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Universal Technical Institute, Inc. (UTI)

Q3 2019 Earnings Call· Fri, Aug 9, 2019

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Transcript

Operator

Operator

Good day, and welcome to the UTI Fiscal Third Quarter 2019 Earnings Call. [Operator Instructions] At this time, I’d now like to turn the conference over to Ms. Jody Kent, Vice President of Communications and Public Affairs for Universal Technical Institute. Please go ahead.

Jody Kent

Analyst

Hello, and thanks for joining us. With me today are Kim McWaters, President and Chief Executive Officer; Scott Yessner, Interim Chief Financial Officer; and Jerome Grant, Chief Operating Officer. During the call today, we’ll update you on our fiscal third quarter 2019 business highlights, our financial results and our vision for the future.Before we begin, we must remind everyone that except for historical information, today’s call may contain forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934 and Section 27A of the amended Securities Act of 1933. I’ll refer you to today’s news release for UTI’s comments on that topic. The safe harbor statement in the release also applies to everything discussed during this conference call, including initial comments by management as well as answers to questions.During today’s call, we’ll refer to adjusted operating loss, adjusted EBITDA and adjusted free cash flow, which are non-GAAP measures. Adjusted operating loss is loss from operations adjusted for items not considered normal recurring operating expenses.Adjusted EBITDA is net income before interest, income taxes, depreciation, amortization adjusted for items not considered normal recurring operating expenses. Adjusted free cash flow is cash from operating activities less capital expenditures adjusted for items not considered normal recurring operating expenses. Management uses adjusted operating loss, adjusted EBITDA and adjusted free cash flow as performance measures internally, and those will be the figures discussed on today’s call.Starting with this third quarter and through fiscal 2020, we will report operating metrics such as student applications and starts, excluding our Norwood, Massachusetts campus. As we have shared previously, Norwood is no longer accepting new student applications and will fully close in the fall of 2020. So we believe it is appropriate to exclude its impact. It is now my pleasure to turn the call to Kim McWaters.

Kim McWaters

Analyst

Thank you, Jody. Good afternoon, everyone, and thank you for joining us today. During the third quarter of 2019, we generated strong revenue growth, delivered our fourth consecutive quarter of year-on-year start growth. And for the second quarter in a row, our average student population was up compared to the prior year. We are making consistent progress toward building a profitable business, and our significant momentum is the direct result of UTI’s multi-year transformation plan.Over the past 18 months, we have redesigned core business processes, leveraged technology and analytics to efficiently attract more qualified potential students, successfully opened a new campus, expanded our Welding programs and further differentiated our industry-leading student value proposition. Even in a time of historically low unemployment when people are far less likely to consider postsecondary education, these initiatives are producing results. We do not know when the macro trends will turn, but it is clear that we are building a business that can thrive in any market environment.In the third quarter, new student starts grew 11.9% year-over-year, marking our fourth consecutive quarter of start growth. Our Bloomfield, New Jersey campus drove approximately 31% of the increase, with the remainder coming from strong same-school start growth. Both our high school and adult channels posted double-digit growth in the third quarter, with the high school segment up 20.2% and the adult segment up 13.3% year-over-year.In the face of historically low unemployment, which makes it easy to get a job without postsecondary education, our adult segment, new student starts have grown year-over-year for five consecutive quarters, demonstrating the effectiveness of our transformation plan.In our military segment, the challenges that come with an all-time low unemployment rate for veterans were compounded by base access issues and fewer transitioning service members due to sizable retention bonuses. As a result, and…

Jerome Grant

Analyst

Thanks, Kim. Let’s start with marketing and generating student demand. We continue to invest in national brand awareness campaigns that drive student interest and increase. I’m pleased to report that we are exceeding our goal of generating more than 50% of those increase from sources that deliver the highest level of conversion rates, while driving cost efficiencies.Our year-over-year advertising costs decreased 11.6% in the third quarter and are down 4.5% year-to-date. Our admissions team is focused on converting inquiries into new student applications on a consolidated basis, new student applications grew 2.9% in the third quarter. This is the sixth consecutive quarter of growth, despite strong macro headwinds, which demonstrates the effectiveness of the transformation plan and the overall value our new campus enrolling programs are giving.Applications for our high school segment grew 7.2%. Adult applications were just shy of last year by 2.7%, and our military applications grew 2.8%. Our work to differentiate UTI and raise awareness of the return on student’s educational investment is driving strong growth in our high school segment, even as options for these students increase as high schools across the nation recognized the value of career in technical education, we’re seeing an increasing number of articulation agreements.These agreements allow students to earn UTI credits for classes they take in high school. This summer, more than 500 students participated in Ignite. That’s our program that gives students opportunities to test drive UTI education before they start their senior year. Because Ignite students take the first UTI class for free and can transfer the credit when they finish school and come to UTI, they pay less for school and they graduate faster. They also become quite popular UTI ambassadors and for trade education as they go back for their senior year. They also show at a…

Kim McWaters

Analyst

Thanks, Jerome. Again, great job. We are very pleased with the results of our transformation plan. And now I’d like to shift gears to talk about our second strategic objective, investing in highly accretive new campuses and programs. August 13 marks the 1-year anniversary of our newest metro campus in Bloomfield, New Jersey. Today, we have more than 380 students in school, and the campus is exceeding our pro forma for fiscal 2019. High school enrollments at Bloomfield are exceptionally strong, and we expect this strong start to the high school season to continue into late summer and early fall.We are also quite pleased with the performance of our new Welding program. Across the system, Welding starts grew 84.5% in the third quarter as we opened our third Welding program in Dallas in January of 2019. And just as we experienced at Avondale and Rancho Cucamonga campuses, student demand for the program is very strong. We do believe several other UTI campuses can support this high demand program, and we have begun the licensing and approval process to bring Welding to more students in more locations. On our next call, we will share more details on the timing and the rollout.Our third strategic objective is rationalizing our national footprint, which is an important piece of our work to restructure our cost base and to operate profitably in any economic cycle. In our larger legacy campuses, we are consolidating or subletting excess space and/or offering new programs, where we can, we are converting these campuses to our smaller metro model.In August, and following successful rightsizing initiatives in Houston, Texas and Rancho Cucamonga, we signed a new 8-year lease extension that will reduce the size of our Exton, Pennsylvania campus by approximately 71,000 square feet. The rightsizing, which we expect to be…

Scott Yessner

Analyst

Thanks, Kim. We are very pleased with our fiscal third quarter and year-to-date operating performance. Our results are meeting or exceeding our expectations for the year. And as a result, we are raising our full year guidance, which I will detail at the end of my remarks.The third quarter results show the positive turn in our financial trajectory and progress made in building a cost structure that supports profitability in the most challenging macro environment.Fiscal third quarter is seasonally our lowest of the year for student population and for revenue as more than half of our students enrolled to begin school in the fourth quarter. Despite seasonality, we were almost breakeven on GAAP operating performance, generated $4.4 million in EBITDA, $4.5 million in adjusted EBITDA in the third quarter and efficiently used our working capital.Our marketing and admission strategies have resulted in four consecutive quarters of start growth. Progressively, over the past four quarters, average student population has been growing. Last quarter, our average student population surpassed that of a year ago, and in the third quarter, we averaged 4.2% more students in schools than 2018 for the same period. You can view this progression through the increasing trend of revenue growth, where revenues grew $4.2 million in Q3 compared to revenue growth of $3 million over the first six months of 2019.Our cost structure strategies from the past 4 quarters are also maturing and being realized in Q3. Third quarter operating expenses have decreased $7.8 million compared to third quarter of 2018 and decreased $7.8 million from Q2 of 2019 and $10.8 million from Q1 of 2019. We have made durable cost reductions that have lowered our base operating expenses, aligned with driving profitability in a challenging macro environment and will carry into 2020.Headcount has declined 126 from 1,807…

Kim McWaters

Analyst

Thank you, Scott. As you heard, based upon our top and bottom line success, we are raising our fiscal 2019 guidance range across the board. In 2020, we believe we will increase revenue through growing new student starts and our average student population. We also expect to drive further efficiencies in our operating model, building on the durable cost structure reductions executed in 2019. The combination should drive significant improvement to cash flow and operating results in 2020.I’d like to close the call by congratulating Peter Appert on his retirement. We will miss our thought-provoking conversations held throughout the years. As we no longer have analyst coverage with his retirement, we will not be conducting a Q&A session today.We thank you all for your continued support and look forward to our next call with you on our fourth quarter and full year fiscal 2019 results. Thank you, and have a great day.

Operator

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time, and have a wonderful day.