ITT Educational Services, Inc. (ESI)

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ITT Educational Services, Inc. (ESI)

Q2 2011 Earnings Call

July 21, 2011, 11:00 a.m. ET


Kevin M. Modany - CEO and Chairman

Daniel M. Fitzpatrick - EVP and CFO


Trace Urdan - Signal Hill

Gary Bisbee - Barclays Capital

Brandon Dobell - William Blair

Jerry Herman - Stifel Nicolaus

Corey Greendale - First Analysis

Gordon Lasik - Robert W. Baird

Paul Ginocchio - Deutsche Bank

David Shue - Bank of America/Merrill Lynch

Peter Appert - Piper Jaffray

Ariel Sokol - UBS

James Samford - Citigroup

Kelly Flynn - Credit Suisse

Suzie Stein - Morgan Stanley

Maria Karahalis - Goldman Sachs

Scott Schneeberger - Oppenheimer



Greetings ladies and gentlemen and welcome to the ITT Educational Services 2011 Second Quarter Earnings Call. (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 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 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 M. Modany

Thank you very much operator. Good morning ladies and gentlemen and thank you for joining us on our 2011 second quarter conference call to review our results. Joining me on the call this morning as usual is our Executive Vice President and Chief Financial Officer, Dan Fitzpatrick.

We will begin our call this morning with an overview of the second quarter marketing and advertising results. We will then provide a few brief comments on our new student enrollment results for the academic period that began in June 2011. From there we will move on to review our student retention and participants results for the second quarter.

At that point we will give you an update on our few of our student outcome metrics including our final 2010 graduate employment metrics and an update on our employment metrics for our 2011 graduates. Next we will provide an update on our progress executing our strategic plan. I’ll then provide a few comments regarding our review of the new gain for employment regulations.

At that point I’ll turn the call over to Dan and he will provide a standard commentary regarding the financial results included in this morning’s press release. Upon conclusion of Dan’s prepared remarks we will open up the call for your questions.

Let’s begin with the review of our second quarter advertising results. Advertising expenditures in the three months ended June 30, 2011 increased approximately 13% compared to the same period in 2010. We accelerated our advertising spend in the later part of the quarter as we have identified additional opportunities in some of our alternative meetings. We believe that these opportunities will continue to be available as we head into the third quarter (inaudible) that advertising cost in the third quarter of 2011 will be approximately 20% higher there the same period in 2010. Both cost for several of our primary television media outlets remain higher compared to historical levels through most of the second quarter of 2011.

We did observe very early signs of some softening in select television spot cost as we began the third quarter of 2011. It is too early, however, to determine a fees changes represent a start of the trend. We experienced degradation in the response rates from some of our national television advertising during the second quarter of 2011 compared to historical levels. However, as we continue our on going efforts to rebalance our advertising away from this traditional media to alternative media. We believe that we should be able to partially offset the impact of any change in response rates from national television [spot].

We believe that the volatility in the media markets will continue throughout the remainder of 2011. So, we will continue our efforts to rebalance our advertising mix and response to those changes. Primarily due to the changing advertising mix, we experienced a decrease in the number of perspective students who expressed an interest in our programs of study during the second quarter of 2011 compared to the same period in the prior year.

Continuing trend that began in the first quarter of 2011, the rate of which enquires converted to applications during the second quarter of 2011 increased compared to the second quarter of 2010. As we projected during our first quarter 2011 earnings call, however, we experienced a year-over-year decline in the rate of which applicant converted to new students in the second quarter of 2011.

Overall, the rate at which enquiries converted to new student enrollment declined 10 basis points in the second quarter of 2011 compared to the same period in the prior year. We believe that these trends will likely continue throughout the remainder of 2011. For a balancing of our advertising mix combined with the decline in the rate of which applicants converted to new students led to a 19.9% decrease in new student enrollment in the second quarter of 2011 compared to same period in 2010.

It's early in the recruitment period for the academic quarter that begins in September 2011. We have observed encouraging trends in our year-over-year leading enrollment indicators compared to the same point in the recruitment period for the academic quarter that began in June 2011.

Considering the recent volatility of the recruitment environment, however, we hesitate to draw any definitive conclusions from the change in trends at this time. As a result of a changes in our advertising mix and resulting reduction in student enquiries during the second quarter of 2011 compared to the same prior year period. We reduced the number of recruitment representatives by 10% as of June 30, 2011 compared to June 30, 2010. We believe that the number of our recruiting representatives declined by approximately 15 to 20% as of December 31st, 2011 compared to the same date in the prior year.

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