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Macro-economic headwinds, regulatory issues and lower students’ enrollment continue to weigh upon Universal Technical Institute Inc. (UTI) 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, respectively. 

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 expenses.

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 sequentially.

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 School logo.

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. (COCO) and Lincoln Educational Services Corporation (LINC), 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, 2011.

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.

Let’s Conclude

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.

 
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