ITT Educational Services, Inc. (ESI)

ESI 
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ITT Educational Services (ESI)

Q1 2013 Earnings Call

April 25, 2013 11:00 am ET

Executives

Kevin M. Modany - Chairman and Chief Executive Officer

Daniel M. Fitzpatrick - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Sara Gubins - BofA Merrill Lynch, Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

George K. Tong - Piper Jaffray Companies, Research Division

Paul Ginocchio - Deutsche Bank AG, Research Division

Gary E. Bisbee - Barclays Capital, Research Division

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Jeffrey Scott Lee - Wells Fargo Securities, LLC, Research Division

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Timo Connor

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the ITT Educational Services 2013 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

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

Mr. Modany, you may begin.

Kevin M. Modany

Thank you. Good morning, ladies and gentlemen, and thank you for joining us on our conference call to review our 2013 first quarter results. Let me -- on the call with me this morning, as usual, is our Executive Vice President and Chief Financial Officer, Dan Fitzpatrick.

In our prepared remarks, we plan to provide an update on several key focus areas for the organization. We will also discuss a few miscellaneous items, including an update on the renewal of the ITT Technical Institute's accreditation. At that point, I will turn the call over to Dan, who will provide some additional color in the financial results reported earlier this morning.

With the agenda out of the way, let's get started. We continue to allocate a great deal of our energies towards stabilizing new student enrollment trends. We believe that new student enrollment results over the past several years have been negatively impacted by prospective students' increased sensitivity to the cost of postsecondary education. We also believe that the uncertainty of the value of additional education has increased recently, and prospective students' lack of confidence with respect to the value of a higher education has led some to put off a decision to pursue additional education.

This uncertainty exists despite the overwhelming data that suggest that there is a growing skills gap in our country in particular disciplines, including health sciences, technology and engineering, at entry-level positions, such as technicians. While we continue to see strong demand for our programs of study, which were supported in the first quarter of 2013 by a 10% increase in advertising expenditures compared to the same period in the prior year, the conversion of prospective student inquiries to new student enrollments continues to lag historical trends. Based on our belief that prospective students are increasingly sensitive to cost and debt levels, we increased the availability of institutional scholarships for our current and prospective students through the introduction of the opportunity scholarship. The opportunity scholarship is an institutional scholarship intended to help reduce the cost of an ITT Technical Institute education and to increase access to our high-quality career-based technology and health care related programs of study.

To give you a sense of the projected impact of the opportunity scholarship on the average ITT Technical Institute associate degree graduate, we currently believe that the average debt balance owed by an associate degree program graduate who benefits from the opportunity scholarship for the entire duration of his or her program of study will be approximately $20,000. That compares to the average debt balance of an associate degree program graduate just 3 years ago of approximately $32,000. As you can see, the opportunity scholarship has the potential to make a material difference in the overall value proposition of an ITT Technical Institute education for our graduates.

All but 7 of our 146 ITT Technical Institute campuses across the nation offered the opportunity scholarship to prospective new associate degree-seeking students who enrolled for the start of the academic period that began in March 2013. 115 ITT Technical Institute campuses first began offering the opportunity scholarship approximately 8 weeks before the start of the March 2013 academic period. To provide more color regarding the impact of the opportunity scholarship on first quarter 2013 revenue, approximately 5% to 6% of the students benefited from the opportunity scholarship in the first quarter of 2013. Therefore, it is still very early in the roll-off of this new scholarship program.

With that said, we believe the introduction of the opportunity scholarship led to the 230-basis-point improvement in the rate at which student applicants converted to new students in the first quarter of 2013 compared to the same period in the prior year. The conversion rate of student applicants to new student enrollments is commonly referred to as the show rate. As a result of the year-over-year improvement in the first quarter 2013 show rate, we are cautiously optimistic about the prospects of the new opportunity scholarship.

However, while we have trained and coached the majority of our more than 1,300 admission representatives across the country on how to effectively communicate the benefits of the opportunity scholarship, we believe that we can improve the effectiveness of those communications to prospective students. Based on the initial results, we have decided to expand the eligibility for the opportunity scholarship to students interested in pursuing a bachelor's degree program at ITT Technical Institute. Consistent with the decline in historical conversion rate of prospective student inquiries to new associate degree program students over the past couple of years, we have also experienced a decline in the rate at which ITT Technical Institute associate degree program graduates enrolled in an ITT Technical Institute bachelor's degree program of study during that same period.

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