ITT Educational Services, Inc. (ESI)

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ITT Educational Services, Inc. (ESI)

Q3 2008 Earnings Call Transcript

October 23, 2008, 11:00 am ET


Kevin Modany – CEO, Chairman, and President

Dan Fitzpatrick – SVP and CFO


Jerry Herman – Stifel Nicolaus

Brandon Dobell – William Blair

Corey Greendale – First Analysis

Gary Bisbee – Barclays Capital

Trace Urdan – Signal Hill

Morris Katog [ph] – Piper Jaffray

Kevin Doherty – Banc of America Securities

Suzi Stein – Morgan Stanley



Good evening, ladies and gentlemen. And welcome to the ITT Educational Services third quarter 2008 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

Joining us today from the management of ITT Educational Services, we have Kevin Modany, Chief Executive Officer, Chairman, and President; and Dan Fitzpatrick, Senior Vice President and Chief Financial Officer.

Before we begin, ITT Educational Services, Inc. wishes to remind you that this conference call may include forward-looking information. Actual results may differ from the information presented during this call. For additional information, please review the section on forward-looking information contained in today's news release or in the company’s public filings with the Securities and Exchange Commission.

Thank you. Mr. Modany, you may begin.

Kevin Modany

Thank you. Good morning everyone, and thanks for joining us on our third quarter conference call to review our operating and financial results for the three and nine months ended September 30, 2008.

As usual Dan Fitzpatrick, our Senior Vice President and Chief Financial Officer will join me on the call this morning. And he will assist me in providing our prepared comments and in answering your questions.

We would like to kick off the discussion by giving you a quick overview of the agenda for the call this morning. We plan to follow our regular conference call outline by providing you will updates in several key areas of the business. First, we will provide you with some additional color on the fantastic third quarter operating results reported earlier this morning in our press release. Then we will review the progress we have made in the execution of our growth strategy. We'll go from there to providing some additional insight on the student financial aid market with regard to our students’ ability to access federal and private student loans as we enter the fourth quarter of the year.

At that point, I will turn the call over to Dan who will provide a few comments on the excellent financial results for the quarter. I will follow his remarks with a wrap up of our prepared comments and then we will open up the lines for your questions.

With the administrative matters out of the way, let’s get started on the operating results for the quarter. As you’ve already read in this morning’s press release, we reported wonderful results that once again exceeded our internal goals due to another quarter of exceptional performance by our management, faculty, and staff. We believe that the challenging economic environment brings excellent opportunities for our business. We believe that our prospects for attractive levels of performance are very good as we head into the fourth quarter of 2008.

Historically, we’ve experienced above average growth at our colleges during slow or recessionary economy, as if these periods motivated people to pursue additional education to learn new or upgrade existing skills in order to increase their employment prospects. We believe this is a special (inaudible) in the current employment market that places an ever increasing premium on skilled labor. These market dynamics, coupled with the strong performance in the third quarter and the robust outlook that we have for our key operating metrics, that led us to increase our internal 2008 EPS goal from the previous range of $4.65 to $4.75 to a revised range of $4.90 to $5.00. We continue to believe that we are well positioned to achieve our operating and financial goals for fiscal 2008.

I would like to now turn to a brief review of our third quarter operating results. As you read in this morning’s press release, new student enrolment increased a very impressive 19.4% to 21,807 through the three months ended September 30, 2008 compared to 18,270 during the same period in the prior year. In increase in new student enrollment was fueled by continued strong demand for our program offerings across all six schools of study.

Student interest in our programs of study in the third quarter was driven by a 7% increase in advertising expenditures in the third quarter of 2008 compared to the third quarter of 2007. The year over year increase in advertising expenditures in the third quarter was less than we originally planned, as we once again benefitted from the reduced advertising cost due to the declining demand in the general advertising market arising from the slowing economy. We believe that advertising expenditures in the final quarter of 2008 will be below our originally planned year over year increase in the quarter of between 10% and 15%, as we intend to continue taking advantage of lower advertising rates.

Our advertising plan allocates sufficient amounts of marketing expenditures to support the opening of new colleges and the introduction of new programs of study throughout the remainder of ’08 and into 2009. The rate at which student increase converted to new students increased in the third quarter of 2008 compared to the same prior year period. We attribute some of this to the improved productivity of the student recruiters who were hired in early 2008. As many of you are aware, the lead conversion rates of student recruiters correlate with their tenure in the position. As a result, more experienced recruiters typically convert student increase at a higher rate than less experienced representatives. We believe that we enter the fourth quarter with a sufficient number of trained and experienced student recruiters to service an increasing number of perspective students who are expressing interest in our programs of study.

At this point, we will turn our attention to student persistence. We are very pleased to report in this morning’s press release that our student persistence rate in the third quarter of 2008 increased 10 basis points to 72.5% compared to 72.4% in the third quarter of ‘07. That increase in student persistence was due to improved student retention in the third quarter compared to the same prior year period. That increase in student retention was offset by a solid increase in the number of graduates in the third quarter of ’08 compared to the third quarter of ’07. The increase in graduates was primarily due to improved student retention that we experienced and reported to you during 2007. As we look forward to the fourth quarter of ’08, we believe that student persistence will be approximately the same as the fourth quarter of ’07 after excluding the large increase in the number of graduates that we expect in the fourth quarter of ’08.

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