Institute brand with our new tagline, Chosen By Industry, Ready To Work, which captures our unique differentiation and value proposition for students. In addition, we tested a few advertising campaigns with different messaging for our target audience, and are now optimizing across multiple channels. Our goal is to efficiently generate a growing number of quality inquiries from students who are interested in a UTI education, and demonstrate the willingness and ability to not only inquire but to enroll, graduate, and become gainfully employed.

We've made slow but steady progress in our media optimization efforts. It an increasingly complex, yet less-efficient environment, with escalating costs and competition for a higher quality student. Our advertising expense as a percent of revenues for the full year was 10.2% and 9.8% for the quarter. Ad spend during the quarter was down roughly $175,000 quarter-over-quarter and up $150,000 year-over-year. This quarter marked the lowest level spend in advertising during the fiscal year, and the largest increase in student inquiries. During the fourth quarter, student inquiries increased by 17.2% year-over-year, marking the third consecutive quarter of positive growth in this important area of our business.

But even more important than inquiry generation is how we successfully help students, interested in UTI, become enrolled and start school. This is an area of continued focus for us. We know there are both internal and external challenges we must overcome to grow student enrollments. Affordability, specifically the willingness and ability to finance an education and support themselves while attending school, remains a key challenge for our students, especially those who must relocate to attend one of our campuses. In addition, we continue to adapt to the implications of regulatory change to our processes, performance management, and reward and recognition programs. Bottom line, we're not as efficient as we once were, but believe we can and will improve as we get better at doing things differently.

Turning to admissions, the total number of student applications was down 3.7% year-over-year for the full fiscal year, and 5.8% for the fourth quarter, compared to the same period a year ago. For the full-year, the number of applications received from our high school channel was flat year-over-year. The adult channel was down roughly 10%, while our military channel was up 20%. Fourth-quarter performance was similar to the annual trend we experienced across all channels. For the adult segment, destination campuses had the greatest declines. It is probably worth noting that while the impact of ATB students did not hit UTI as hard as some other schools, it did have some impact. Historically on an annual basis, ATB students accounted for roughly 5% of our new student applications, with the vast majority of it attributed to the adult segment.

During the quarter, we had 6,300 new students begin school. 6,300 new students. This was down 3% year-over-year with roughly 200 fewer new student starts. The decline was driven entirely by 120 basis point drop in our student show rate, primarily attributed to students under the age of 20 who have a long enroll-to-show time frame and must relocate to attend UTI. From an ATB perspective, historically, ATB students accounted for 2% to 3% of new student starts in the fourth quarter. So excluding the impact of the loss of ATB students, our new student starts for the quarter would have been flat on a year-over-year basis.

We understand the importance of rebuilding the front end of our business from student inquiry growth and improved conversion rates to new student growth. We're optimistic that in time, our strategy and tactics will address the challenges we're facing, and set us up for a strong and successful future. Meanwhile we'll stay focused on helping the students get to school, stay in school, and graduate.

Now I'm going to turn it over to Eugene to discuss what we're doing to help students address some of the affordability issues necessary to attend school and graduate. Eugene?

Thanks again, Kim. While we are beginning to see improvement in both the quality and quantity of inquiries, our show rates continue to be pressured by a variety of factors. As we've been discussing for several quarters now, we believe affordability to be a large challenge for our prospective and continuing students. The cost of education, and more specifically, affordable options for financing their education, is a main topic of concern for students and their families. Additionally, the process of applying for and receiving financial aid is a significant burden for many of our potential students. We believe that increased denials of Parent Plus loans, comparative confusion of program costs from the net price calculator, as well as some internal servicing issues for future students, are combining with affordability challenges to negatively impact our show rates.

We are pleased to see the Department of Ed's plans to reverse the denial of many Parent Plus loans and we have implemented some changes to certain of our processes, and are evaluating additional changes to simplify and improve our student experience and processing. Additionally, we continued to offer both merit and need-based scholarships, and we increased the amount of need-based scholarships awarded this year. For the quarter, the dollar amount of need-based scholarships increased 44%, and the number of scholarships awarded increased 97%. For the year, need-based scholarships increased 23%, and the number of scholarships awarded increased 63%.

During 2012, we made our proprietary loan program even more accessible to prospective students, by increasing awareness of the program, and removing certain qualification barriers for dependent students. As a result, for the year ended September 30, we extended approximately $21 million in loans under this program. That's up from $8.2 million last year. We plan to continue these programs, but ensure that all traditional credit-based funding sources have been exhausted, prior to utilizing the proprietary program. As a reminder, our program helps students who don't have sufficient access to traditional credit-based loan products, and yet, who are otherwise fully qualified to attend UTI.

As of September 30, we've committed to provide approximately $60 million under this program. The average individual loan amount is currently about $5,200, and we do expect the number of loans we provide to increase as we enter the first part of fiscal 2013. Since we started the program, we have not recognized tuition and interest revenues, totaling $47 million through September 30. With that said, our cash collections continued to improve. During the fourth quarter, we recorded $435,000 in revenue and interest from payments received. That's up from $259,000 in the previous year. For the year, we recorded $1.6 million compared to $857,000 in the prior year, and since inception, we've collected $2.7 million on this program.

Turning to employment, graduate employment continues to be a strength for UTI. On a consolidated basis, our overall graduate employment rate was 82% for the year, and while slightly below our historical standards, we continue to be pleased with this high rate of placement in the face of a still struggling economy, as well as having over 12,700 graduates, which is one of the highest, if not the highest year in our history. We continue to see very strong demand for our diesel grads, improving demand for auto grads, and slight improvement recently in motorcycle and collision repair.

The launch of our blended learning curriculum, which I mentioned earlier, is going on at our Avondale campus, and it's successfully underway. We recently completed the first phases of our courses, with both active and new students, with positive outcomes and feedbacks. While we believe our blended curriculum ultimately will lead to reduced costs once it is implemented across all of our auto campuses, the roll-out to existing campuses will require further capital investment and some higher than usual operating expense as we complete the transition. For the coming year, we anticipate investing in the range of $4 million to $4.5 million in computer equipment and training aids to complete the rollout at Avondale, as well as a second campus that will start in the summer of 2013. This schedule reflects our balanced approach to the business where we continued to invest in our future, while carefully managing the challenges facing us in the present.

Our strong industry relationships are critical to our ability to deliver quality training, and I'm pleased to share with you that during the fourth quarter, we renewed our manufacturer-specific advanced training programs with Porsche. Our many industry relationships continue to provide a key differentiator for us in the marketplace, and for our students, as they seek careers in the industry.

As we look to 2013, we expect the number of applications to improve during the year. But as Kim noted, giving the continuing headwinds, it will take some time for these applications to convert to new student starts. We expect our new student starts for the first half to be flat to slightly down, before possibly improving during the second half, resulting in full-year new student starts to be close to flat year-over-year. As a result, we anticipate that the average student population for 2013 to decline by a mid-to-high single digit rate, and that these lower enrollment levels will combine with slightly higher tuition to result in a low to mid-single digit decline in revenues in 2013, and a slight overall decline in operating margin and net income compared to this past year. These revenue pressures enhance the necessity of tight cost control and process management improvement, yet maintaining our quality of student experience that we believe will continue to lead to quality student outcomes.

So despite severe economic headwinds caused by the length and depth of the most recent recession, our company and our employees have remained focused on their core mission. Changing our students' lives for the better, by providing a quality education, which we believe leads to enhanced employment opportunities. Kim and I would both like to thank all of our employees for their efforts, and we look forward to dealing with the challenges in 2013, and increasing the number of students that we can successfully educate. And now, operator, I think we're ready to open the line for questions, please.

(Operator Instructions)

Our first question comes from Peter Appert at Piper Jaffray.

Kim, I think you mentioned maybe a couple times increased competition as a factor that you're seeing in terms of impact on enrollments. Can you give more color on what you're seeing in the marketplace and how big a factor you think that is, in terms of the overall start and enrollment performance?

Yes, Peter. The increased competition I'm referring to is largely from an advertising standpoint in the digital environment, with competition for keywords and focus on the quality or higher-quality student, trying to offset this ATB population. So that's where we've seen the most increased competition, is from an advertising standpoint. I wouldn't necessarily say it's coming from direct competitors, any more so than we've seen in the past. It's the indirect competitors who are competing for similar words, as we all try to navigate this changing advertising climate.

Got it, understand. Thank you. That's helpful. And in terms of how conceptually you're thinking of pricing and pricing strategies in 2013 over the next couple of years, how do you balance the need to protect profitability against the affordability issues you've highlighted?

Well, it's a very good question, and one that's taking a considerable amount of our focus. And we are raising our tuitions below the educational average, I would say across all universities and colleges of roughly 3%. We do believe that it's necessary, given the low student populations, but we have a team that is looking at strategic pricing alternatives, with scholarship considerations, institutional grants, employer-sponsored training, as we start to see that demand pick up on the back end, as well as some of the things that we're doing with our First Century Loans program. With that said, this is all about getting far more efficient with everything we do, and the greatest amount of focus is on the front end, to eliminate waste from targeting and advertising to students who are not likely to enroll and show to school. So we're trying to get smarter about it on the front end, to take out costs, to lessen our dependence on tuition increases. But it's a balancing act.

Right. Okay, great. Thank you. And last thing, Eugene, do you have an estimate for capital spending for fiscal 2013?

Including the $4 million that I talked about in terms of the new curriculum rollout, my guess at this point in time is that it will be somewhere in the $18 million to $20 million range.

Great. Thank you.

The next question comes from David Chu, at Bank of America-Merrill Lynch.

Revenue per student increased in 4Q. Seems to have been a little bit lower than past quarters. Is this really a reflection of increased scholarships?

I think it's a combination of an increase in scholarships, as well as increased usage of the loan program.

Okay. So how should we think about revenue per student for 2013?

Well, I think in terms of the growth rates on a quarter-over-quarter basis, I would assume that it would look pretty close to the increase that you saw this current quarter.

So how about if you're thinking about it year-over-year?

I would suggest that you're probably going to be looking at something in the 3% range.

3%? Okay. And also, I think Eugene, you mentioned that the Department of Ed reversed its decision to deny PLUS loans. Is that what you mentioned?

Well, I'm not sure I said reverse, but I think they are re-looking at some of the denials -- I think Secretary Duncan put out a press release earlier this week that talked about the need for the Department to re-look at it. I think they may have had some unintended consequences. That's my interpretation, but clearly, they saw denial rates significantly higher than at least what it appears that they were looking for.

Okay. And last question, is there any way to quantify the impact of starts in this quarter? For the PLUS loan impact?

Not at this time.

I can tell you that in terms of our PLUS loan denial rates, it was up significantly, so if you are thinking of a population of 50% denial rate, it was up over 60%, which is greater than what you'd see across the board for other institutions. So it did have an impact, especially when you consider the large volume of students who are dependents inside of the fourth quarter, and do depend on that parental support.

Okay. That's helpful. Thank you.

The next question comes from Jeff Silber at BMO Capital Markets.

In your comments when you talk about the show rate decline, you mentioned a couple things I just wanted to get a little bit more color on. You mentioned confusion regarding the net price calculator and some internal servicing issues. Again, if you can explain those, I would appreciate that.

Internal servicing issues is a kind way of saying we're not operating as efficiently in terms of processing as we would like to be, so we've made some changes there, both in terms of process and in terms of individual oversight. And I think that is a step in the right direction in terms of -- as Kim talked about, getting more efficient there, and getting some of the waste out of the process, so it doesn't bog us down. The commentary about the net price calculator is, I think there is confusion, as students and potential students get more and more information out there that is available to them, in terms of how everybody is listing it, what requires room and board, what doesn't. And I think we have opportunities to improve the communication with our potential students so that they have an even better understanding and comparison of the costs of attending UTI versus some other alternatives.

Okay. Great. That's helpful. And shifting gears a bit, you mentioned the relocation of the Glendale Heights facility to Lisle. When that facility is up and running can you describe what the differences are, how you expect the profitability to vary between those two types of facilities? Thanks.

I think it's a little too early to do that. I would expect that the rent is roughly going to be the same, so at first blush, I would say that there won't be significantly different margin, but I think it will be a much more efficient building, in terms of how we manage the workforce, how it shows. I would certainly hope that it leads to better show rates and higher student populations than the current facility. So if you factor that in, obviously, expect it to be a pick-up, but it's too early to factor that in.

Great. And can you remind me again when is that relocation going to be occurring?

I think we'll start teaching there, obviously dependent upon weather and construction delays, but the plan is late October, early November of 2013.

Great. Thanks so much.

Our next question comes from Kelly Flynn at Credit Suisse. We'll move on to the next question, which is Jason Anderson at Stifel.

I wanted to touch back on the scholarships. One, I was hoping you could provide your scholarship dollar amount in fiscal year 2012. And on your website I see you allude to about $11 million number, but it looks like that encompasses some other sources too. Could you maybe distinguish between what is UTI-sponsored and what might be externally sponsored?

Round numbers, and that's all I have in front of me, I think the scholarships that I was talking about equate to about $4 million.

Okay.

A year.

Great. And a little more strategically on scholarshipping, how do you think about -- obviously you've been increasing scholarships quite a bit by the numbers you threw out there, but is there a way -- would it make sense to get more aggressive on scholarshipping and possibly reducing internal lending or anything to get the affordability for the student down a bit? You mentioned -- you have highlighted that for several quarters. That's a main stumbling block for apprehensive prospective students.

Yes. And you're right on. It is a main stumbling block, and we have been focused on trying to utilize scholarships in a more strategic way, and pricing, for that matter, and what we have -- I think we'll be prepared to talk a little bit more about it in our February call. But what we've been trying to do is analyze certain student segments who will utilize the scholarships and actually benefit from them. I think in the previous question, we talked about the scholarships that are on the website. Those are the number of scholarships that are awarded, yet you see the difference that Eugene mentioned in terms of the impact that we're feeling. We believe by targeting those students who have a greater propensity to use them, and being more strategic about how they are awarded will address some of the concerns that we just talked about and that you just asked of. So I guess what I'd like to do is say, give us until February when we have got the project wrapped up. There's a full-blown project that is nearing completion at the end of this year, and we'll give some insight there without giving away the secret sauce.

Great. Thanks for that color. If I could add one more quick one, I know we've asked you a few times about capacity. It comes up often, but do you see any opportunities in 2013 to reduce capacity or effectively even by sub-leasing, and again, I know it comes up a lot, but any comments you have there?

Not much in terms of opportunity there.

Great. Thanks.

Never say never, but that's highly unlikely.

Thanks for taking my questions.

Our next question comes from Gary Bisbee at Barclays.

Let me follow up on that one. Why wouldn't you consider, on the transition to the new campus you're building, having it be somewhat smaller square footage? I guess both if you are using the hybrid curriculum, presumably you can do that, but also just given the current depressed demand environment. Wouldn't it be smart to think about having somewhat smaller facilities?

It will be somewhat smaller.

Okay.

You're absolutely right. The question -- maybe I misunderstood the previous question. I thought he was going about existing facility, could we sublease some of that out? But clearly, as we look to when campuses are -- leases are up, we obviously evaluate that market and any potential new markets around it for appropriate resizing, and we have done that in Chicago.

Are there any others that are coming due in the next year or two? That you might do the same thing?

The next one that will be coming up will be in I believe it's early 2016, but it's 2016 at Houston.

Okay. But that was the smaller start-up in recent years anyways.

No. That was Dallas. Houston is a large multi-facility campus.

Okay. Then just strategically, I know you have shied away from expanding beyond auto historically, but are there any other things that you could use your knowledge base and your facilities to teach like maybe more short-term programs or training, like recertification or training of existing work forces of auto dealers, or anything like that? Anything else you're thinking about to drive new profits or non-Title IV revenue or better utilize existing facilities or anything on the table?

Yes. Without scaring people on the phone, absolutely. We are looking at those things with a much greater purpose than we have in the past. I think the Company has transitioned from five years ago basically saying, let's stick to our knitting and focus on filling the existing seats, with what looks like our current student. A couple years ago, that kind of morphed into we will be opportunistic in terms of looking at other alternatives. I think we're at a position now, as you mentioned, Gary, for a variety of reasons, looking to not only expand, but in some cases diversify our revenue stream. Obviously that takes a little bit of time, a little bit of luck in some situations, but the difference I can tell you is that we have dedicated individuals now that have responsibility for that process.

Okay. And have you gotten to the point where you've looked at any, just as one example, overseas markets? And are there markets where you could use your existing knowledge around trading mechanics? And where there is funding situations that would allow that to be attractive, or is that probably still a ways off?

It's actively under investigation, but it's not something that is going to help us impact revenue in the next quarter or so. But I think it's clearly something that if all goes well, I would hope that we would talk more about in the coming couple quarters.

Okay. And one last one, you mentioned -- Eugene, you mentioned something about something you had previously written off many years ago that actually came back. And I missed that. Can you repeat that?

The only reason I mentioned it, there was -- the bad debt expense for this quarter included a reversal of $600,000 from a note that was written off in 2004, stemming from a past acquisition that we actually collected on. So the only point of raising it is that -- I don't want anybody to look at this quarter's bad debt expense as a percentage of revenue and extrapolate that out. It is abnormally low by about $600,000.

Great. Thank you very much.

You're welcome.

Our next question comes from Corey Greendale at First Analysis.

This is David Warner for Corey. I was wondering if you could speak to your 2013 advertising plans in more detail. Are you expecting that to be up on an absolute dollar basis?

I would expect it to be down on an absolute basis, and probably around 9% to 10% of revenue for the year. Basically building on the efficiencies that we are trying to achieve with our media optimization and predictive model. So it's built in and we did see that inside of this quarter slightly, but I would expect you to see even more of that as we move into the first half of next year.

Okay. And one more, I think you mentioned you have committed $60 million to the internal lending program. You sound like you're willing to commit more. Is there some amount that you're thinking that would limit you there, that you don't see yourself going above as far as offering that lending capacity?

Nothing in the near future. Nothing in 2013.

Okay. Thank you.

(Operator Instructions)

And our next question comes from Trace Urdan of Wells Fargo.

I wanted to go back to the questions about scholarships and pricing. I'm wondering if you have evidence to suggest that a few thousand dollars at the margin can make the difference between a student showing and a student not showing. Has that been your experience?

We have a lot of data and research that has shown exactly what you said, except for when you roll it back the past year, everything that looked like a trend previously is skewed in different ways, which is why it's taking us a little bit longer to sort through this, in terms of how we might award the students who really will use the scholarships to show to school. So, this year did not look like previous years and we're trying to learn from the tests that we had inside of the year.

I'm sorry, Kim. I'm just not getting it. Do you mean that in the past it has made a difference, and this year it didn't seem to? Is that what you're saying?

Yes. I would say that the formula that we had used in the past, for different income levels, different proximities, different age, whether it was need or merit-based, we did not see the same experience inside of this year. And so, typically, you could see various behaviors around scholarship application, acceptance of scholarships, and be able to project whether or not that student would show to school, and stay in school, and graduate. So even down to a specific dollar amount, and we're not seeing that same trend inside of this year. Things have changed. And that's what we're trying to sort through to figure out what scholarship we can do, and for what segments of students we should help.

Okay. And related to that, do you have any anecdotal evidence to suggest that students are trading down to community college programs that you compete with?

Well, I don't have any data that suggests that. Especially when you look across the universe, I can tell you that they are certainly increasing their marketing messaging around cost, which is one of the reasons that Eugene mentioned the net price calculator, and our belief that we can strengthen our value proposition in terms of how we communicate to students. But I wouldn't say that's anything -- any significant difference right now.

The gist of my questions is, I'm trying to figure out if the issue is just the overall sticker shock and the unwillingness to borrow to go to school, or whether there is really at the margin, some better price or higher discount that can make a difference for students. It sounds like you're trying to figure that out too.

I think it's a combination of both, in all honesty. There are some that are going to come to UTI regardless, and then there are others that, they want automotive but they can't make it happen. They can't travel across the country, so they'll settle for their local community college. But there's always been that. And we're trying to sort through how much of that is driving the results that we see today, specifically with the young adults. Because military is up, our high school population is flat to up, and we've seen the greatest challenge with our adult population.

Okay. Thanks.

At this time, I show no further questions. I would like to turn the conference back over to Kim McWaters for closing remarks.

I would like to thank everybody for your questions. We appreciate your time and interest in Universal Technical Institute and we look forward to updating you on our next earnings call which is scheduled for Thursday, January 31. I hope you have a great evening, and a happy holiday season.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.