ITT Educational Services, Inc. (ESI)

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ITT Educational Services (ESI)

Q3 2012 Earnings Call

October 25, 2012 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

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

Sara Gubins - BofA Merrill Lynch, Research Division

James Samford - Citigroup Inc, Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

Gary E. Bisbee - Barclays Capital, Research Division

Paul Ginocchio - Deutsche Bank AG, Research Division

Kelly A. Flynn - Crédit Suisse AG, Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

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

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

Thomas Allen - Morgan Stanley, Research Division

Timo Connor

Alexander P. Paris - Barrington Research Associates, Inc., Research Division

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the ITT Educational Services 2012 Third 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, operator. Good morning, ladies and gentlemen, and thank you for joining us on our conference call to review our 2012 third quarter results. Dan Fitzpatrick, our Executive Vice President and Chief Financial Officer, is on the call with me this morning.

We'll spend a little more time this morning on our prepared remarks, as we have a lot of information that we'd like to cover. However, we expect to provide you with about 30 minutes for your questions during the Q&A session at the conclusion of our prepared comments.

I'll begin by providing you with a quick overview of the topics we'd like to address this morning. We will provide some color on the enrollment results for the third quarter as well as our thoughts on the enrollment outlook for the final quarter of 2012. Then, we'll provide you with our typical update on a few of the other key third quarter operating metrics for the business including student retention, year-over-year graduation information and graduate employment measures. Next, we'll provide an update on our strategic plan. It's here we will spend a little additional time today, as we hope to provide insight into how we're thinking about our business over the long term, taking into consideration sector changes over the past couple of years. We will discuss our current thinking on topics such as perspective student behavior, program costs, student value proposition and more. Dan will conclude our prepared remarks by providing additional color on the financial results reported in this morning's press release as well as an update on our risk share agreement under the private student loan programs. Then, we will open the lines for your questions.

Before we begin reviewing the third quarter results, we should note that we will not provide an outlook on the business for 2013 in our call this morning. However, we do expect to review our 2013 internal goals for the key operating and financial metrics in our January 2013 earnings call.

With the agenda for the call out of the way, let me begin with the review of our 2012 third quarter marketing and advertising results. Advertising expense decreased 17% in the third quarter of 2012 compared to the same prior year period, as we continue to adjust our spending in an effort to generate efficiencies in our student enrollment process. The reduced advertising spend generated an increase in perspective student increase in the third quarter of 2012 compared to the same period in the prior year. However, once again, we experienced a decrease in the rate at which student applications converted to new students, resulting in the 15.8% decline in new student enrollments.

At this point, we'd like to give you a little bit of color on the enrollment results by program and/or school starting. In the third quarter of 2012 compared to the same period in the prior year, new student enrollment decreased approximately 36% in graphics design and criminal justice related programs, combined; decreased approximately 12% in our 3 core associate degree programs in the drafting, network administration and electronics disciplines, combined; increased approximately 16% in our Breckinridge School of Nursing and Health Sciences programs; and increased approximately 29% in our School of Business programs.

Further, new student enrollment in our online programs of study in the third quarter of 2012 declined at almost twice the rate of our resident programs of study compared to the same period in the prior year. Looking ahead to the academic period that will begin in December 2012. As of October 22, 2012, applications for the academic period that begins in the fourth quarter of 2012 for programs offered by ITT Technical Institute were approximately 9% less than the number of applications received as of the same point in 2011 for the academic period that began in the fourth quarter of 2011.

At this point, based on current enrollment trends, the lack of visibility and predictability of the conversion rate of student inquiries into new student enrollments and other related information, we cannot provide any specific predictions regarding when we may return to year-over-year growth in new student enrollment.

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