Universal Technical Institute, Inc. (UTI) Q1 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the UTI Fiscal Year 2012 Q1 Earnings Conference Call. [Operator Instructions] Please also note that today's event is being recorded. I would now like to turn the conference call over to Mr. John Jenson, Vice President and Corporate Controller. Please go ahead.

Thank you. Hello, and thank you for joining us today for Universal Technical Institute's quarterly conference call. During the call, we will discuss the results of our first quarter ended December 31, 2011. We will then open up the call for your questions. The company's earnings release was issued after markets closed today, and is available on UTI's website at www.uti.edu. Before we begin, we would like to remind everyone that except for historical information presented, the matters discussed today may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Exchange Act of 1933 as amended. I'll refer you to today's news release for UTI's comments on that topic. The Safe Harbor statement in this release, which I will not repeat here in the interest of time, also applies to all statements made during this conference call. Information in the conference call, including the initial statements by management, as well as answers to questions related in any way to any projection or forward-looking statement, are subject to this Safe Harbor statement. In the prepared remarks today, you'll hear we will make reference to EBITDA. EBITDA, for all periods discussed during our remarks, is a non-GAAP measure representing net income, exclusive of interest, income taxes, depreciation and amortization. The schedule provided in the earnings release reconciles EBITDA to the nearest corresponding GAAP measure, net income. At this point, I would like to turn the call over to Kim McWaters, Chief Executive Officer. Kim?

Thank you, John. Good afternoon, ladies and gentlemen, and thank you for joining us. On today's call, I will begin with a high level overview of the quarter, and then turn it over to Eugene to discuss our financial results. Following his commentary, I will spend a few minutes discussing marketing and student recruitment trends, and Eugene will follow with an update on business operations and our outlook for 2012. As our first quarter came to a close, thankfully, so did calendar year 2011. With greater clarity on the regulatory front and change efforts well underway, we are adjusting to the new state of normal. Given the challenges of the current environment and the hurdles our students must overcome to get the training they need for a good career, we were pleased to see roughly the same number of new students begin school as we saw last year. And we were also happy that more students were able to stay in school. As you know, we pride ourselves on the quality education we provide and the positive effect it has on our graduates' lives. Almost 3,000 students successfully completed their training this quarter and we know their job potential is good, as 85% of last year's UTI graduates went to work. Although much has been done, we still have work to do to overcome some of the challenges that negatively impacted new student growth and our continuing population into this year. So while we anticipate that new student growth will likely resume the latter part of this year, we know our financial results will reflect the challenges of a lower average student population over the course of the year. We will remain diligent to keep our cost structure in mind with our student population while we make the necessary investments to rebuild the population as we move in to 2013. Let me turn it over to Eugene, now, to discuss the financial results in greater detail, and then we can cover some of the specific business drivers and operating trends in the quarter.

Thanks, Kim. As Kim mentioned, our financial outcomes were down from last year for the first quarter 2012 as a result of the lower student population as the year began. This decrease was mitigated to some extent due to the focus placed on efficiencies and managing costs during the quarter. Revenues for the quarter were $106.4 million, a 9.4% decrease compared to the prior year. The decrease in revenues primarily relates to a decrease in average full-time students of 10.7% and 1 less earning day in the quarter, partially offset by an increase in tuition rates. And during the quarter of fiscal 2012 and 2011, respectively, tuition excluded $2.6 million and $1.8 million related to students participating in our Proprietary Loan Program as that revenue will be recognized when payments are received. And the average revenue per student for the quarter increased 1.8% to approximately $5,800. Operating income for the first quarter was $6.8 million, down 60% compared to $16.9 million the same period last year. The operating margin for the quarter was 6.2%, down from 14.3%. We have been successful in managing variable costs according to our student population. However, as mentioned before, our higher fixed cost structure is the primary contributor to that decline in operating margin. Advertising expense increased $2.5 million to $10.5 million and is primarily attributable to our continued investment in various media and an overall shift in strategy to higher quality inquiries. Advertising expense as a percentage of revenues increased from 6.8% to 9.9%. Our bad debt expense as a percentage of revenue was 2.4% for the quarter compared to 2.5% last quarter. EBITDA for the first quarter of fiscal 2011 was $13.2 million -- I'm sorry, of 2012, was $13.2 million compared to $23.3 million last year. And net income for the quarter was $4 million compared to $10.3 million last year, and earnings per share were $0.16, down 62%. Our return on equity for the trailing fourth quarters was 15.6%. Moving to the balance sheet, it continues to be extremely strong and liquid. Cash, cash equivalents and investments totaled $113 million at year end compared to $109.6 million at September 30. We generated cash from operations of $5.6 million for the 3 months ended December 31. The decline is driven primarily by the decrease in the student population that we discussed earlier. We continue to have no debt on our balance sheet, and as most of you know, in December our Board of Directors authorized the repurchase of up to $25 million of our common stock in the open market or through privately negotiated transactions. This share repurchase plan replaces the 2 existing share repurchase plans and the timing and the actual number of shares purchased will depend on a variety of factors. And because the authorization was implemented so late in the quarter, we did not make any purchases during the quarter. During the quarter, we invested $1.5 million in fixed assets, which was down significantly from $6.5 million in the same period last year when we were investing in our new curriculum. The $1.5 million is related to new and replacement training equipment for our ongoing operations. We will continue to be very focused on managing our capital expenditures as well as our operating expenses during this period of lower student population. And now, I'd like to turn it back to Kim to discuss our marketing and mission efforts in a little bit more depth. Kim?

Thanks, Eugene. Let's start with marketing. As a reminder, our marketing initiatives have centered on 2 critical priorities. Rebalancing our marketing mix to higher quality student inquiries sources using our media attribution models, and brand revitalization efforts including new creative development and testing to support our new national campaign that launches this quarter. First, I'm very pleased with the progress our team has made, generating higher-quality inquiries. You may recall that we eliminated all student inquiry aggregators in Q2 of last year. Until that time, Internet lead aggregators accounted for 30% of our student inquiries. Today, we are generating 100% of our student inquiries and have nearly replaced former lead aggregator volume with higher-quality sources. In fact, we were off only 4% on a year-over-year basis for the quarter. If we compared apples-to-apples and excluded lead aggregator sources from last year’s inquiry volume, we grew total inquiries by 37% during the quarter. As expected, it did cost us more on the front end, but we are confident the investment will be worth it from a student outcome perspective. As Eugene mentioned, advertising cost increased $2.5 million or 31% year-over-year. Again, the increase in cost was due to our desire to invest in high quality media outlets and build on the positive results of the new campaign. In addition, we did accelerate some of our advertising spend for the year given the holiday season and the desire to improve first and second quarter new student start. For the full year, we continue to expect advertising cost to run in the 9% to 10% range as a percentage of revenue. Meanwhile, our brand revitalization efforts are well underway and our new campaign is ready to launch. We believe these efforts will elevate our brand and market position in an increasingly competitive environment. As part of this effort, we will retire the company's corporate logo and begin using the UTI school logo to leverage the powerful brand equity we've built over the past 47 years. And we're excited about our new tagline, "Chosen by industry, ready to work." As we believe it is a clear statement of our market leadership and value proposition. These efforts are foundational to our new national campaign and will build on the positive momentum created last quarter. Now let's move onto admissions. The total number of student applications received during the quarter was only off 4% year-over-year, which represents a significant slowdown in the decline in sequential quarters. I believe last quarter's June applications were down 8%. During the quarter, the number of military applications increased 35% as compared to last year. A number of high school applications was down 5%, and adult applications decreased 8%. Overall, our military and adult student representative’s productivity levels improved over last year as a result of the greater volume of higher-quality prospective students, process improvement, and team stability. As we continue to replace low-quality increase sources with a greater volume of higher-quality prospective students, and gained further traction with our new tools and training initiatives, we should continue to see efficiency gains with our teams. In alignment with student inquiry growth and efficiency gains, we will consider adding new representatives, but we're not there just yet. Overall, I believe our admissions team is adapting to all of the changes with a positive attitude while implementing the new plans, processes and procedures in response to the new environment. I remain very optimistic about how these changes will ultimately better serve our students and how we, as an organization, will eventually benefit as well. Before I hand the call back to Eugene, I would like to make a few comments on new student starts and our show rate for the quarter. In round figures, we started 3,300 new students, which is approximately the same number of students who began school last year at this time. We are very pleased with that outcome and appreciate the efforts of our team given what remains a very challenging environment. Our show rate was slightly down, only 80 basis points year-over-year and represents a significant slowing in the rate of decline compared to last quarter. Looking ahead to our second quarter, we still believe it's unlikely we will start as many new students as we did last year during the quarter. Starts could be down in the high single to low double digits on a year-over-year basis, this is in line with our last quarter's guidance, and just to reminder you, we do expect to see some quarterly volatility throughout the year. That said, we do see the potential for new student starts to turn positive during the latter part of the year. Meanwhile, we remain diligent in our efforts to help prospective students show to school, stay in school, and graduate into a career as a skilled technician. Now I'll hand it back Eugene to discuss some of our key student metrics and operating results.

Thanks, Kim. As we discussed earlier, students who were scheduled to begin school have many hurdles to face, and we're working diligently to assist them. One area of concern for the students and their family continues to be the cost of education, and more specifically, affordable options for financing their education. We know that the elimination of year-round Pell and any additional cut to that program will make it more difficult for students to pursue an education. While the change may not directly impact our revenues, it does have the potential to create pressure on our show rates and requires alternate solutions to help our students. Our team makes certain that our students know of all the financing resources available to them, whether it's grants, loans or scholarships. We continue to offer both merit and need-based scholarships, and we are increasing the amount of need-based scholarships awarded this year. We're also making our loan program more accessible to students who may not understand this alternative solution is available to them. And along with the increasing awareness of the program, we are moving some qualification barriers for dependent students. In short, we'll make it easier for students to participate in our loan program. And as a reminder, the program helps students who don't have sufficient access to traditional credit-based loan products and who are otherwise fully qualified to attend UTI. As of December 31, we have committed to provide approximately $39 million under this program. The average loan per student is now about $5,100. And since inception of the program, we have not recognized tuition and interest revenue totaling $33 million. That said, our cash collections continue to improve. During the first quarter, we recorded $321,000 in revenue and interest from cash payments that were received, and that's up from $142,000 the previous year. Inception to date, we have collected $1.5 million on this program. Our support continues while students are in school. For the first quarter of 2012, we saw improvement in student persistence of 150 basis points. I'm pleased to say that during this period, 10 out of our 11 campuses improved their performances as it relates to persistence. Every campus remains focused on persistence this year, and we realize that a small improvement in these percentage points can make a big impact, both for the student and for our financial, and for our outcomes. During the quarter, we graduated about 2,900 students, which is a decrease of 19% year-over-year, which of course is to be expected with the decline in our student population. And over the past 12 months, we've graduate a total of approximately 12,100 students with either degrees or certificates. Moving to curriculum. We anticipate rolling out our new blended learning curriculum at our Avondale campus later this year. And while we ultimately believe our blended curriculum will help us reduce cost once fully implemented across the system, as we've mentioned before, the next few years will require further capital investment and some higher-than-usual operating expenses we transitioned to all of our auto campuses. I'm pleased to share with you that during the first quarter, we renewed our manufactured-specific advanced training agreements with both Porsche and Volvo. We also began teaching our newly launched Honda Automotive Program at our Glendale Heights campus last month. We are the only private proprietary education company to offer the Honda P.A.C.T. program. Our many industry relationships continue to provide a key differentiator for us in the marketplace and for our students as they seek careers in the industry. And looking at employment, another area where we have seen continuous positive outcome this quarter, although we experienced a slight drop in automotive and diesel when compared to the same period last year, we're seeing some impressive improved outcomes in the motorcycle and collision employment markets, as well as very strong increases in demand for diesel. Turning to the remainder of 2012. Our expectations have not changed since the last call. We have seen the rate of decline in both applications and new student starts improve significantly, and in fact, more so than we had anticipated during our first quarter. During our second quarter, we expect our new student starts will decline year-over-year, and as is typical for our second quarter, I expect them to be slightly lower than our first quarter before potentially improving in the second half of the year. Given our current enrollment levels, the macroeconomic headwinds have continued pressure on program affordability, we anticipate that the average student population for 2012 to decline by a rate in the low teens. We expect these lower-level enrollments will result in a mid-to-high single digit decline in revenue for full-year 2012 and an overall decline in operating margin and net income compared to 2011. Given these trends and the fact that due to regulatory changes, we have a higher fixed component in our admissions cost structure, we must remain focused on efficiencies and managing cost in addition to rebuilding our student population to meet industry demand as well as ensuring quality student outcomes. And now, operator, I think we're ready to open the lines for questions, please.

[Operator Instructions] Our first question comes from David Chu from Bank of America Merrill Lynch.

Can you just discuss a little bit in more detail why starts are expected to turn negative before trending positive again or hopefully turning positive again in the back half of the year?

Basically, looking at where we're at right now in terms of applications that we've received for the quarter, preliminary data on January and as a sum of the volatility that we've seen in the show rates. Now we've seen a lot of positive momentum, but it has been a little choppy, and so we're just being cautious given what we know about January. And I'd say that January is roughly around 5% down from a new student start standpoint. And while we have opportunity to turn it around at the end of March, we still -- we have some work to do there. So I'm hopeful that we can continue to close the gap just as we did in the first quarter, it's just we don't have that information to share with you today. So we're continuing to stand by the guidance that we have shared with you previously.

Okay. And what a percentage of starts typically come from high school for the fiscal second quarter?

I'd say that it's probably less than 25% to 20% coming, and those would be recent high school graduates or young adults covered by the field, but it's a small percentage.

Okay. And is there any segment that's seeing particular weakness or is it just kind of across the board -- or relative to the January figure you were speaking to?

As far as the applications received, we saw good progress with our military group. We saw significant improvement in terms of efficiencies with our adult-based campus teams that is highly correlated with the improvement in our student inquiry model. And we saw a little bit of a drag in the high school market in terms of activity as we moved into the holiday season. So that would be, in terms of contracts written last quarter, and of course, that would populate some of second quarter and beyond. So the pressure from a show rate standpoint continues to be with independent students, primarily, and those who have to relocate. So that segment is under the most pressure moving into Q2, and it is the largest population that we have in the second quarter.

Okay. And one last, if I may. How much of that persistent improvement was due to lower graduating -- of the impact of lower graduations versus higher retention?

I don't think I can give you that number right here. We'll have to give -- we'll have to break that out for you offline.

Our next question comes from Kelly Flynn from Credit Suisse.

Have a bunch of small questions. First of all, the revenue per pupil growth, I think you referenced it as being up 1.8%, which was the last time kind of 5% last year. Can you talk about why it decelerated and then what we should model going forward?

Well, I think you should still model somewhere in the 2% to 4% range going forward. As we've talked about before, Kelly, there are a lot of variables that go into it on a quarterly basis in terms of program mix shifts that are based upon customer behavior, student behavior. So it's very difficult to forecast that. I think additionally, the number of days that goes into a quarter was down this year, so that has some impact on revenue per student as well.

Okay, great. And then a couple of others. On the SG&A line, I'm thinking about it just a run rate number for going forward. I mean, should we assume it sort of stays at this level given some of the advertising related things you talked about or is there opportunity to bring that down on an absolute basis?

We'll comment on that between...

I don't think you should assume that it's going to come down on an absolute basis at this point in time, at least not for -- if you're looking at the second quarter. If you're looking going out further, as we start getting some positive efficiencies from a growing population, while the number may not go down on an absolute basis, it will certainly -- I would expect it to go down on a percentage of revenue basis.

Okay. And then similar question about the ad services expense. I mean, historically, it seems like it's always gone up seasonally in the second quarter or sequentially gone up versus the first quarter, but your revenue probably will be lower in the second quarter. So I just want to make sure it's appropriate to model that expense line going up sequentially despite a revenue decline.

I think it should not go up as much as it has in past years, Kelly, because I think as we -- if you're looking at recent years, you're in an environment where the student population was increasing and instructors were coming onboard in anticipation of the starts coming in the third and fourth quarter. And while we're still optimistic that, that will happen, I don't think we're believing that it will be in the same velocity as it has in the past year. So I would expect -- I would not expect to see as much of a ramp up in ad services in Q2 as you've seen historically.

Okay, great. And then just lastly, I want to clarify what you're expecting for new student starts in the second quarter. I think, Kim, you said -- I think you said mid-to-high single digit decline, but then, I think later in the comments, I think Eugene, you said you expected it to be down sequentially versus Q1. So that implies more like sort of 9%, 10% decrease. So if you could you just clarify kind of what you're expecting there based on those 2 comments, that would be great.

Yes. I think somewhere, and I know maybe we're splitting hairs and that's getting a little precise, but I think I would go with the mid-to-high single digit range. And it's conceivable that could be slightly lower than first quarter and fall in there, but as I said, that's kind of splitting hairs.

Our next question comes from Peter Appert from Piper Jaffray.

So Eugene or Kim, could you talk about what the current media mix looks like, and I'm wondering if TV is a bigger part of the mix in the context of the remake of the ad campaign? And then what the implications of higher TV cost might be to the second half expenses?

Good question. Currently, when you look at our advertising expense, it is pretty evenly split between television and digital or Internet types of activities. And certainly, the cost to advertise on television is greater than Internet expense, but we've been seeing some very positive results given the model that we have in place and believe that the television campaign is the primary driver of traffic on the Internet in supporting our overall campaign. So we've seen prices go up in certain months and for certain channels and markets, but we've also seen some favorable pricing that we've been able to take advantage of and have acted on that given the success that we're seeing. So it's not so much that pricing in television has gone up year-over-year in a significant way. It's how we're choosing to spend it and increasing our buys, because it's being successful.

Got it, understand. But should we assume that you have baked in though, in terms of own expectations, and some --- I would assume fairly meaningful increases in the TV rates though in the back half of the year, is that built into the model?

We have considered what we know in terms of expected increases in media. We have accounted for what we expect to spend when we've given you the range in terms of 10% of revenue for the full year, and I'll remind you that we did accelerate some spending into this quarter given that we are trying to rebuild our student population inside of the first half of the year as well. So we did accelerate some of that spend and I am optimistic that as the new campaign launches and we start to build efficiencies, given the frequency of these advertisements running, as well as the improvement that has been made with the website and knowing that there's continued optimization efforts required there, I think that we will gain efficiencies throughout the year. So I'm not expecting that television cost to go up significantly in the second half of the year.

Got it. And then one other thing, just wondering if your hearing more feedback or your reps are hearing more feedback from students in terms of cost affordability pricing. And specifically, I guess to Eugene's comment earlier, about the 2% to 5% -- or 2% to 4% increase in revenue per student, as we think about the next couple of years, is that a sustainable level? Do you think you might have to rethink pricing strategy a little bit?

Pricing strategy is something that we are continuously looking at and evaluating given this very dynamic ever-changing environment that we're operating in. But price sensitivity and affordability, as Eugene mentioned, continues to be of concern. At this point in time, we have not talked about keeping our tuition at the same level or taking any sort of tuition or overall price decreases, as we believe we understand the student segment's requirements and believe that we can address those individually through our scholarships program that are need-based.

Our next question comes from Jeff Silber from BMO Capital Markets.

A couple of questions on, I guess, the legislative and regulatory side. You know there's a change in terms of effective July 1 that ATB students are no longer eligible for Title IV funding. Can you just remind us what your exposure is to ATB students and if that's incorporated in your guidance for this year?

Jeff, the current mix is less than 4% of our students are ATB. And yes, that is -- that legislative change is incorporated in the guidance that we've been giving.

All right, great. And then on the military side, I know there's some concern about potentially including military funding as part of the 90/10, can you also remind us what the military exposure you have as a percentage of revenues?

I'm going to pass on the percentage of revenue right now, but we're running it about 10% to 12% of our population as military.

And you do provide in terms of the price you charge to the military, is that in line usually with the tuition assistance program from the Department of Defense?

Yes.

Okay, great. And then a couple of quick numbers questions. What are you budgeting for capital spending 2012?

I believe the guidance that we've given is in the $20 million to $25 million range.

All right, great. And I know in prior quarters you've given us your capacity utilization for the square footage that you have, anything you could provide us would be great.

Well, I mean, obviously, however you look at it, we've got less students than we had a year ago. I'll give you the number, it's in the low 60s, but as we've talked about before, it's a mistake to compare low 60s with 100%. Our operating capacity, if you will, is probably in the mid-80s. So I think a better way that I've maybe communicated to the folks in the past is we've got the ability today to easily handle another 7,000 to maybe 8,000 students.

Our next question comes from Corey Greendale from First Analysis.

First of all, I wanted to ask you, you haven't, I would say, over emphasized the impact of incentive comp changes, at least recently or how that's affecting productivity. Can you just speak a little bit to the state of the world on that, and how much you think that is impacting the adoption rates?

I think the campus team, the population that deals with the adult students, we're seeing improved efficiency. I'd say the adoption rate of the new performance management, the success tools that we've been rolling out is greater on the adult team, than maybe with our field and high school recruiters. I think there are a couple of other differences to consider as well. With the high school, that is a more seasoned team, and when you divide the team into those who have less than a year of service, the efficiency gain inside of this quarter was pretty significant in a positive way. Those who have been with the organization who are having to adapt to the change and process, et cetera, we are not seeing the efficiency levels at the same rate as the year prior. So I'd say that we've made very good progress, but we don't believe we're fully optimized given that there was so much change.

Okay. And at a similar topic, the way we can calculate it, the cost of student acquisition continues to trend up and maybe with the shifts you're making in media sources, the idea is looking at the full life time value of the student, not just the cost of acquiring the student. But do you think, overtime, as efficiencies improve that you can get back to historical levels of cost per student acquisition?

That's certainly the intent, but I think there are too many variables to be very clear on that at this point. Given that the Internet and the lead aggregators that we've all used at some level were a very inexpensive source that needs to be replaced with a higher cost. And so on the front end it will look more expensive when you look at it from a cost-per-inquiry basis. My hope is that, as we continue to get more educated on the types of students who have the willingness and ability to pursue a UTI education, that we get more efficient in how we engage them. The other contributing factor is that there are higher fixed cost with the admissions team, and I don't see that changing anytime soon. So I think the efficiencies that we had there may not return to those levels and it's going to have to be offset in some way. It's just -- it's too early to comment on it.

Okay. And actually, Kim, if could take a step back to kind of pull back from the quarter-to-quarter tactical stuff, as you look at this business over the next 5 years or so, can you just -- and I'm not going to ask you to layout kind of long-term growth goals, but can you just help us understand how you look at the business in terms of -- do you think there's opportunity still to take share in given markets? Or do you really look at the business as being kind of maintaining in the market share you're in and you grow via geographic expansion with a new campus every few years or something like that?

I think there is opportunity to take market share in existing markets, as there's tremendous turmoil out there given that the regulatory changes that the sector has faced. And I think that is opportunity for some of the larger higher quality education companies. And those opportunities do exist in the markets where we have campuses. And hopefully, as we get -- as I said, more educated and sophisticated about how we engage with students, we will continue to build on that. We believe that our value proposition remains very strong, demanded by industry as well as our students and that we can build on that and have put significant energy into our brand revitalization efforts to do just that. With that said, in terms of growing this business and responding to the marketplace and needs of our customers, it is important that we do take opportunity to open new locations and grow in that regard, taking education to the students. So again, the model of Dallas and moving that forward.

Our next question comes from Trace Urdan from Wunderlich Securities.

It's kind of interesting that you guys have the sort of the -- roughly the same number of student starts as a year ago, and yet the process of acquiring those students seems to have been so different. Can you maybe describe how you see that class of students coming in this year as different from the way they were a year ago?

Well, again, it's a little early to tell given that we've had our new media buying strategies based on the media attribution model I spoke of earlier in place for about 2 quarters. And so we do need to see these students matriculate through the system to fully understand what that is and what it looks like. But I can give you a couple of comments and that we do ask our admissions representatives to score or evaluate the quality of the inquiries that we're receiving. And I can tell you during the quarter, better than 90% of them were described as a prospective student who is able to enroll. And so that's a significant improvement from a year ago. It's not scientific, but I think that is an indication when the front line is sharing that the quality is improved. We would expect that you would see that throughout the entire life cycle of the students, higher quality, higher commitment to education, improved educational outcomes. And again, it's very early on, but we're pleased with the progress so far.

Our next question comes from Gary Bisbee from Barclays Capital.

I just want to follow up on the last question and comment. When you talked about moving to all high-quality lead sources. And I guess, I was going to ask any more -- can you give us any more color on how we should think about how you define that? I guess that last statement about the scoring of the quality of the inquiries is probably the best answer, but how else are you judging that? I guess, I'm asking it from the perspective of it seems to be costing so much more per inquiry. You would really need to have quite a bit higher retention, I would think, to have a similar quality over the life, unless they're just heck of a lot easier for your people to close those students and get them onboard. How do you think about what we're seeing today? How you justify paying that much more, and maybe what it'll mean over time for the lifetime value?

So on the front end and looking historically, I would say that we would traditionally look at our advertising expense in a cost-per-inquiry standpoint. And I'll just make it as simple as I can. Given that most media agencies in the direct response environment, that's how they're measured, given a budget for a quarter or a month to generate that many inquiries. Given the media attribution model being in place for a number of quarters, we are now making ad buys in various medium outlets that we would not have made a year ago because the cost per inquiry was too high. However, after we track them through enrollment and into start, that higher cost of acquisition is well worth it on the back end, especially when you eliminate all of the excess spend that is not generating or delivering higher quality. So in this environment, with our revenues being down, it's exaggerated. But over time, we believe that it's going to be a positive thing and that we will continue to get better and better at it, and that should be a good thing for the business over the long haul. It should be a good thing for our students, their education experience, and it should be good for our employers.

Would you think that or expect at some point that the productivity of your people would be above where it was historically so you could pay more for the television spot that you're talking about, but yet have a similar cost? Or should we really be thinking about this more that it's likely to be a higher cost per start going forward, but you're going to get students that will retain better, and so you'd do better from that perspective?

I'd really like to tell you that in a quarter or 2, but what I can tell you is, I do expect productivity levels to improve. We've already seen that. As I mentioned, the campus team dealing with the adult students, we saw significant productivity gains in this last quarter, which is closely correlated with the change in our media strategy and the quality of the inquiries being generated. It still is a different cost structure though in terms of compensation and how you manage your admissions team is different as well. And so we just don't have enough experience yet for me to say it's going to wash or balance out. Pardon?

Your point is, I think, directionally correct, but we can't point to it yet. That's certainly the goal is to move from Kim's example of improving cost per lead to looking at the next step being more of a metrics of cost per student starting, and then eventually cost per student graduating. And it's not just the advertisement, it's the on-boarding effort. It's focusing on those students that are very motivated, very capable, that they come to school and better identifying those earlier on in the process so that it's an efficient use of our time and it's an efficient use of the student who's actually going to come to UTI. And honestly, it's an efficient use of the student that is interested, but maybe not capable of doing the work and they need to either go back and get better qualified or find out that this is not the right thing for them, because we want successful outcomes. But directionally, that's certainly our goal.

Okay, great. And then just one other question, and maybe I'm digging too much into your comments this quarter versus last, but I felt like maybe there were fewer references to the challenges students are having, getting their financing or thinking about that. Has anything changed there or is that getting a little too cute? And I remember, a quarter ago, you did specifically say you were likely to use more need-based scholarships and that type of thing, I wondered if...

No, I think you got too cute. It is still extremely challenging for them. We expect to continue to increase the amount of need-based scholarships. I would expect to continue and probably increase the percentage of students that use alternative funding, specifically our loan programs. So there has not been any easing of those financial hurdles.

[Operator Instruction] Our next question comes from Jason Anderson from Stifel, Nicolaus.

I just want to touch back on persistence. We touched on it a little bit, but going forward, should we extrapolate the improvement we saw this quarter though remaining quarters or could you provide some commentary on that?

Well, that's something that's difficult to forecast. I don't think there's anything unusual in this quarter that would suggest that we're going to take a step backwards. But persistence is still a challenge out there and it goes hand-in-hand with those financial challenges that we've talked about. They're still there for students. So if the economy continues to get better and part-time jobs continue to stay stable or improved, that's directly correlated to persistence. If it goes the other way, that will create another challenge to persistence. So I'm not sure I can correctly or accurately forecast the direction of all the factors that are going to impact it. But bottom line, I would say there was not anything unusual in persistence this quarter. So I would hope that it would stay stable, and with our continued focus on it, potentially, show some improvement.

If I can just add to that, I do think that the campuses are obviously very focused on it. And given the economy and the environment, we have had more students that have had to take a break or a leave. And typically, those students are motivated to come back when circumstances change, and I will tell you that our teams are being more proactive to help assist them, given the investment that they have already made in their education to get back in school, and we believe that we're seeing some success there. So it's obviously a key priority and focus and can help us as we improve the front end of the business.

Okay. And I guess a little more on to that, I know you mentioned graduates, the number of graduates was down this quarter and you expect it to be down for the whole year. But do you expect each quarter for it to be down or is it going to be more volatile than that?

When you say down, are you referring to a year-over-year basis?

I'm sorry, I'm sorry, yes, year-over-year.

Generally speaking, I would say, yes. I'd expect it to be down on a year-over-year basis.

Okay, great. And then one other question I had, you mentioned the rollout for the hybrid plan or program at Avondale. You mentioned later in the year, I think, you prior said maybe spring '12 is that what you meant by later or is it further back than that? And on top of that, would you expect the later it goes, should we expect that the expenses are obviously be greater than any kind of revenue that would then lap kind of the trailing or the improvement of Dallas in the prior year? Should we expense or expect some headwind there on the expense line from that?

Well, you got a couple of questions there. So I'll comment -- start to take them in order. In terms of spring or later in the year, what I would say is as we've talked about before, we've implemented in Dallas, that was a new campus. And while that was a great effort and challenging, we've always said we're going to have more learnings the first time we go to a legacy campus. And we're going as fast as we can. We may still be within spring. It may go from spring to summer, but we'll update you as soon as we have a firm date on when we're getting ready to start that. But we're making good progress there and I would expect it to happen sooner rather than later. In terms of how that flows into financials, you will see increased cost prior to the opening or the transition to that because of training and travel and those types of expenses. And the sooner that we implement it, the sooner that we will get or at least be able to prove out the efficiency that we'll be able to get to it. So we're in a hurry to do it for a variety of reasons, one of which is we believe it is what the students want, what industry wants, and what we want. So for all of those reasons, we're moving as quickly as we can, but doing it in a quality manner that treats the students most definitely is our primary focus.

And at this time, I'm showing no additional questions. I would like to turn the conference back over for any final remarks.

Just like to thank everyone for your participation and for your questions. We do appreciate your interest in Universal Technical Institute, and we look forward to updating you on our next earnings call, which is scheduled for Tuesday, May 1. Have a great evening. Thank you.

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