UTI Misses On Bottom Line
Universal Technical Institute Inc. (NYSE:UTI) recently posted lower-than-expected fourth-quarter 2011 results. The quarterly earnings of 24 cents a share missed the Zacks Consensus Estimate of 28 cents, and dropped 17.2% from 29 cents earned in the prior-year quarter due to fall in students’ enrollment.
Behind the Headline
Net revenue for the quarter declined 6.6% to $111.4 million from the prior-year quarter, and came ahead of the Zacks Consensus Estimate of $111 million. The fall in revenue reflects a decrease in average undergraduate full-time student enrollment, partially offset by a rise in tuition fees.
The educational institute, which provides professional automotive, diesel, collision repair, motorcycle and marine programs, reported that average undergraduate full-time enrollment dropped 11.3%. Student starts for the quarter fell 14.5%, following a decline of 32.5% witnessed in the third quarter.
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 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 stated that the rate of fall in new student starts has decelerated when compared with the third quarter. Management hinted that applications and new student starts will drop but at a slower rate in the beginning of fiscal 2012, but will show improvement in the second half of the year.
Universal Technical cautioned 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 witnessing in the student enrollment amid turbulent environment and regulatory issues, the company is pushing hard to manage costs effectively, trying means to improve marketing efficiencies and is launching new program focusing on automotive and diesel.
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.
Universal Technical informed that EBITDA for the quarter tumbled 9% to $16.8 million, whereas EBITDA margin contracted 40 basis points to 15.1%. Operating income plunged 13.6% to $10.2 million in the quarter, whereas operating margin shriveled 80 basis points to 9.1%.
Other Financial Details
Universal Technical, which competes with Corinthian Colleges Inc. (NASDAQ:COCO), ended the quarter with cash and cash equivalents of $53.7 million and shareholders’ equity of $142.1 million. The company generated operating cash flow of $26.5 million during the quarter. Return on equity for the trailing four quarters ended September 30, 2011, came in at 21.4% compared with 25.6% for the trailing four quarters ended September 30, 2010.
Given a waning economy, tough regulatory environment and falling enrollments that are adversely impacting the top and bottom line results, we are maintaining our long-term ‘Underperform’ rating on the stock. However, the recent steps such as cost containment and focus on admission and operating efficiencies, along with a new curriculum program that may help the company to afloat, are well defined by our Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation.