Macro-economic headwinds, regulatory issues and lower students'
enrollment continue to weigh upon
Universal Technical Institute Inc.
) that went on to post lower-than-expected first-quarter 2012
results. The quarterly earnings of 16 cents a share was way below
the Zacks Consensus Estimate of 27 cents, and dropped significantly
from 42 cents earned in the prior-year quarter.
Net revenue for the quarter declined 9.4% to $106.4 million from
the prior-year quarter, and came marginally ahead of the Zacks
Consensus Estimate of $105 million. The fall in revenue reflects a
decrease in average undergraduate full-time student enrollment,
partially offset by a rise in tuition fees. Average revenue per
student inched up 1.8% to approximately $5,800.
Let's Unveil the Picture
The educational institute, which provides professional
automotive, diesel, collision repair, motorcycle and marine
programs, reported that average undergraduate full-time enrollment
dropped 10.7% to 18,300 in the first quarter of 2012, after falling
11.3% in the fourth quarter of 2011. Student starts for the quarter
remained flat at 3,300 compared with the prior-year quarter,
reflecting an improvement over a decline of 14.5% and 32.5%
witnessed in the fourth quarter and the third quarter of 2011,
The company reported a 4% year-over-year fall in the number of
student applications received, which however reflected a
significant improvement from a decline of 8% experienced in the
fourth quarter of 2011. Number of military applications surged 35%.
The number of high school applications dropped 5%, whereas adult
applications fell 8%.
Universal Technical's leading position in providing technical
education to aspiring automotive professionals and its business
model of working closely with leading original equipment
manufacturers provide the company with a competitive advantage.
However, management hinted that the regulation proposed by the
Department of Education is weighing upon student enrollments.
The Department of Education proposed that an educational program
could only qualify for Title IV funds, if it helps in achieving
gainful employment, which includes the criteria of loan repayment
rate and debt-to-income ratios. The company derives a major portion
of its revenues from federal student financial aid programs, the
Title IV programs. The education institutions are also under the
scanner due to the rise in the default rate of student loans.
Universal Technical informed that EBITDA in the quarter tumbled
43.1% to $13.2 million, whereas EBITDA margin contracted 740 basis
points to 12.4%. Operating income plunged to $6.6 million compared
with $16.9 million in the year-ago period, whereas operating margin
shriveled 810 basis points to 6.2%. The fall in operating income
was due to lower top-line growth and rise in advertising
The company is ramping up its advertising activities under brand
revitalization initiatives. Advertising expense climbed $2.5
million or 31% to $10.5 million from the year-ago quarter, and now
represents 9.9% of total revenue, up from 6.8%. Management now
projects advertising expenses to be in the range of 9% to 10% of
total revenue for fiscal 2012.
Enrollment Picture in 2012
Universal Technical remains cautious about its performance in
fiscal 2012. Management hinted that both applications and new
student starts showed a sequential improvement during the first
quarter of 2012. While the company expects the new student starts
to improve in the second half of the year, the company warned that
during the second quarter it could drop in the high single-digit to
low double-digit from the prior-year period and will also fall
Management warned that average number of students for fiscal
2012 will drop at a low-teens rate, and will consequently result in
a mid to high single-digit revenue decline.
To counter the sluggishness currently witnessed in the student
enrollment, amid the turbulent environment and regulatory pressure,
the company is pushing hard to manage costs effectively, trying
means to improve marketing efficiencies and is focusing on
launching new curriculum. Further, to unlock its brand value, the
company is coming up with a new tag line and will be using UTI
Universal Technical further intends to bring its current and
potential students under the spectrum of proprietary loan program
by increasing its accessibility, and enhance the count of
need-based scholarships in fiscal 2012.
Other Financial Details
Universal Technical, which competes with
Corinthian Colleges Inc.
Lincoln Educational Services Corporation
), boasted a debt-free balance sheet, and ended the quarter with
cash and cash equivalents of $51.1 million and shareholders' equity
of $147.3 million. The company generated operating cash flow of
$5.6 million during the quarter. Return on equity for the trailing
four quarters ended December 31, 2011, came in at 15.6% compared
with 21.4% for the trailing four quarters ended September 30,
In December 2011, the company's board of directors announced a
new $25 million share buyback program, replacing the existing share
repurchase authorization, which had $23.7 million remaining at its
disposal. However, the company is yet to repurchase shares under
the current authorization.
Given the recent steps, such as cost-containment efforts and
focus on admission and operating efficiencies, along with new
curriculum program that may help the company to afloat, we are
maintaining our long-term 'Neutral' rating on the stock. However,
waning economy, tough regulatory environment and falling
enrollments, which are adversely impacting the top and bottom-line
results, are well defined through our Zacks #5 Rank that translates
into a short-term 'Strong Sell' recommendation.
CORINTHIAN COL (
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